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 March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-25226
Delaware 22-3285224
------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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:
Name of each exchange
Title of each class on which registered
-------------------------------------- ----------------------------
Common Stock, par value $.01 per share American Stock Exchange
|
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. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) [ ] YES [X] NO.
Aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates of the registrant at September 30, 2004 (computed by reference to the last reported sale price of the Common Stock on the American Stock Exchange on such date): $44,451,232.
Number of Common Shares outstanding at June 7, 2005: 27,203,164
DOCUMENTS INCORPORATED BY REFERENCE:
Document Part of the Form 10-K
-------- ---------------------
Proxy Statement for 2005 Annual Meeting of Part III
Stockholders
|
PART I
This Annual Report on Form 10-K contains, in addition to historical information, "forward-looking statements" (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. See "Business- Forward-Looking Statements."
ITEM 1. BUSINESS
THE COMPANY
We operate in two business segments:
o consumer electronics; and
o sporting goods.
The consumer electronics segment designs, sources, imports and markets a variety of consumer electronic products and licenses its trademarks for a variety of products worldwide. The sporting goods segment, which is operated through our 53% ownership of Sport Supply Group, Inc., distributes and markets sports related equipment and leisure products primarily to institutional customers in the United States.
Emerson was originally formed in the State of New York in 1956 under the name Major Electronics Corp. In 1977, we reincorporated in the State of New Jersey and changed our name to Emerson Radio Corp. In 1994, we were reincorporated in the State of Delaware. Our principal executive offices are located at Nine Entin Road, Parsippany, New Jersey 07054-0430. Our telephone number in Parsippany, New Jersey, is (973) 884-5800.
Unless the context otherwise requires, the term:
o "Emerson" refers to our "consumer electronics" segment which is operated through Emerson Radio Corp. and its subsidiaries, other than SSG;
o "SSG" refers to our "sporting goods" segment which is operated through Sport Supply Group, Inc. and its subsidiaries; and
o "we", "us" and "our" refers to both Emerson and SSG.
For additional disclosures of our business segments and major
customers, as well as financial information about geographical areas, see Item 8
- "Financial Statements and Supplementary Data" - Note 14 of Notes to
Consolidated Financial Statements.
SUPERVISION AND REGULATION
We file reports and other information with the Securities and Exchange Commission ("SEC") pursuant to the information requirements of the Securities Exchange Act of 1934. Readers may read and copy any document we file at the SEC's public reference room at 450 Fifth St. N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operations of the public reference room. Our filings are also available to the public from commercial document retrieval services and at the SEC's website at www.sec.gov.
We make available through our internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to such reports and other filings made by us with the SEC, as soon as practicable after we electronically file such reports and filings with the SEC. Our website address is www.emersonradio.com. The information contained in our website is not incorporated by reference in this report.
On March 5, 2004, SSG filed a Form 15 with the Securities and Exchange Commission giving notice of the termination of the registration of its securities and the suspension of duty to file periodic reports under Sections 13 and 15(d) of the Securities Exchange Act of 1934. As a result, SSG is no longer required to file annual reports on Form 10-K, quarterly reports on Form 10-Q or current reports on form 8-K with the SEC.
CONSUMER ELECTRONICS SEGMENT
General
Emerson, directly and through several subsidiaries, designs, sources, imports, markets, sells and licenses to certain licensees a variety of consumer electronic products, both domestically and internationally, under the Emerson(R) and HH Scott(R) brand names. These products include:
o video products - televisions, combination television/VCR/DVDs, digital video discs (DVD), video cassette recorders (VCR) and set top boxes;
o microwave ovens;
o audio, clocks and clock radios, home theater systems and multi-media;
o houseware products; and
o video accessories, telecommunication equipment, certain computer accessories, specialty, other consumer electronic products and mobile electronics.
Emerson also licenses a variety of specialty themed logos and marks from third parties for use on audio products that bear the names of these third parties. We refer to these licenses as inward licenses.
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. See "Consumer Electronics Segment - Licensing and Related Activities."
Emerson believes it possesses an advantage over its competitors due to the combination of:
o the "[EMERSON LOGO]" brand recognition;
o its distribution base and established customer relations;
o its sourcing expertise and established vendor relations;
o an infrastructure with personnel experienced in servicing and providing logistical support to the domestic mass merchant distribution channel; and
o its extensive experience in establishing license and distribution agreements on a global basis for a variety of products.
Emerson intends to continue leveraging its core competencies to offer a broad variety of current and new consumer electronic products to customers. In addition, Emerson intends to enter into additional licenses of third party trade names and trademarks ("inward licenses"), as well as licenses for the use of Emerson's trade names and trademarks by third parties ("outward licenses") and distribution agreements that take advantage of Emerson's trademarks and utilize the logistical and sourcing advantages for products that are more efficiently marketed through these agreements. We continuously evaluate potential licenses and distribution agreements. In March 2003, Emerson entered into a license agreement with Nickelodeon to license the Nickelodeon name, trademark and logo, along with several other Nickelodeon trademarks and logos. See - "Consumer Electronics Segment - Licensing and Related Activities".
Emerson's core business consists of selling, distributing, and licensing various low to moderately priced categories of consumer electronic products. The majority of Emerson's marketing and sales efforts are concentrated in the United States and, to a lesser extent, certain other international regions. Major competitors in these markets are foreign-based manufacturers and distributors. See "Consumer Electronics Segment - Competition."
Products
Emerson's current product and branded categories consist of the following:
VIDEO PRODUCTS AUDIO PRODUCTS OTHER -------------- -------------- ----- Televisions Portable stereo systems Housewares Specialty televisions Digital clock radios Home theater Digital video discs (DVD) Shelf stereo systems Microwave ovens Specialty video cassette players Specialty clock radios Multi-media Video cassette recorders (VCR) Telecommunications |
Growth Strategy
We believe growth opportunities exist through the implementation of the following:
o higher penetration levels within our existing customers through increases in the products offered and sold to existing accounts;
o expansion of our existing customer base in United States through our sales staff and sales representative organizations;
o expansion of our existing worldwide customer base through our foreign distribution agreements and direct selling, particularly in Europe and Asia;
o expansion into distribution channels we are not currently utilizing through new products that are being offered by Emerson;
o development and sales of new products not presently being offered by Emerson, such as electronics and accessories that utilize popular theme characters and logos through the use of various trademarks licensed from third parties;
o further development of our direct to consumer sales channel, through Emerson's internet web-site;
o continuing to capitalize on the "[EMERSON LOGO]" and "H.H. Scott(R)" trademarks through continued efforts to enter into license agreements with third parties to license the "[EMERSON LOGO]" and "H.H. Scott(R)" trademarks for products not currently being sold, and in geographic areas not presently being serviced; and
o expansion through strategic mergers with and acquisitions of other businesses.
In connection with Emerson's strategic focus, Emerson may acquire an equity position in other corporate entities.
Emerson believes that the "[EMERSON LOGO]" trademark is recognized in many countries. A principal component of Emerson's growth strategy is to utilize this global brand name recognition together with its 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. Emerson believes that it 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 its current product line and augmenting its product line with complementary products. Emerson intends to pursue such plans either independently or by forging new relationships, including license arrangements, distributorship agreements and joint ventures. See "Consumer Electronics Segment - Licensing and Related Activities."
Sales and Distribution
Emerson's Direct Import Program allows its customers to import and receive product directly from Emerson's manufacturers located outside the United States. Under the Direct Import Program, title for its products passes in the country of origin upon shipment of the product by the manufacturer. Emerson also sells product to customers from its U.S. based finished goods inventory, which is referred to as its Domestic Program. Under the Domestic Program, title for its products primarily passes at the time of shipment. Under both programs, we recognize revenues at the time title passes to the customer. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Emerson has an integrated system to coordinate the purchasing, sales and distribution aspects of its operations. Emerson receives orders from its major accounts electronically, via electronic data interface (EDI), facsimile, telephone or mail. Emerson does not have long-term contracts with any of its customers, but rather receives orders on an ongoing basis. Products imported by Emerson, 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. All inventory is monitored by Emerson's electronic inventory system. As a purchase order is received and filled from inventory, warehoused product is labeled and prepared for outbound shipment to customers by common, contract or small package carriers for sales made from inventory.
Domestic Marketing
In the United States, Emerson markets its products primarily through:
o mass merchandisers;
o discount retailers;
o toy retailers; and
o distributors and specialty catalogers.
In fiscal 2005 and 2004, Wal-Mart Stores accounted for approximately 30% and 25% of our consolidated net revenues, respectively, and Target Stores accounted for approximately 12% and 15% of our consolidated net revenues, respectively. No other customer accounted for more than 10% of our consolidated net revenues in either period. Management believes that a loss, or a significant reduction of sales to Wal-Mart or Target would have a material adverse effect on our business and results of operations.
Approximately 45% and 49% of the net consumer electronics revenues in fiscal 2005 and 2004, respectively, were made through third party sales representative organizations that receive sales commissions and work in conjunction with Emerson's own sales personnel. With Emerson's permission, third party sales representative organizations may sell competitive products in addition to Emerson's products. In most instances, either party may terminate a sales representative relationship on 30 days prior notice by Emerson and 90 days prior notice by the sales representative organization in accordance with customary industry practice. Emerson utilizes approximately 22 sales representative organizations, including two through which approximately 18% and 16% of the net consumer electronics revenues were made in fiscal 2005. For fiscal 2004, two sales organizations accounted for approximately 15% and 10% of the net consumer electronics revenues. No other sales representative organization accounted for more than 10% of the consumer electronics net revenues in either year. The remainder of Emerson's sales are serviced by its sales personnel. Management does not believe that the loss of one or more sales representative organizations would have a material adverse effect on our business and results of operations.
Foreign Marketing
Emerson primarily markets and distributes its products in the United States. Accordingly, foreign sales account for less than 10% of total revenues and are not considered material. Emerson intends to expand its existing worldwide customer base through its foreign distribution agreements and direct selling, particularly in Europe and Asia.
Licensing and Related Activities
Emerson has several license agreements that allow licensees to use our trademarks for the manufacture and/or the sale of consumer electronics and other products and are referred to as outward licenses. These license agreements allow the licensee to use our trademarks by a specific product category, by a specific geographic area (that primarily includes some or all the countries located in North America, South America, Mexico and parts of Europe), by a specific customer base, by any combination of the above, or by any other category that might be defined in the license agreement. These license agreements are subject to renewal at the initial expiration of the agreements and are governed by the laws of the United States, and have expiration dates ranging from March 2006 through February 2010. Total license revenues recognized and earned in fiscal 2005, 2004, and 2003 were approximately $10,804,000, $10,973,000, and $10,388,000, respectively. Emerson records licensing revenues as earned over the term of the related agreements.
Effective January 1, 2001, Emerson entered into a license agreement ("Video License Agreement") with Funai Corporation, Inc. ("Funai"), which was amended, to extend the Video License Agreement to December 31, 2006. The Video License Agreement provides that Funai will manufacture, market, sell and distribute specified products bearing the "[EMERSON LOGO]" trademark to customers in the U.S. and Canadian markets. Under the terms of the agreement, Emerson receives non-refundable minimum annual royalty payments of $4.3 million each calendar year and a license fee on sales of products subject to the Video License Agreement in excess of the minimum annual royalties. During fiscal 2005, 2004 and 2003, license revenues of $8,555,000, $8,759,000 and $8,520,000, respectively, were recorded under this agreement.
Throughout various parts of the world, Emerson maintains distribution and outward license agreements that encompass various Emerson(R) branded products into defined geographic areas.
Emerson intends to pursue additional licensing and distribution 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 Item 1 - "Business - Forward-Looking Information" and Item 7 -"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Effective March 2003, Emerson entered into a license agreement with MTV Networks to license the Nickelodeon name, trademark and logo, along with several of Nickelodeon's trademarks and logos. The initial term of the agreement expired in December 2005, and has been, in accordance with the contract option, extended by one year to December 2006. Additionally, Emerson entered into a second contract with MTV Networks for increased Nickelodeon character trademarks and logos, along with expanded product categories. The term of this second contract also expires in December 2006. These licenses provide Emerson with the rights to use such marks in the United States, and require certain minimum royalties to be paid to MTV Networks.
Design and Manufacturing
Emerson's products are manufactured by several original equipment manufacturers in accordance with Emerson's specifications. During fiscal 2005 and 2004, 100% of Emerson's purchases consisted of imported finished goods from manufacturers primarily located in:
o South Korea;
o China;
o Malaysia; and
o Thailand.
Emerson's design team is responsible for product development and works closely with Emerson's suppliers. Emerson's engineers determine the detailed cosmetic, electronic and other features for new products, which typically incorporate commercially available electronic parts to be assembled according to their design. Accordingly, the exterior designs and operating features of the products reflect Emerson's judgment of current styles and consumer preferences. Emerson's designs are tailored to meet the consumer preferences of the local market, particularly in the case of its international markets.
The following summarizes Emerson's purchases from its major suppliers:
Fiscal Year
-----------------------
SUPPLIER 2005 2004
----------------------- -------- --------
StarLite 16% 15%
Lasco Industries 15% 10%
Oxygen 11% *
Avatar Mfg * 14%
GMT Industries * 12%
Daewoo * 12%
|
* - less than 10%
No other supplier accounted for more than 10% of Emerson's total purchases in fiscal 2005 or 2004. Emerson considers its relationships with its suppliers to be satisfactory and believes that, barring any unusual material or part shortages or economic, fiscal or monetary conditions, Emerson could develop, as it already has, alternative suppliers. No assurance can be given that ample supply of product would be available at current prices if Emerson 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. See Item 1 - "Business - Forward-Looking Information, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A - "Inflation, Foreign Currency and Interest Rates."
Warranties
Emerson offers limited warranties for its consumer electronics, comparable to those offered to consumers by its competitors in the United States. Such warranties typically consist of a 90 day period for audio products and one year period for microwave products, under which Emerson will pay for labor and parts, or offer a new or similar unit in exchange for a non-performing unit.
Returned Products
Emerson's customers return product to Emerson for a variety of reasons, including:
o retailer return policies with their customers;
o damage to goods in transit and cosmetic imperfections; and
o mechanical failures.
Emerson has entered into agreements with the majority of its suppliers that require the supplier to accept returned defective product. Emerson pays a fee to the supplier and in exchange receives a unit.
Backlog
We do not believe that backlog is a significant factor in our consumer electronics segment. The ability of management to correctly anticipate and provide for inventory requirements is essential to the successful operation of our consumer electronics business.
Trademarks
Emerson owns the:
o "[EMERSON LOGO]";
o "Emerson Research(R)";
o "Emerson Interactive sm";
o "Girl Power TM";
o "H.H. Scott(R)"; and
o "Scott(R)"
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 Emerson, those registered in the United States and Canada must be renewed at various times through 2011 and 2014, respectively. Emerson's trademarks are also registered in various other countries, which registrations must be renewed at various times. Emerson intends to renew all trademarks necessary for its business. Emerson considers the "[EMERSON LOGO]" and HH Scott(R) trademarks to be of material importance to its business and, to a lesser degree, the remaining trademarks. Emerson licenses the "[EMERSON LOGO]" and HH Scott(R) trademarks to third parties, the scope of which is on a limited product and geographic basis and for a period of time. See "Consumer Electronics Segment - Licensing and Related Activities."
Competition
As published in the January 2005 edition of the Consumer Electronics Association Market Research report, the market segments of the consumer electronics industry in which Emerson competes generates approximately $21 billion of factory sales annually and is highly fragmented, cyclical and very competitive. The industry is characterized by the short life cycle of products, which requires continuous design and development efforts.
Emerson primarily competes in the low to medium-priced sector of the consumer electronics market. Management estimates that Emerson has several dozen competitors that are manufacturers and/or distributors, many of which are much larger and have greater financial resources than Emerson. Emerson competes primarily on the basis of:
o its reliability;
o quality;
o price;
o design;
o consumer acceptance of its products; and
o quality service and support to retailers and their customers.
Emerson also competes at the retail level for shelf space and promotional displays, all of which have an impact on its established and proposed distribution channels.
Seasonality
Emerson generally experiences stronger demand from its customers for its products in the fiscal quarters ending September and December. However, during the last several years, this revenue pattern has been less prevalent due to the need for retailers to plan earlier for the winter holiday selling season and our management's ability to obtain additional orders to meet increased product demand during the March and June fiscal quarters.
Working Capital
Our consumer electronics segment is impacted by its seasonality in that it generally records the majority of annual sales in the quarters ending September and December, requiring it to maintain higher inventory levels during the quarters ending June and September, therefore increasing the working capital needs during these periods. Management believes that the outward license agreements, sales margin stability and the policies in place for returned products should continue to favorably impact our cash flow. Management believes that anticipated cash flow from operations and the financing presently in place will provide sufficient liquidity to meet its operating and debt service cash requirements in the year ahead. Management believes the Company's working capital practices are similar to those of its competitors.
SPORTING GOODS SEGMENT
General
Management believes SSG is a leading direct mail marketer of sports related equipment and leisure products for sale primarily to the institutional market in the United States.
From July 2003 through November 2003, certain of SSG's team dealer locations were discontinued. In November 2003, SSG sold all of the issued and outstanding capital stock of it's wholly-owned subsidiary, Athletic Training Equipment Company, Inc. ("ATEC"). Collectively, we refer to these as "Discontinued Operations" and accordingly, the accompanying financial statements reflect these as discontinued operations. These transactions helped reduce the overhead of SSG along with providing funds to reduce the debt of SSG.
Products
Management believes SSG manufactures and distributes one of the broadest lines of sporting goods, physical educational, recreational and leisure products to the institutional market. SSG offers over 10,000 products, of which SSG manufactures approximately 1,000 of these products and the remainder are purchased from other manufacturers. The SSG product lines include: archery; baseball; softball; basketball; camping; football; tennis and other racquet sports; gymnastics; indoor recreation; game tables; physical education; soccer; field and floor hockey; lacrosse; track and field; volleyball; weight lifting; fitness equipment; outdoor playground equipment; and early childhood development products.
Management believes brand recognition is important to the institutional market. Most of SSG's products are marketed under trade names or trademarks owned or licensed by SSG and include the following:
Alumagoal(R) Blastball(R) BSN(R) Champion Barbell Curvemaster(R) Fibersport Flag A Tag(R) Gamecraft GSC Sports Maxpro(R) MacGregor(R) New England Camp & Supply NorthAmerican Recreation(R) Passon's Sports Pillo Polo(R) Port-A-Pit(R) Pro Base(R) Pro Down(R) Pro Net Rol-Dri(R)and Tidi-Court Toppleball(R) U.S. Games, Inc(R) Voit (R) |
Growth Strategy
SSG believes it is well positioned to grow its business due to:
o its ability to process and fulfill a high capacity of orders;
o its well-developed expertise in catalog design and merchandising; and
o its information technology system and its Internet platform.
One of the most important contributions of SSG's information technology platform is that the order processing and fulfillment capabilities are integrated throughout the operations of SSG, including all of SSG's websites. Each website is strategically targeted to a specific customer group or product line. The continued migration of SSG's customers to its websites is important to SSG's growth and success.
Sales and Distribution
SSG's websites enable its customers to place orders, access account information, track orders, and perform routine customer service inquiries on a real-time basis, twenty-four hours a day, seven days a week. This functionality allows for more convenience and added flexibility for its customers.
SSG's sourcing, warehousing, distribution and fulfillment capabilities and its fully integrated information system, provide the necessary capacities, logistics, information and technological capabilities to meet the demands and growth potential of commerce.
Domestic Marketing
SSG offers products directly to the institutional market primarily through:
o a variety of distinctive, information-rich catalogs;
o sales personnel strategically located in certain large metropolitan areas;
o in-bound and out-bound telemarketers;
o a team of experienced bid and quote personnel; and
o the Internet.
SSG's marketing efforts are supported by a database of over 250,000 customers, a call center, a custom-designed distribution center and several manufacturing facilities. SSG currently offers approximately 10,000 sports related equipment products to over 100,000 customers, which include: public and private schools; colleges; universities and military academies; municipal and governmental agencies; military facilities; churches; clubs; camps; hospitals; youth sports leagues; non-profit organizations; team dealers; and certain large retail sporting goods chains.
SSG believes that its customer base in the United States is the largest in the institutional direct mail market for sports related equipment.
Licensing and Related Activities
SSG has inward licenses for certain well-known names and trademarks that allow it to manufacture, sell, and distribute specified sport related products and equipment to institutional customers using the licensed names for specified royalty fees paid to licensors. See "Business-Sporting Goods Segment - Trademarks."
Design and Manufacturing
SSG manufactures, assembles and distributes many of its products at its facilities. See Item 2 - "Properties."
Most of SSG's manufactured products are standardized. Certain products manufactured by SSG are custom made; such as tumbling mats ordered in color or size specifications. The principal raw materials used by SSG in manufacturing are, for the most part, readily available from several different sources. No one supplier accounts for more than 10% of the total raw materials supplied to SSG. Such raw materials include: foam; vinyl; nylon thread; steel and aluminum tubing.
Items not manufactured by SSG are purchased from various suppliers primarily located in the United States, Taiwan, Australia, the Philippines, Thailand, China, Pakistan, Sweden and Canada. SSG has no significant purchase contracts with any major supplier of finished products, and most products purchased from suppliers are available from other sources. Purchases of most finished products are made in U.S. dollars and are, therefore, not subject to direct foreign exchange rate differences.
Warranties
SSG typically offers limited warranties for its sporting goods, which are comparable to its competitors.
Returned Products
In most instances, SSG's customers have the right to return product within 30 days. Returned products in the sporting goods segment are less frequent than the consumer electronics segment, and are not considered a significant factor in SSG's operations.
Backlog
SSG had a backlog of approximately $2.4 million at March 31, 2005, $2.2 million at March 31, 2004, and $2.9 million at March 31, 2003.
Trademarks
SSG licenses certain well known trade names and trademarks allowing it to manufacture, sell, and distribute specified sport related products and equipment to institutional customers using these names for specified royalty fees. These license agreements have expiration dates ranging from December 2009 through 2040, in some cases with renewable terms and include our license with MacGregor(R), which expires in 2040 and allows us to manufacture, promote, sell and distribute specified products and equipment under the MacGregor(R) name.
Competition
SSG competes in the institutional sporting goods market principally with:
o local sporting goods dealers;
o retail sporting goods stores;
o other direct mail catalog marketers; and
o providers of sporting goods on the Internet.
SSG has identified approximately 15 other direct mail and internet companies in the institutional market most of whom management believes are competitors that are substantially smaller than SSG in terms of geographic coverage, products, e-commerce capability, customer base and revenues.
SSG competes in the institutional market principally on the basis of brand, price, product availability, quality and customer service. SSG believes it has an advantage in the institutional market over traditional sporting goods retailers and team dealers because its selling prices do not include comparable price markups attributable to traditional multi-distribution channel markups. In addition, SSG's expansive product lines and the ability to control the availability of goods that SSG sources enables it to respond more rapidly to customer demand.
Seasonality
SSG has historically experienced strong revenues during the March, June and September quarters primarily due to volume generated by spring and summer sports, favorable outdoor weather conditions and school needs before summer closings.
Working Capital
The sporting goods segment is impacted by seasonality with its March quarter being the highest sales period, and the quarter ending December being its lowest sales period. This seasonality requires the sporting goods segment to maintain higher amounts of inventory during the quarters ending March and June, therefore increasing the working capital needs during these periods.
GOVERNMENT REGULATION
Pursuant to the Tariff Act of 1930, as amended, the Trade Act of 1974 and regulations promulgated there under, 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 us or limiting quantities of goods available to us from our 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 us. Additional Federal legislation and regulations regarding the importation of consumer electronics products, including the products marketed by us, have been proposed from time-to-time and, if enacted into law, could adversely affect our financial condition and results of operations.
Many of our products are subject to Federal regulations, among other laws, which empowers the Consumer Product Safety Commission (the "CPSC") to protect consumers from hazardous sporting goods and other articles. The CPSC has the authority to exclude from the market certain articles that are found to be hazardous and can require a manufacturer to refund the purchase price of products that present a substantial product hazard. CPSC determinations are subject to court review. Similar laws exist in some states and cities in the United States.
PRODUCT LIABILITY AND INSURANCE
Because of the nature of the products sold by us, particularly those products sold by SSG, we are periodically subject to product liability claims resulting from personal injuries. We may become involved in various lawsuits incidental to our business. Additionally, significantly increased product liability claims continue to be asserted successfully against manufacturers and distributors of sports equipment throughout the United States resulting in general uncertainty as to the nature and extent of manufacturers' and distributors' liability for personal injuries. See Item 3 - "Legal Proceedings".
In recent years, product liability insurance has become much more expensive, more restrictive and more difficult to obtain. Accordingly, there can be no assurance that our general product liability insurance will be sufficient to cover any successful product liability claims made. In our opinion, any ultimate liability arising out of currently pending product liability claims will not have a material adverse effect on the financial condition or results of operations. However, any claims substantially in excess of the insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on our financial condition and results of operations.
EMPLOYEES
As of April 29, 2005, we had approximately 379 employees, of which 139 were employed by Emerson, and 240 were employed by SSG. None of our employees are represented by unions, and we believe our labor relations are good.
RISK FACTORS
You should carefully consider these risk factors in addition to our financial statements, including the notes to such financial statements. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be adversely affected. In that case, the trading price of our common stock could decline.
BUSINESS RELATED RISKS
The loss, or significant reduction in business of any of our key customers, including Wal-Mart and Target, could negatively affect our revenues and could decrease our earnings.
We are highly dependent upon sales of our consumer electronic products to certain of our customers, including Wal-Mart and Target. During our fiscal years ended March 31, 2005 and 2004, Wal-Mart stores accounted for approximately 30% and 25%, respectively, and Target stores accounted for approximately 12% and 15%, respectively, of our consolidated net revenues. Although no other customer in either of our operating segments accounted for greater than 10% of our consolidated net revenues during these periods, other customers may account for more than 10% of our consolidated net revenues in future periods. All purchases of our products by customers in both of our operating segments are made through purchase orders and we do not have any long-term contracts with any of our customers. The loss of Wal-Mart or Target, or any of our other customers to which we sell a significant amount of our products or any significant portion of orders from Wal-Mart or Target, or such other customers or any material adverse change in the financial condition of such customers could negatively affect our revenues and decrease our earnings.
The failure to maintain our relationships with our licensees, licensors and distributors or the failure to obtain new licensees, licensors or distribution relationships could negatively affect our revenues and decrease our earnings.
We maintain license agreements that allow licensees to use our Emerson(R) and H.H. Scott(R) trademarks for the manufacture and sale of consumer electronics and other products. In addition, we maintain distribution agreements for the distribution of our consumer electronics products into defined geographic areas. Although we have entered into agreements with certain of our licensees and distributors of consumer electronics products, most of which have a term of three years or less and expire between March 2006 and February 2010, including our agreement with Funai, we cannot assure that such agreements will be renewed when the terms of such agreements expire, or that our relationships with our licensees or distributors will be maintained on satisfactory terms or at all. The failure to maintain our relationships with Funai and our other licensees and distributors, the failure to obtain new licensees or distribution relationships or the failure by our licensees to protect the integrity and reputation of our Emerson(R) and H.H. Scott(R) trademarks could negatively affect our licensing revenues and decrease our earnings. In addition, we maintain license agreements with MTV Networks to license the Nickelodeon name, trademark and logo, along with several of Nickelodeon's trademarks and logos, each of which expire in December 2006. We may not be able to renew the license on terms favorable to us or at all. The failure to maintain our relationship with MTV Networks or other licensors could negatively affect our revenues and decrease our earnings.
Our sporting goods business licenses certain well-known names and trademarks, including MacGregor(R) that expires in 2040, and allows us to manufacture, promote, sell and distribute specified products and equipment. Although the MacGregor(R) agreement expires in 2040, we cannot be assured that our relationship with MacGregor(R) will be maintained on satisfactory terms or at all. The non-renewal or termination of one or more of our material licenses in our sporting goods business would eliminate our ability to sell products bearing such names and trademarks and decrease our earnings.
Our revenues and earnings could be negatively affected if we cannot anticipate market trends or enhance existing products or achieve market acceptance of new products.
Our success is dependent on our ability to successfully anticipate and respond to changing consumer demands and trends in a timely manner. In addition, to increase our penetration of current markets and gain footholds in new markets for our products, we must maintain existing products and integrate them with new products. We may not be successful in developing, marketing and releasing new products that respond to technological developments or changing customer needs and preferences. We may also experience difficulties that could delay or prevent the successful development, introduction and sale of these new products. In addition, these new products may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance. If release dates of any future products or enhancements to our products are delayed, or if these products or enhancements fail to achieve market acceptance when released, our sales volume may decline and earnings could be negatively affected. In addition, new products or enhancements by our competitors may cause customers to defer or forgo purchases of our products, which could also negatively affect our revenues and earnings.
We depend on a limited number of suppliers for our components and raw materials and any interruption in the availability of these components and raw materials used in our products could reduce our revenues and adversely affect our relationship with our customers.
We rely on a limited number of suppliers, most of which are located outside of the United States, for the components and raw materials used in our consumer electronics and sporting good products. Although there are many suppliers for each of our component parts and raw materials, we are dependent on a limited number of suppliers for many of the significant components and raw materials. This reliance involves a number of significant risks, including:
o lack of availability of materials and interruptions in delivery of components and raw materials from our suppliers;
o manufacturing delays caused by such lack of availability or interruptions in delivery;
o fluctuations in the quality and the price of components and raw materials, in particular due to the petroleum price impact on such materials; and
o risks related to foreign operations.
We do not have any long-term or exclusive purchase commitments with any of our suppliers. StarLite, Lasco Industries and Oxygen are our largest suppliers of components for our consumer electronics products, each of which accounted for more than 10% of our purchases of components for our consumer electronics products for our latest fiscal year. Our failure to maintain existing relationships with our suppliers or to establish new relationships in the future could also negatively affect our ability to obtain our components and raw materials used in our products in a timely manner. If we are unable to obtain ample supply of product from our existing suppliers or alternative sources of supply, we may be unable to satisfy our customers' orders which could reduce our revenues and adversely affect our relationship with our customers.
The operating results of our sporting good segment may continue to be affected by budgetary restrictions of schools and government agencies.
A substantial portion of our sporting goods product revenues are generated through sales to the institutional market, including:
o public and private schools;
o colleges and universities;
o military academies;
o municipal and governmental agencies;
o military and correctional facilities;
o youth sports leagues.
As a result, our sporting goods business is substantially dependent on the budgetary allowances of schools as well as local, state and federal government agencies. Restrictions or reductions to the budgeted spending of these entities could reduce the amount of goods purchased from us and could materially adversely affect our revenues and earnings.
If our original equipment manufacturers are unable to deliver our products in the required amounts and in a timely fashion, we could experience delays or reductions in shipments to our customers which could reduce our revenues and adversely affect our relationship with our customers.
All of our consumer electronic products and approximately 23.0% of our sporting good products are manufactured in accordance with our specifications by original equipment manufacturers principally located in:
o South Korea;
o China;
o Malaysia;
o Thailand; and
o Taiwan
If we are unable to obtain our products from the original equipment manufacturers located in these countries in the required quantities and quality and in a timely fashion, we could experience delays or reductions in product shipments to our customers which could negatively affect our ability to meet the requirements of our customers, as well as our relationships with our customers.
Unanticipated disruptions in our operations or slowdowns by our suppliers, manufacturers and shipping companies could adversely affect our ability to deliver our products and service our customers which could reduce our revenues and adversely affect our relationship with our customers.
Our ability to provide high quality customer service, process and fulfill orders and manage inventory depends on:
o the efficient and uninterrupted operation of our call center, distribution center and manufacturing facilities related to our sporting goods segment; and
o the timely and uninterrupted performance of third party manufacturers and suppliers, shipping companies, and dock workers relating to both our consumer electronics and sporting goods segments.
Any material disruption or slowdown in the operation of our call center, distribution center, manufacturing facilities or management information systems, or comparable disruptions or slowdowns suffered by our principal manufacturers, suppliers and shippers could cause delays in our ability to receive, process and fulfill customer orders and may cause orders to be canceled, lost or delivered late, goods to be returned or receipt of goods to be refused. Our sporting goods segment ships approximately 60% of its products using United Parcel Service. A strike by UPS or any of our other major carriers or any other disruption in our ability or our customer's ability to receive our products as a result of a strike or otherwise could materially adversely affect our results of operations as a result of our failure to deliver our products in a timely manner and using other more expensive freight carriers.
The operations of our sporting goods segment are subject to high fixed costs, which could adversely affect our earnings.
The operations and maintenance of our call center, distribution center, manufacturing facilities and management information systems related to our sporting goods segment involve substantial fixed costs. Paper and postage are significant components of our sporting goods segment operating costs. Catalog mailings entail substantial paper, postage, and costs associated with catalog development, each of which is subject to price fluctuations. If net revenues are substantially below expectations, these fixed costs may not be proportionately reduced and could materially adversely affect the earnings of our sporting goods segment and, in turn, our consolidated earnings.
Our revenues and earnings could be adversely affected by foreign regulations and changes in the political, public health and economic conditions in the foreign countries in which we operate our business.
We derive a significant portion of our revenues from sales of products manufactured by third parties located primarily in China, South Korea, Malaysia, Thailand and Taiwan. In addition, third parties located in these and other countries located in the same region produce and supply many of the components and raw materials used in our products. Conducting an international business inherently involves a number of difficulties and risks that could adversely affect our ability to generate revenues and could subject us to increased costs. The main factors that may adversely affect our revenues and increase our costs are:
o currency fluctuations which could cause an increase in the price of the components and raw materials used in our products and a decrease in our profits;
o more stringent export restrictions in the countries in which we operate which could adversely affect our ability to deliver our products to our customers;
o tariffs and other trade barriers which could make it more expensive for us to obtain and deliver our products to our customers;
o political instability and economic downturns in these countries which could adversely affect our ability to obtain our products from our manufacturers or deliver our products to our customers in a timely fashion; and
o seasonal reductions in business activity in these countries during the summer months which could adversely affect our sales.
In addition, the prior outbreak of severe acute respiratory syndrome, or SARS, which had particular impact in China, Hong Kong and Singapore, had a negative effect on our consumer electronics operations. Our operations, including our ability to obtain our products in a timely fashion, could be impacted again, including disrupting the operation of our suppliers, manufacturers and shipping companies, each of which could adversely affect our earnings, should SARS reoccur in the future.
We have experienced, and may in the future experience, many of these risks and cannot predict the impact of any particular risk on our operations. However, any of these factors may materially adversely affect our revenues and/or increase our operating expenses.
The seasonality of our business, as well as changes in consumer spending and economic conditions, may cause our quarterly operating results to fluctuate and cause our stock price to decline.
Our net revenue and operating results may vary significantly from quarter to quarter. The main factors that may cause these fluctuations are:
o seasonal variations in operating results;
o variations in the sales of our products to our significant customers;
o increases in returned consumer electronics products in the March quarter which follows our peak September and December selling quarters;
o variations in manufacturing and supplier relationships;
o if we are unable to correctly anticipate and provide for inventory requirements from quarter to quarter, we may not have sufficient inventory to deliver our products to our customers in a timely fashion or we may have excess inventory that we are unable to sell;
o the discretionary nature of our customers' demands and spending patterns;
o changes in market and economic conditions; and
o competition.
In addition, our quarterly operating results could be materially adversely affected by political instability, war, acts of terrorism or other disasters.
Sales of our consumer electronics products are somewhat seasonal due to consumer spending patterns, which tend to result in significantly stronger sales in our September and December fiscal quarters, especially as a result of the holiday season. Our sporting goods segment is also somewhat seasonal due to stronger demand for its products during the March fiscal quarter due to volume generated by spring and summer sports, favorable outdoor weather conditions and school needs before summer closings. These patterns will probably not change significantly in the future. Although we believe that the seasonality of our business is based primarily on the timing of consumer demand for our products, fluctuations in operating results can also result from other factors affecting us and our competitors, including new product developments or introductions, availability of products for resale, competitive pricing pressures, changes in product mix, pricing and product reviews and other media coverage. Due to the seasonality of our business, our results for interim periods are not necessarily indicative of our results for the year.
Our sales and earnings can also be affected by changes in the general economy since purchases of consumer electronics and sporting goods are generally discretionary for consumers and subject to budgetary constraints by schools and government agencies. Our success is influenced by a number of economic factors affecting disposable consumer income, such as employment levels, business conditions, budgetary restrictions of schools and government agencies, interest rates and taxation rates. Adverse changes in these economic factors, among others, may restrict consumer spending or increase budgetary restrictions at schools and government agencies, thereby negatively affecting our sales and profitability.
As a result of these and other factors, revenues for any quarter are subject to significant variation, which may adversely affect our results of operations and the market price for our common stock.
If our third party sales representatives fail to adequately promote, market and sell our consumer electronic products, our revenues could significantly decrease.
A portion of our consumer electronic product sales are made through third party sales representative organizations, whose members are not our employees. Our level of sales depends on the effectiveness of these organizations, as well as the effectiveness of our own employees. Some of these third party representatives may sell, with our permission, competitive products manufactured by other third parties as well as our products. During our fiscal years ended March 31, 2005 and 2004, these organizations were responsible for approximately 45% and 49%, respectively, of our net consumer electronics revenues during such periods. In addition, two of these representative organizations were responsible for a significant portion of these revenues. If any of our third party sales representative organizations engaged by us, especially our two largest, fails to adequately promote, market and sell our consumer electronics products, our revenues could be significantly decreased until a replacement organization or distributor could be retained by us. Finding replacement organizations and distributors could be a time consuming process during which our revenues could be negatively impacted.
The ownership of our common stock by Geoffrey P. Jurick, our Chairman, Chief Executive Officer and President, substantially reduces the influence of our other stockholders.
Geoffrey Jurick, our Chairman, Chief Executive Officer and President, owns approximately 38.0% of our outstanding common stock. As a result, Geoffrey Jurick currently has the ability to influence significantly the actions that require stockholder approval, including:
o the election of our directors; and
o the approval of mergers, sales of assets or other corporate transactions or matters submitted for stockholder approval.
As a result, our other stockholders may have little or no influence over matters submitted for stockholder approval.
In January 2005, Geoffrey P. Jurick, the Chairman, Chief Executive Officer and President of Emerson Radio Corp., obtained a $16 million loan from a foreign financial institution. The loan (which, prior to extension, came due on April 20, 2005) currently matures on July 20, 2005, is guaranteed by a third party unaffiliated with Emerson and is secured by a pledge by Mr. Jurick of approximately 10 million shares of his Emerson common stock (approximately 38% of Emerson's common stock). If the loan term is not further extended and the loan is not repaid at maturity, the stock could be utilized to satisfy Mr. Jurick's obligations.
We may seek to make acquisitions that prove unsuccessful or strain or divert our management's attention and our capital resources.
We may seek to grow our business through acquisitions of related businesses. Such acquisitions present risks that could materially adversely affect our earnings, including:
o the diversion of our management's attention from our everyday business activities;
o the assimilation of the operations and personnel of the acquired business;
o the incurring of additional expenses related to such acquisitions, whether or not such acquisitions are consummated;
o the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business; and
o the need to expand management, administration and operational systems.
If we make such acquisitions, we cannot predict whether:
o we will be able to successfully integrate the operations of any new businesses into our business;
o we will realize any anticipated benefits of completed acquisitions; or
o there will be substantial unanticipated costs associated with acquisitions.
In addition, future acquisitions by us may result in:
o potentially dilutive issuances of our equity securities;
o the incurrence of additional debt; and
o the recognition of significant charges for depreciation and amortization related to goodwill and other intangible assets.
We continuously evaluate potential acquisitions of related businesses. However, competition for such potential acquisitions is intense and we have not reached any agreement or arrangement with respect to any particular acquisition and we may not be able to complete any acquisitions on favorable terms or at all.
We are subject to intense competition in the industries in which we operate, which could cause material reductions in the selling price of our products or losses of our market share.
The consumer electronics industry and the institutional market for sporting goods and leisure products are highly competitive, especially with respect to pricing and the introduction of new products and features. Our consumer electronics segment competes in the low to medium-priced sector of the consumer electronics market and competes primarily on the basis of:
o reliability;
o quality;
o price;
o design;
o consumer acceptance of the Emerson(R) trademark; and
o quality service and support to retailers and our customers.
Our sporting goods segment competes in the institutional sporting goods market principally with local sporting goods dealers, retail sporting goods stores, other direct mail catalog marketers and providers of sporting goods on the Internet. Our sporting goods segment competes principally on the basis of:
o brand;
o quality;
o price;
o product availability; and
o customer service.
In recent years we and many of our competitors have regularly lowered prices, and we expect these pricing pressures to continue. If these pricing pressures are not mitigated by increases in volume, cost reductions or changes in product mix, our revenues and profits could be substantially reduced. As compared to us, many of our competitors have:
o significantly longer operating histories;
o significantly greater managerial, financial, marketing, technical and other competitive resources; and
o greater name recognition.
As a result, our competitors may be able to:
o adapt more quickly to new or emerging technologies and changes in customer requirements;
o devote greater resources to the promotion and sale of their products and services; and
o respond more effectively to pricing pressures.
These factors could materially adversely affect our operations and financial condition. In addition, competition could increase if:
o new companies enter the market;
o existing competitors expand their product mix; or
o we expand into new markets.
An increase in competition could result in material price reductions or loss of our market share.
Our business could be adversely affected if we cannot protect our intellectual property rights or if we infringe on the intellectual property rights of others.
Our ability to compete effectively will depend on our ability to maintain and protect our proprietary rights. We own the Emerson(R) trademark, which is materially important to our business, as well as our license, other trademarks and proprietary rights that are used for certain of our home entertainment and consumer electronics products. In addition, we license names and trademarks in connection with our sporting goods business. Our trademarks are registered throughout the world, including the United States, Canada, Mexico, France, Spain, Germany and the United Kingdom. However, third parties may seek to challenge, invalidate, circumvent or render unenforceable any proprietary rights owned by or licensed to us. In addition, in the event third party licensees fail to protect the integrity of our trademarks, the value of these marks could be adversely affected.
The laws of some foreign countries in which we operate may not protect our proprietary rights to the same extent as do laws in the United States. The protections afforded by the laws of such countries may not be adequate to protect our intellectual property rights.
Our inability to protect our proprietary rights could materially adversely affect the license of our trade names and trademarks to third parties as well as our ability to sell our products. Litigation may be necessary to:
o enforce our intellectual property rights;
o protect our trade secrets; and
o determine the scope and validity of such intellectual property rights.
Any such litigation, whether or not successful, could result in substantial costs and diversion of resources and management's attention from the operation of our business.
We may receive notice of claims of infringement of other parties' proprietary rights. Such actions could result in litigation and we could incur significant costs and diversion of resources in defending such claims. The party making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief. Such relief could effectively block our ability to make, use, sell, distribute or market our products and services in such jurisdiction. We may also be required to seek licenses to such intellectual property. We cannot predict, however, whether such licenses would be available or, if available, that such licenses could be obtained on terms that are commercially reasonable and acceptable to us. The failure to obtain the necessary licenses or other rights could delay or preclude the sale, manufacture or distribution of our products and could result in increased costs to us.
We could be exposed to product liability or other claims for which our product liability or other insurance may be inadequate.
A failure of any of the products marketed by us, particularly those products sold by our sporting goods segment, may subject us to the risk of product liability claims and litigation arising from injuries allegedly caused by the improper functioning or design of our products. Although we currently maintain product liability insurance in amounts which we consider adequate, we cannot assure that:
o our insurance will provide adequate coverage against potential liabilities;
o adequate product liability insurance will continue to be available in the future; or
o our insurance can be maintained on acceptable terms.
We and certain of our officers and directors, are party to a class action lawsuit and we cannot assure the outcome of such litigation. Although we maintain liability insurance in amounts that we consider adequate, we cannot assure that such policies will provide adequate coverage against potential liabilities. To the extent product liability or other litigation losses are beyond the limits or scope of our insurance coverage, our expenses could materially increase. See Item 3 - "Legal Proceedings".
The inability to use our tax net operating losses could result in a charge to earnings and could require us to pay higher taxes.
Both Emerson and SSG have substantial tax net operating losses available to reduce taxable income for federal and state income tax purposes. A portion of the benefit associated with the tax net operating losses has been recognized as a deferred tax asset in our financial statements and could be used to reduce our tax liability in future profitable periods. We believe these net deferred tax assets will be realized through tax planning strategies available in future periods and future profitable operating results. Although realization is not assured at either Emerson or SSG, we believe it is more likely than not that all of the remaining net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced or eliminated in the near term if certain tax planning strategies are not successfully executed, or estimates of future taxable income during the carryforward period is reduced.
In addition, transactions consummated by us or Geoffrey Jurick, that together with other transactions consummated by Emerson, SSG or Mr. Jurick or that involve the common stock of Emerson or SSG, are deemed collectively to result in a change of control of Emerson or SSG, respectively, and under the tax code could limit the use of our tax net operating losses. In the event that either Emerson or SSG is unable to utilize its tax net operating losses in a reasonable time frame, it would be required to adjust its deferred tax asset on its financial statements which would result in a charge to earnings. Additionally, should the utilization of tax net operating losses be limited, we would be required to pay a greater amount of taxes in future periods.
Our existing indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.
From time to time we incur debt in connection with our operations. As a result, we may be subject to the risks associated with indebtedness, including:
o we must dedicate a portion of our cash flows from operations to pay debt service costs and, as a result, we have less funds available for operations and other purposes;
o it may be more difficult and expensive to obtain additional funds through financings, if available at all;
o we are more vulnerable to economic downturns and fluctuations in interest rates, less able to withstand competitive pressures and less flexible in reacting to changes in our industry and general economic conditions; and
o if we default under any of our existing credit facilities or if our creditors demand payment of a portion or all of our indebtedness, we may not have sufficient funds to make such payments.
We have pledged substantially all of our assets to secure our borrowings under our credit facilities and are subject to covenants that may restrict our ability to operate our business.
Our indebtedness under our credit facilities are secured by substantially all of our assets. If we default under the indebtedness secured by our assets, those assets would be available to the secured creditor to satisfy our obligations to the secured creditor. In addition, our credit facilities impose certain restrictive covenants, including financial, ownership, operational and net worth covenants. Failure to satisfy any of these covenants could result in all or any of the following:
o acceleration of the payment of our outstanding indebtedness;
o our inability to borrow additional amounts under our existing financing arrangements; and
o our inability to secure financing on favorable terms or at all from alternative sources.
Any of these consequences could significantly reduce the amount of cash and financing available to us which in turn would adversely affect our ability to operate our business, including acquiring our products from our manufacturers and distributing our products to our customers.
MARKET RELATED RISKS
The market price of our common stock has experienced significant price and volume fluctuations from time to time.
The market price for our common stock and for securities of similar companies has from time to time experienced significant price and volume fluctuations. Factors which may affect our market price include:
o market conditions in the industries in which we operate;
o competition;
o sales or the possibility of sales of our common stock;
o our results of operations and financial condition; and
o general economic conditions.
Furthermore, the stock market has experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. These market fluctuations may also adversely affect the market price of our common stock.
Our organizational documents and Delaware law may make it harder for us to be acquired without the consent and cooperation of our board of directors and management.
Several provisions of our organizational documents and Delaware law may deter or prevent a takeover attempt, including a takeover attempt in which the potential purchaser offers to pay a per share price greater than the current market price of our common stock. Under the terms of our certificate of incorporation, our board of directors has the authority, without further action by the stockholders, to issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. The ability to issue shares of preferred stock could tend to discourage takeover or acquisition proposals not supported by our current board of directors.
FORWARD-LOOKING INFORMATION
This report contains various forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and information that is based on management's beliefs as well as assumptions made by and information currently available to management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. When used in this report, the words "anticipate", "believe", "estimate", "expect", "predict", "project", and similar expressions are intended to identify forward-looking statements. We cannot guarantee the accuracy of the forward-looking statements, and you should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including the statements under "Risk Factors" set forth above and "Critical Accounting Policies" set forth in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Due to these uncertainties and risks, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
ITEM 2. PROPERTIES
The following table sets forth the material properties owned or leased by us:
Approximate Lease
Square Expires
Facility Purpose Footage Location or is Owned
---------------- ------- -------- --------
Consumer electronics segment:
Corporate headquarters 22,500 Parsippany, NJ December 2009
Hong Kong office 10,000 Hong Kong, China October 2005
Macao office (1) 2,000 Macao, China Owned
Macao office 8,700 Macao, China Owned
Warehouse 97,105 Irving, TX June 2010
Sporting goods segment:
Manufacturing and corporate 135,000 Farmers Branch, TX December 2007
headquarters
Warehouse and fulfillment processing 181,000 Farmers Branch, TX December 2007
Manufacturing 35,000 Anniston, AL Owned
Manufacturing 45,000 Anniston, AL Owned
|
(1) - currently in process of being sold.
Emerson also utilizes public warehouse space with terms typically of one year. Public warehouse expenses for Emerson varies based on a percentage of sold products shipped from the location.
We believe that the properties used for our operations are in satisfactory condition and adequate for our present and anticipated future operations. In addition to the facilities listed above, SSG leases space in various locations, primarily for use as sales offices, which lease terms range from month to month to three years and are not material to us.
ITEM 3. LEGAL PROCEEDINGS
Putative Class Actions
Between September 4, 2003 and October 30, 2003, several putative class action lawsuits were filed in the United States District Court for the District of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth Corby and John Raab (the "Individual Defendants") on behalf of purchasers of Emerson's publicly traded securities between January 29, 2003 and August 12, 2003 (the "Class Period.") On December 17, 2003, the Court entered a Joint Stipulation and Order consolidating these putative class actions under the caption In Re Emerson Radio Corp. Securities Litigation, 03cv4201 (JLL) (the "Consolidated Action.") Further to that Stipulation and Order, lead plaintiff was appointed and co-lead counsel and co-liaison counsel were approved by the Court in the Consolidated Action. Consistent with the Stipulation and Order, the plaintiffs filed an Amended Consolidated Complaint (the "Amended Complaint") that, among other things, added Jerome Farnum, one of Emerson's directors, as an individual defendant in the litigation.
Generally, the Amended Complaint alleges that Emerson and the Individual Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated there under, by (i) issuing certain positive statements during the Class Period regarding our ability to replace lost revenues attributable to the Hello Kitty(R) license and (ii) omitting to disclose that Emerson suffered allegedly soured relationships with its largest retail customers. The Amended Complaint further alleges that these statements were materially false and misleading when made because Emerson allegedly misrepresented and omitted certain adverse facts which then existed and disclosure of which was necessary to make the statements not false and misleading. Emerson and the Individual Defendants deny all allegations and have moved to dismiss the Complaint in its entirety for failure to state a claim. The motion to dismiss was fully briefed and was submitted to the Court on October 15, 2004. The Court's decision on the motion is pending. Emerson and the Individual Defendants intend to defend the lawsuit vigorously.
Other Matters
We are a party to various other litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our financial position, results or operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
(a) Market Information
Our common stock has traded on the American Stock Exchange under the symbol MSN since December 22, 1994. The following table sets forth the range of high and low sales prices for our common stock as reported by the American Stock Exchange during the last two fiscal years.
FISCAL 2005 FISCAL 2004
------------------- ------------------
High Low High Low
First Quarter $ 4.10 $ 3.00 $ 7.88 $ 5.95
Second Quarter 3.25 2.56 7.80 2.47
Third Quarter 3.83 2.58 4.28 3.15
Fourth Quarter 3.98 3.00 4.05 3.27
|
There is no established trading market for our Series A convertible preferred stock, whose conversion feature expired as of March 31, 2002.
(b) Holders
At April 25, 2005, there were approximately 342 stockholders of record of our common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders, because a large portion of our common stock is held of record in broker "street names."
(c) Dividends
Our policy has been to retain all available earnings, if any, for the development and growth of our business. We have not paid and do not intend to pay cash dividends on our common stock. In addition, our credit facility restricts our ability to pay cash dividends on our common stock.
(d) Unregistered Securities
None
(e) Share Repurchases
For the fiscal year ended March 31, 2005, we did not repurchase any shares under the Emerson Radio Corp.'s common stock share repurchase program. The share repurchase program was publicly announced in September 2003 to repurchase up to 2,000,000 shares of Emerson's outstanding common stock. Share repurchases are made from time to time in open market transactions in such amounts as determined in the discretion of Emerson's management within the guidelines set forth by Rule 10b - 18 under the Securities Exchange Act. Prior to the fiscal year ended March 31, 2005, we repurchased 1,111,625 shares under this program. The maximum number of shares that are available to be repurchased under Emerson Radio Corp's common share repurchase program as of March 31, 2005 was 888,375.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data for the five years ended March 31, 2005. The selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, and Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations."
-------------- ------------- -------------- -------------- ------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2003 2002 2001 (1)
-------------- ------------- -------------- -------------- ------------
(In thousands, except per share data)
Summary of Operations:
Net Revenues (2) $ 320,704 $ 263,774 $ 330,315 $ 297,175 $ 354,760
Operating Income (loss) $ 11,303 $ (1,032) $ 18,685 $ 9,535 $ 13,980
Income (loss) from continuing
operations $ 5,855 $ (3,735) $ 26,206 $ 18,649 $ 13,495
Income (loss) from discontinued operations,
net of tax $ 50 $ 2,661 $ 840 $ 758 (842)
Cumulative effect of change in accounting
principle
-- -- (5,546) -- --
Net income (loss) $ 5,905 $ (1,074) $ 21,500 $ 19,407 $ 12,653
Balance Sheet Data at Period End:
Total Assets $ 131,168 $ 118,669 $ 134,562 $ 135,839 $ 119,006
Current Liabilities 45,899 40,637 48,668 54,723 45,330
Long-Term Debt 14,970 15,027 18,079 29,046 38,257
Shareholders' Equity 53,603 47,212 51,237 34,740 15,131
Working Capital 56,116 46,729 49,101 49,290 39,497
Current Ratio 2.2 to 1 2.2 to 1 2.0 to 1 1.9 to 1 1.9 to 1
Per Common Share: (3)
Basic net income (loss) per share:
Income (loss) from
continuing operations $ .22 $ (.14) $ .95 $ .60 $ .38
Discontinued operations -- .10 .03 .02 (.02)
Cumulative effect of change in
accounting principle -- -- (.20) -- --
------------- ------------ ------------- ------------ -----------
$ .22 $ (.04) $ .78 $ .62 $ .36
============= ============ ============= ============ ===========
Diluted net income (loss) per share:
Income (loss) from
continuing operations $ .22 $ (.14) $ .91 $ .50 $ .35
Discontinued operations -- .10 .03 .02 (.02)
Cumulative effect of change in
accounting principle -- -- (.19) -- --
------------- ------------ ------------- ------------ ------------
$ .22 $ (.04) $ .75 $ .52 $ .33
============= ============ ============= ============ ===========
Weighted Average Shares Outstanding:
Basic 26,991 27,227 27,716 31,298 35,066
Diluted 27,264 27,227 28,640 40,485 38,569
|
(1) Prior to March 23, 2001, the investment in SSG was accounted for under the equity method of accounting. On March 23, 2001, a majority interest in SSG was reached and required this interest be accounted for as a partial purchase to the extent of the change in control. The assets and liabilities of SSG have been revalued to fair value to the extent of Emerson's interest in SSG. SSG's results of operations and the minority interest related to those results have been included in our results of operations as though it had been acquired at April 1, 2000.
(2) During fiscal 2004, SSG discontinued operations of certain team dealer operations, and sold all of the capital stock of Athletic Training Equipment Company, Inc. ("ATEC"). These transactions were classified as discontinued operations, and accordingly reported separate from continuing operations. The financial statements for fiscal 2001 through 2003 have been reclassified to reflect such discontinued results.
(3) For fiscal 2002 and 2001, dilutive securities include 3,531,000 and 3,066,000 shares, respectively, assuming conversion 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, 2002, and 2001. For fiscal 2005, 2003, 2002 and 2001, dilutive securities also include 322,000, 924,000, 452,000 and 437,000 shares assuming conversion of 632,000, 1,195,000, 1,645,000 and 1,658,000 options, respectively, and 100,000 warrants for fiscal 2003. For fiscal 2002, dilutive securities also included 5,204,000 shares assuming the conversion of convertible debentures. Per common share data is based on the net income or loss for the year and deduction of the amount of dividends required to be paid to the holders of the preferred stock and the weighted average of common stock outstanding during each fiscal year. Loss per share in fiscal 2004 does not include potentially dilutive securities assumed outstanding since the effects of such conversion would be anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During fiscal 2001, Emerson increased its ownership in SSG to 50.1%. Accordingly, Emerson's and SSG's results of operations are consolidated for fiscal 2005, 2004 and 2003. See Item 8 - "Financial Statements and Supplementary Data - Note 1 and Note 3 of Notes to Consolidated Financial Statements."
Management's Discussion and Analysis of Financial Condition and Results of Operation is presented in three parts: consolidated operations, consumer electronics segment and sporting goods segment.
The following discussion of our operations and financial condition should be read in conjunction with the Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Special Note: Certain statements set forth below constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See Item 1 - "Business- Forward-Looking Information."
In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all figures are approximations.
CONSOLIDATED OPERATIONS:
The following table sets forth, for the periods indicated, certain items related to our consolidated statements of operations as a percentage of net revenues for the fiscal years ended March 31. A detailed discussion of the material changes in our operating results is set forth under our discussion of our two operating segments: consumer electronics and sporting goods.
2005 2004 2003
---- ---- ----
Net revenues (in thousands) $ 320,704 $ 263,774 $ 330,315
================= ================= ===============
100.0% 100.0% 100.0%
Cost of sales 81.8% 81.7% 80.0%
Other operating costs and expenses 1.8% 2.0% 1.3%
Selling, general and administrative expenses 12.9% 15.9% 13.0%
Acquisition costs (recovered) incurred (0.1%) 0.6% --
Stock based costs 0.1% 0.2% --
----------------- ----------------- ---------------
Operating income (loss) 3.5% (0.4%) 5.7%
Interest expense, net 0.5% 0.5% 0.8%
Minority interest in net (income) loss of
consolidated subsidiary (0.2%) 0.3% 0.2%
----------------- ----------------- ---------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 2.8% (0.6%) 5.1%
Provision (benefit) for income taxes 1.0% 0.8% (2.8%)
----------------- ----------------- ---------------
Income (loss) from continuing operations 1.8% (1.4%) 7.9%
Income from discontinued operations, net of
tax -- 1.0% 0.3%
Cumulative effect of change in
accounting principle -- -- (1.7%)
----------------- ----------------- ---------------
Net income (loss) 1.8% (0.4%) 6.5%
================= ================= ===============
|
RESULTS OF CONSOLIDATED OPERATIONS - FISCAL 2005 COMPARED WITH FISCAL 2004
Net Revenues - Net revenues for fiscal 2005 increased approximately $56.9 million, or 21.6%, to $320.7 million as compared to $263.8 million for fiscal 2004. The increase in net revenues was primarily due to an increase of approximately $50.8 million, or 28.3%, in the consumer electronics segment, as well as an increase of $6.1 million, or 7.3%, in the sporting goods segment.
Cost of Sales - Cost of sales, in absolute terms, increased $46.8 million, or 21.7%, to $262.3 million for fiscal 2005 as compared to $215.5 million for fiscal 2004. This increase was primarily due to an increase of $44.6 million, or 29.0% in the consumer electronics segment, as well as an increase of $2.3 million, or 3.6%, in the sporting goods segment. As a percentage of consolidated net revenues, cost of sales increased from 81.7% in fiscal 2004 to 81.8% in fiscal 2005.
Other Operating Costs and Expenses - Other operating costs and expenses are associated with the consumer electronics segment and include those components as described in Note 1 of the Notes to Consolidated Financial Statements. As a result of increased activity in these areas, other operating costs increased $635,000, or 12.1%, from $5.3 million (2.0% of consolidated net revenues) in fiscal 2004 to $5.9 million (1.8% of consolidated net revenues) in fiscal 2005.
Selling, General and Administrative Expenses ("S,G&A") - In absolute terms, S,G&A costs decreased by approximately $717,000, or 1.7%, from $42.0 million in fiscal 2004 to $41.3 million in fiscal 2005. In the consumer electronics segment, S,G&A expenses increased $1.6 million, or 9.8%, while the sporting goods segment recorded a decrease in S,G&A costs of $2.3 million, or 8.7%. As a percentage of consolidated net revenues, S,G&A expenses decreased to 12.9% for fiscal 2005 as compared to 15.9% for fiscal 2004, principally as a result of the increase in consolidated net revenues.
Acquisition Costs (Recovered) Incurred - Acquisition costs are associated with the consumer electronics segment. Adjustments to acquisition costs incurred in the prior year were recorded in fiscal 2005, resulting in a recovery of such costs of $454,000, or -0.1% of consolidated net revenues. For fiscal 2004, acquisition costs were $1.6 million, or 0.6% of consolidated net revenues, due to two unsuccessful acquisition attempts during the year.
Stock Based Costs - Stock based costs relate to the cost of warrants associated with consulting service agreements and stock options expense associated with the early adoption of SFAS 123R, "Share-Based Payments" for fiscal 2005. (See Note 1 to accompanying financial statements). In absolute terms, stock based costs were approximately $377,000, or 0.1% of consolidated net revenues, for fiscal 2005, as compared to $524,000, or 0.2% of consolidated net revenues, for fiscal 2004.
Interest expense, net - In absolute terms, interest expense increased $220,000, or 16.4%, from $1.3 million in fiscal 2004 to $1.6 million in fiscal 2005. The increase was primarily due to higher borrowing amounts and borrowing costs in the consumer electronics segment, resulting in an increase of $463,000, or 52.4%, partially offset by a decrease of $243,000, or 52.9%, in the sporting goods segment. Interest expense, as a percentage of consolidated net revenues, remained unchanged at 0.5% for both fiscal 2005 and fiscal 2004.
Minority Interest in Net (Income) Loss of Consolidated Subsidiary - Minority interest in net (income) loss of consolidated subsidiary represents that portion of the sporting goods segment (income) loss for the fiscal year that relates to the ownership of SSG by shareholders other than us. See Item 8 - "Financial Statements and Supplementary Data - Note 1 of Notes to Consolidated Financial Statements."
Provision (Benefit) For Income Taxes - The provision for income taxes, which primarily represents the deferred tax charges associated with Emerson's profits in the United States, increased approximately $833,000, or 38.7%, to $3.0 million for fiscal 2005 from approximately $2.2 million for fiscal 2004. The increase in the provision for income taxes was primarily due to an increase in pre-tax profit in the consumer electronics segment.
Income from Discontinued Operations, Net of Tax - From July 2003 through November 2003, SSG ceased operating several of its Team Dealer locations. In November 2003, SSG sold all of the issued and outstanding shares of capital stock of its wholly owned subsidiary - ATEC. Income of $50,000 was recorded during the wind down of these operations (the "discontinued operations") in fiscal 2005 as compared to income of approximately $2.7 million, or 1.0% of consolidated net revenues for fiscal 2004.
Net Income (loss) - As a result of the foregoing factors, we had net earnings of approximately $5.9 million (1.8% of consolidated net revenues) for fiscal 2005 as compared to a net loss of $1.1 million (-0.4% of consolidated net revenues) for fiscal 2004.
RESULTS OF CONSOLIDATED OPERATIONS - FISCAL 2004 COMPARED WITH FISCAL 2003
Net Revenues - Net revenues for fiscal 2004 decreased approximately $66.5 million, or 20.1%, to $263.8 million as compared to $330.3 million for fiscal 2003. The decrease in net revenues was primarily due to a decrease of approximately $65.3 million, or 26.6%, in the consumer electronics segment, as well as a decrease of $1.3 million, or 1.5%, in the sporting goods segment.
Cost of Sales - Cost of sales, in absolute terms, decreased $48.6 million, or 18.4%, to $215.4 million for fiscal 2004 as compared to $264.0 million for fiscal 2003. This decrease was primarily due to a decrease of $49.1 million, or 24.2%, in the consumer electronics segment, partially offset by an increase of $474,000, or 0.8%, in the sporting goods segment. As a percentage of consolidated net revenues, cost of sales increased from 80.0% in fiscal 2003 to 81.7% in fiscal 2004. The percentage increase in cost of sales was primarily the result of lower margins in the consumer electronics segment in fiscal 2004.
Other Operating Costs and Expenses - Other operating costs and expenses are associated with the consumer electronics segment and include those components as described in Note 1 of Note to Consolidated Financial Statements. As a result of increased activity in these areas, other operating costs increased $0.9 million, or 20.8%, from $4.3 million (1.3% of consolidated net revenues) in fiscal 2003 to $5.3 million (2.0% of consolidated net revenues) in fiscal 2004.
Selling, General and Administrative Expenses ("S,G&A") - In absolute terms, S,G&A expenses decreased $1.2 million, or 2.7%, to $42.0 million in fiscal 2004 as compared to $43.2 million in fiscal 2003. This decrease in S,G&A was primarily the result of a decrease of $1.5 million, or 8.6%, in the consumer electronics segment, partially offset by an increase of $319,000, or 1.2% in the sporting goods segment. As a percentage of consolidated net revenues, S,G&A expenses increased to 15.9% for fiscal 2004 as compared to 13.0% for fiscal 2003, principally as a result of the decline in revenues.
Acquisition Costs - Acquisition costs are associated with the consumer electronics segment. Acquisition costs were $1.6 million (0.6% of consolidated net revenues) for fiscal 2004, due to two unsuccessful acquisition attempts during the year. There were no acquisition costs in fiscal 2003.
Stock Based Costs - Stock based costs are associated with the consumer electronics segment, which relate to the value of warrants issued in exchange for consulting services. Stock based costs increased from $49,000 (less than 0.1% of consolidated net revenues) in fiscal 2003 to $523,000 (0.2% of consolidated net revenues) in fiscal 2004.
Interest expense, net - Interest expense decreased $1.2 million, or 46.2%, from $2.5 million (0.8% of consolidated net revenues) in fiscal 2003 to $1.3 million (0.5% of consolidated net revenues) in fiscal 2004. The decrease was primarily due to lower borrowing amounts and lower interest rates, resulting in a decrease of $1.0 million, or 53.4%, in the consumer electronics segment, as well as a decrease of $0.2 million, or 23.4%, in the sporting goods segment.
Minority Interest in Net Loss of Consolidated Subsidiary - Minority interest in net loss of consolidated subsidiary represents that portion of the sporting goods segment loss for the fiscal year that relates to the ownership of SSG by shareholders other than us. See Item 8 - "Financial Statements and Supplementary Data - Note 1 of Notes to Consolidated Financial Statements."
Provision (Benefit) For Income Taxes - The provision for income taxes in absolute terms was $2.2 million in fiscal 2004 as compared to a tax benefit of $9.3 million in fiscal 2003. The provision of $2.2 million in fiscal 2004 primarily represents the deferred tax charges associated with Emerson's profits in the United States. The tax benefit in fiscal 2003 was primarily the result of a reduction in the valuation reserve in the consumer electronics segment, previously established against the deferred tax assets relating to the accounts receivable and temporary inventory differences, as well as the recognition of management's estimation of net operating loss carry forwards subject to limitations under IRC Section 382. See Item 8 - "Financial Statements and Supplementary Data - Note 7 of Notes to Consolidated Financial Statements."
Income from Discontinued Operations, Net of Tax - Income from discontinued operations, net of tax, is associated with the sporting goods segment. In July, October and November 2003, SSG ceased operations of its Team Dealer locations in Little Rock, Arkansas, Enid, Oklahoma, and Wichita, Kansas, respectively. In addition, SSG sold all of the issued and outstanding capital stock of ATEC. Income from discontinued operations increased $1.9 million to $2.7 million (1.0 % of consolidated net revenues) in fiscal 2004 from $0.8 million (0.3% of consolidated net revenues) in fiscal 2003. See Item 8 - "Financial Statements and Supplementary Data - Note 17 of Notes to Consolidated Financial Statements."
Net Income (loss) - As a result of the foregoing factors, we had a net loss of approximately $1.1 million (-0.4% of consolidated net revenues) for fiscal 2004 as compared to net income of $21.5 million (6.5% of consolidated net revenues) for fiscal 2003.
CONSUMER ELECTRONICS SEGMENT:
The following table summarizes certain financial information relating to the consumer electronics segment for the fiscal years ended March 31 (in thousands):
2005 2004 2003
---------------- ----------------- -----------------
Net revenues $ 230,783 $ 179,952 $ 245,216
---------------- ----------------- -----------------
Cost of sales 198,221 153,643 202,699
Other operating costs 5,889 5,254 4,348
Selling, general & administrative 17,436 15,885 17,380
Acquisition costs (recovered) incurred (454) 1,553 --
Stock based costs 249 524 49
---------------- ----------------- -----------------
Operating income 9,442 3,093 20,740
Interest expense, net 1,346 883 1,893
---------------- ----------------- -----------------
Income before income taxes 8,096 2,210 18,847
Provision (benefit) for income taxes 2,983 2,150 (9,281)
---------------- ----------------- -----------------
Net income $ 5,113 $ 60 $ 28,128
================ ================= =================
|
RESULTS OF CONSUMER ELECTRONICS OPERATIONS - FISCAL 2005 COMPARED WITH FISCAL
2004
Net Revenues - Net revenues for fiscal 2005 increased $50.8 million, or 28.3%, to $230.8 million as compared to $180.0 million for fiscal 2004. Consumer electronics net revenues are comprised of Emerson(R) branded product sales, themed product sales and licensing revenues. Emerson(R) branded product sales are earned from the sale of products bearing the Emerson(R) or HH Scott(R) brand name; themed product sales represent products sold bearing a certain theme or character; and licensing revenues are derived from licensing the Emerson(R) and HH Scott(R) brand names to licensees for a fee. The increase in net revenues comprised of:
i) Emerson(R) branded products sales increased to $202.9 million in fiscal 2005 compared to $158.5 million in fiscal 2004, an increase of $44.3 million, or 28.0%, primarily resulting from increased sales volume.
ii) Themed product sales increased to $17.1 million in fiscal 2005 compared to $10.4 million in fiscal 2004, an increase of $6.7 million (63.7%), primarily due to increased Nickelodeon sales volume.
iii) Licensing revenues decreased $169,000, or 1.5%, to $10.8 million in fiscal 2005 compared to $11.0 million in fiscal 2004, primarily due to slightly lower sales volumes from our video licensing agreements.
Cost of Sales - In absolute terms, cost of sales increased $44.6 million, or 29.0%, to $198.2 million in fiscal 2005 as compared to $153.6 million in fiscal 2004. Cost of sales, as a percentage of net revenues, increased from 85.4% in fiscal 2004 to 85.9% in fiscal 2005. The increase in cost of sales in relative terms was primarily due to lower margins on Emerson(R) branded and themed products, primarily attributable to competitive market conditions.
Gross profit margins continue to be subject to competitive pressures arising from pricing strategies associated with the price categories of the consumer electronics market in which Emerson competes, accordingly, a change in revenues does not directly correlate to a change in unit volume. Emerson's products are generally placed in the low-to-medium priced category of the market, which has a tendency to be highly competitive.
Other Operating Costs and Expenses - Other operating costs and expenses include those components as described in Note 1 of Notes to Consolidated Financial Statements. As a result of increased activity in these areas, other operating costs and expenses as a percentage of net revenues were 2.6% in fiscal 2005 as compared to 2.9% in fiscal 2004. In absolute terms, other operating costs and expenses increased $635,000, or 12.1%, to $5.9 million for fiscal 2005 as compared to $5.3 million in fiscal 2004.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a percentage of net revenues, were 7.6% in fiscal 2005 as compared to 8.8% in fiscal 2004. S,G&A, in absolute terms, increased $1.5 million, or 9.8%, to $17.4 million in fiscal 2005 as compared to $15.9 million for fiscal 2004. The increase in S,G&A in absolute terms between fiscal 2005 and 2004 was primarily due to increased freight out costs totaling $1.0 million, and increased advertising expenditures of $800,000, partially offset by a decrease in professional fees of $700,000, offset by smaller variances in other S,G&A expenses.
Acquisition Costs (Recovered) Incurred - Acquisition costs are associated with the consumer electronics segment. Adjustments to acquisition costs incurred in the prior year were recorded in fiscal 2005, resulting in a recovery of such costs of $454,000, or -0.2% of consumer electronics net revenues. For fiscal 2004, acquisition costs were $1.6 million, or 0.9% of consumer electronics net revenues, due to two unsuccessful acquisition attempts during the year.
Stock Based Costs - Stock based costs relate to the cost of warrants associated with consulting service agreements and stock options expense associated with the early adoption of SFAS 123R "Share-Based Payments" for fiscal 2005. Stock based costs decreased from $524,000 (0.3% of consumer electronics net revenues) in fiscal 2004 to $249,000 (0.1% of consumer electronics net revenues) in fiscal 2005, including approximately $161,000 related to the early adoption of SFAS 123R.
Interest Expense, net - Interest expense increased $463,000, or 52.4%, to $1.3 million (0.6% of consumer electronics net revenues) in fiscal 2005 from $0.9 million (0.5% of net revenues) in fiscal 2004. The increase was attributable primarily to increased borrowings and borrowing costs.
Provision (benefit) for Income Taxes - Emerson's provision for income taxes, which primarily represents the deferred tax charges associated with Emerson's profits in the United States, was $3.0 million for fiscal 2005, or 1.3% of consumer electronics net revenues, as compared to $2.2 million for fiscal 2004, or 1.2% of consumer electronics net revenues.
Net Income - As a result of the foregoing factors, the consumer electronics segment generated net income of $5.1 million (2.2% of net revenues) in fiscal 2005 as compared to $60,000 (less than 0.1% of net revenues) in fiscal 2004.
RESULTS OF CONSUMER ELECTRONICS OPERATIONS - FISCAL 2004 COMPARED WITH FISCAL
2003
Net Revenues - Net revenues for fiscal 2004 decreased $65.3 million, or 26.6%, to $180.0 million as compared to $245.2 million for fiscal 2003. Consumer electronics net revenues are comprised of Emerson branded(R) product sales, themed product sales and licensing revenues. Emerson(R) branded product sales are earned from the sale of products bearing the Emerson(R) or HH Scott(R) brand name; themed product sales represent products sold bearing a certain theme or character; and licensing revenues are derived from licensing the Emerson(R) and HH Scott(R) brand names to licensees for a fee. The decrease in net revenues comprised of:
i) A decrease in Emerson(R) branded products sales of $34.2
million, or 17.7% to $158.5 million in fiscal 2004
compared to $192.6 million in fiscal 2003. These decreases
were associated with increased competition, decreased
orders from our primary customers and an overall slower
economy.
ii) Themed product sales decreased to $10.4 million in fiscal
2004 compared to $42.2 million fiscal 2003, or a decrease
of $31.7 million (75.2%). These decreases were due to the
discontinuance of sales of NASCAR(R), Mary Kate and
Ashley(R) and Hello Kitty(R) themed products, and
decreases in Girl Power TM themed product, partially
offset by the start up sales from Nickelodeon themed
products.
iii) Licensing revenues increased to $11.0 million in fiscal
2004 compared to $10.4 million in fiscal 2003, primarily
due to increased sales volumes from our video licensing
agreements.
Cost of Sales - In absolute terms, cost of sales decreased $49.1 million, or a 24.2% decrease, to $153.6 million in fiscal 2004 as compared to $202.7 million in fiscal 2003. Cost of sales, as a percentage of net revenues, increased from 82.7% in fiscal 2003 to 85.4% in fiscal 2004. The increase in cost of sales in relative terms was primarily due to lower margins on product sales of traditionally higher margin themed products, and lower margins on Emerson(R) branded products, primarily attributable to competitive market conditions. In absolute terms, cost of sales decreased by $49.1 million due to a lower revenue base.
Other Operating Costs and Expenses - Other operating costs and expenses include those components as described in Note 1 of Notes to Consolidated Financial Statements. As a result of increased activity in these areas, other operating costs and expenses as a percentage of net revenues were 2.9% in fiscal 2004 as compared to 1.8% in fiscal 2003. In absolute terms, other operating costs and expenses increased $906,000, or 20.8%, to $5.3 million for fiscal 2004 as compared to $4.3 million in fiscal 2003.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a percentage of net revenues, were 8.8% in fiscal 2004 as compared to 7.1% in fiscal 2003. S,G&A, in absolute terms, decreased $1.5 million, or 8.6%, to $15.9 million in fiscal 2004 as compared to $17.4 million for fiscal 2003. The decrease in S,G&A in absolute terms between fiscal 2004 and 2003 was primarily due to a reduction of bad debt expenses totaling approximately $1.5 million.
Acquisition Costs - Acquisition costs were $1.6 million (0.9% of consumer electronics segment net revenues) for fiscal 2004, due to two unsuccessful acquisition attempts during the year. There were no acquisition costs in fiscal 2003.
Stock Based Costs - Stock based costs, are the value of warrants issued in exchange for consulting services. Stock based costs increased from $49,000 (less than 0.1% of consumer electronics net revenues) in fiscal 2003 to $524,000 (0.3% of consumer electronics net revenues) in fiscal 2004.
Interest Expense, net - Interest expense decreased $1.0 million, or 53.4%, from $1.9 million (0.8% of consumer electronics net revenues) in fiscal 2003 to $0.9 million (0.5% of net revenues) in fiscal 2004. The decrease was attributable primarily to decreased borrowing amounts and lower interest rates.
Provision (benefit) for Income Taxes - Emerson's provision for income taxes was $2.2 million for fiscal 2004 as compared to a benefit of $9.3 million for fiscal 2003. The provision of $2.2 million in fiscal 2004 represents deferred tax charges associated with Emerson's profits in the United States. The benefit for fiscal 2003 consisted primarily of the reduction in the valuation reserve previously established against the deferred tax assets relating to the accounts receivable and inventory temporary differences, as well as the recognition of management's estimation of net operating loss carryforward's subject to limitations under IRC Section 382, which management believes it was likely to realize the benefit of such net deferred tax assets. See Item 8 - "Financial Statements and Supplementary Data - Note 7 of Notes to Consolidated Financial Statements."
Net Income - As a result of the foregoing factors, the consumer electronics segment generated net income of $60,000 (less than 0.1% of net revenues) in fiscal 2004 as compared to $28.1 million (11.5% of net revenues) in fiscal 2003.
SPORTING GOODS SEGMENT:
During fiscal 2004, SSG discontinued operations of certain team dealer operations, and sold all of the capital stock of ATEC. These businesses have been classified as discontinued operations, and, accordingly, their operating results have been reported separate from continuing operations. The following table summarizes certain financial information relating to the sporting goods segment for the fiscal years 2005, 2004, and 2003 (in thousands):
2005 2004 2003
Net revenues $ 89,921 $ 83,822 $ 85,099
---------------- ----------------- ---------------
Cost of sales 64,064 61,812 61,338
Selling, general & administrative
expenses 23,868 26,135 25,816
Stock based costs 128 -- --
---------------- ----------------- ---------------
Operating income (loss) 1,861 (4,125) (2,055)
Interest expense, net 216 459 599
---------------- ----------------- ---------------
Income (Loss) before income taxes and
cumulative effect of change in
accounting principle 1,645 (4,584) (2,654)
Benefit for income taxes -- -- (1)
---------------- ----------------- ---------------
Income (loss) from continuing operations 1,645 (4,584) (2,653)
Income from discontinued operations,
net of tax 50 2,661 840
Cumulative effect of change in
accounting principle -- -- (7,442)
---------------- ----------------- ---------------
Net income (loss) $ 1,695 $ (1,923) $ (9,255)
================ ================= ===============
|
RESULTS OF SPORTING GOODS OPERATIONS - FISCAL 2005 COMPARED WITH FISCAL 2004
Net Revenues - Net revenues for fiscal 2005 increased approximately $6.1 million, or 7.3%, to $89.9 million as compared to $83.8 million in fiscal 2004. The increase in net revenues was primarily a result of increased product and customer sales volumes, representing a 6.6% increase, as well as fiscal 2005 having three additional business days as compared to fiscal 2004, representing approximately 0.7% of the net revenue increase.
Cost of Sales - Cost of sales, as a percentage of net revenues, decreased for fiscal 2005 to 71.2% as compared to 73.7% for 2004, or by $2.3 million. The 2.5% cost of sales improvement was due to a 1.8% improvement in product margins along with a 0.7% decrease in inventory write off expense.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A expenses for fiscal 2005 decreased by $2.3 million, or 8.7%, to $23.9 million as compared to $26.1 million in fiscal 2004. As a percentage of net revenues, S,G&A decreased to 26.5% in fiscal 2005 from 31.2% in fiscal 2004. The decrease in S,G&A in absolute and relative terms was primarily due to decreases in: legal, accounting and professional services of $1.0 million; facilities and insurance costs of $480,000; licenses and royalties of $175,000; depreciation and amortization expenses of $162,000; MIS costs of $137,000; bad debt expense of $122,000; and approximately $160,000 of various other expenses . This decrease was partially offset by an increase in payroll related costs of $266,000. Additionally, freight carrier bankruptcy expenses of $296,000 recorded in fiscal 2004 contributed to the current fiscal year improvement.
Interest Expense, net - Interest expense, net decreased approximately $243,000 (52.9%) in fiscal 2005 as compared to fiscal 2004. The decrease was attributable primarily to decreased overall levels of borrowing.
Provision for Income Taxes - The sporting goods segment has a portion of the tax benefits associated with a net operating loss carryforward included in net deferred tax assets. This net operating loss carryforward can be used to offset future taxable income and can be carried forward for 15 to 20 years. Realization of the net deferred tax asset is dependent on generating sufficient taxable income, either through operations or tax planning strategies, prior to the expiration of loss carryforwards. The current year taxes on income were applied against the deferred tax asset and related valuation allowance, resulting in no income tax expense in fiscal 2005.
Discontinued Operations - Discontinued operations reflect net operating losses related to our discontinued and sold team dealer operations and the net income from and net gain on sale of our ATEC subsidiary, all of which occurred in fiscal 2004. The $50,000 in fiscal 2005 reflects the income after the finalization of discontinuing these operations.
Net Income (Loss) - As a result of the foregoing factors, income of $1.7 million, or 1.9% of net revenues, was reported for fiscal 2005 as compared to a net loss of $1.9 million, or 2.3%, for fiscal 2004.
RESULTS OF SPORTING GOODS OPERATIONS - FISCAL 2004 COMPARED WITH FISCAL 2003
Net Revenues - Net revenues for fiscal 2004 decreased approximately $1.3 million (1.5%) as compared to fiscal 2003. The decrease in net revenues was primarily a result of increased competition, a decreased sales force, continued restrictions in state, federal and school budgets and declining participation and funding of youth sports organizations.
Cost of Sales - Cost of sales, as a percentage of net revenues, increased for fiscal 2004 to 73.7% as compared to 72.1% for 2003, or by $474,000. This was due to a $542,000 write-down for obsolete and slow moving inventory, and to a lesser extent, more aggressive pricing, increased freight and increased importing costs.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A expenses for fiscal 2004 increased by $319,000 (1.2%) as compared to fiscal 2003. As a percentage of net revenues, S,G&A increased to 31.2% in fiscal 2004 from 30.3% in fiscal 2003. The increase in S,G& A in absolute and relative terms was primarily due to an increase in professional service fees of approximately $617,000, bankrupt freight carrier expenses of $296,000 and $181,000 in uncollectable trade account receivable allowances partially offset by decreases in payroll related expenses of $460,000, employee travel and entertainment expense of $215,000 and $145,000 in facility expenses.
Interest Expense, net - Interest expense, net decreased approximately $140,000 (23.4%) in fiscal 2004 as compared to fiscal 2003. The decrease was attributable primarily to decreased overall levels of borrowing.
Benefit for Income Taxes - The sporting goods segment has a net operating loss carryforward included in net deferred tax assets that can be used to offset future taxable income and can be carried forward for 15 to 20 years. Realization of the deferred tax asset is dependent on generating sufficient taxable income, either through operations or tax planning strategies, prior to the expiration of loss carryforwards. The deferred tax asset associated with the current year losses was offset with a full valuation allowance and accordingly no benefit for income taxes was recorded in fiscal 2004.
Discontinued Operations - Discontinued operations reflect net operating losses related to our discontinued and sold team dealer operations and the net income from and net gain on sale of our ATEC subsidiary, which occurred in fiscal 2004.
Net loss - As a result of the foregoing factors, a net loss of $1.9 million was reported for fiscal 2004 as compared to a net loss of $9.3 million for fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had cash and cash equivalents of approximately $3.0 million, compared to approximately $6.4 million at March 31, 2004. Working capital increased to $56.1 million at March 31, 2005 as compared to $46.7 at March 31, 2004. The decrease in cash and cash equivalents of approximately $3.4 million was primarily due to operating and financing activities, as described below.
Operating cash flow used in continuing operating activities was approximately $9.3 million for fiscal 2005, resulting from income before depreciation and amortization and deferred tax expenses of approximately $12.0 million, primarily offset by growth in accounts receivable and inventory. Growth in accounts receivable accounted for a usage of cash of approximately $10.3 million as a result of the shift from the direct import business (which represents sales under LC arrangements) to domestic business (which represents sales on account), and an increase in consumer demand. Also as a result of the shift to domestic business, increases in inventory accounted for a usage of cash of approximately $6.3 million in order to meet the growing need for inventory at domestic locations. Increases in cash securing bank loans and reductions of accounts payable and other current liabilities also contributed to the use of cash by operations.
Operating cash flow used by discontinued operations for the fiscal year 2005 was approximately $143,000 due to the results and disposals of SSG's ATEC subsidiary and Team Dealer locations in fiscal 2004.
Net cash used by investing activities was $2.6 million for fiscal 2005, due to the purchase of fixed assets, which consisted primarily of acquisition of real property, trademark investments, and machinery and office equipment purchases.
Net cash provided by financing activities was $8.6 million for fiscal 2005. Cash was primarily utilized for the increase in inventories due to the higher level of sales in the current fiscal year, as well as the continuing shift from the direct import to domestic business.
Emerson and SSG maintain credit facilities as described in Note 6 - "Borrowings." At March 31, 2005, there were approximately $14.3 million of borrowings outstanding under these facilities, of which no letters of credit were outstanding. At March 31, 2005, Emerson and SSG were in compliance with the covenants on its credit facilities. On June 27, 2005, Emerson entered into a $42.5 million Revolving Credit and Term Loan Agreement with two U.S. financial institutions to replace the existing $25 million revolver. (See Note 6).
Our foreign subsidiaries maintain various credit facilities, aggregating $76.0 million, with foreign banks consisting of the following:
o four letter of credit facilities totaling $21.0 million which is used for inventory purchases; and
o five back-to-back letter of credit facilities totaling $55.0 million.
At March 31, 2005, our foreign subsidiaries pledged approximately $5.6 million in certificates of deposit to these banks to assure the availability of the $21.0 million credit facilities. At March 31, 2005, there were approximately $15.7 million of letters of credit outstanding under these credit facilities. These letter of credit facilities contain a net worth covenant of the foreign subsidiaries with which the subsidiaries were in compliance at March 31, 2005.
Short-Term Liquidity. Liquidity for the consumer electronics segment is impacted by its seasonality in that we generally record the majority of our annual sales in the quarters ending September and December. This requires the consumer electronics segment to maintain higher inventory levels during the quarters ending June and September, therefore increasing the working capital needs during these periods. Additionally, the consumer electronics segment receives the largest percentage of product returns in the quarter ending March. The higher level of returns during this period adversely impacts Emerson's collection activity, and therefore its liquidity. Management believes that the license agreements as discussed above, continued sales margin improvement and the policies in place for returned products, should continue to favorably impact its cash flow. In fiscal 2005, products representing approximately 38% of net revenues of the consumer electronics segment were imported directly to our customers. This contributes significantly to Emerson's liquidity in that this inventory does not need to be financed directly by the Company.
Liquidity for the sporting goods segment is also impacted by its seasonality in that it generally records the majority of revenues in the March quarter, which is its highest sales period. The quarter ending December is its lowest sales period. This requires the sporting goods segment to maintain higher amounts of inventory during the quarters ending March, June and December, therefore increasing the working capital needs during these periods.
Our principal existing sources of cash are generated from operations and borrowings available under our revolving credit facilities. As of March 31, 2005, we had $26.6 million of borrowing capacity available under our $45.0 million revolving credit facilities (reflecting outstanding loans of approximately $14.3 million). In addition, at March 31, 2005, we had $76.0 million of letter of credit facilities, of which approximately $47.3 million was available. We believe that our existing sources of cash for the consumer electronics segment and sporting goods segment will be sufficient to support our existing operations over the next 12 months; provided, however, we may raise additional financing, which may include the issuance of equity securities, or the incurrence of additional debt, in connection with our operations or if we elect to grow our business through acquisitions.
Long-Term Liquidity. We continue to be subject to competitive pressures arising from pricing strategies. SSG has discontinued certain lower margin products in favor of higher margin replacement products. Management believes that this, together with our various license agreements and the continued introduction of higher margin products in both segments, the sourcing of less costly product from foreign manufacturers by SSG combined with reduced selling, general and administrative expenses will result in a return to profitability by SSG. Both senior secured credit facilities for Emerson and SSG impose financial covenants. Non-compliance with the covenants could materially affect our future liquidity. Management believes that anticipated cash flow from operations and the financing noted above will provide sufficient liquidity to meet our operating and debt service cash requirements on a long-term basis.
The following summarizes our obligations at March 31, 2005 for the periods shown (in thousands):
PAYMENT DUE BY PERIOD
------------------------------------------------------------------------------
Less than 1 1 - 3 3 - 5 More than
Total year Years years 5 years
------------------------------------------------------------------------------
Notes and mortgages
payable $ 15,025 $ 74 $ 3,158 $ 11,448 $ 345
--
Capital lease obligations 55 36 19 -- --
Leases 6,934 2,663 3,440 767 64
------------------------------------------------------------------------------
Total $ 22,014 $ 2,773 $ 6,617 $ 12,215 $ 409
==============================================================================
|
As of March 31, 2005, there were no material capital expenditure commitments and no substantial commitments for purchase orders outside the normal purchase orders used to secure product.
Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States accounting principles. The preparation of these financial statements require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We consider certain accounting policies related to inventories, trade accounts receivables, impairment of long lived assets, valuation of deferred tax assets, sales return reserves and cooperative advertising accruals to be critical policies due to the estimation processes involved in each.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out basis for our consumer electronics segment, and average cost for our sporting goods segment. We record inventory reserves to reduce the carrying value of inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. Conversely, if market conditions improve, such reserves are reduced.
Trade Accounts Receivable. We extend credit based upon evaluations of a customer's financial condition and provide for any anticipated credit losses in our financial statements based upon management's estimates and ongoing reviews of recorded allowances. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves may be required. Conversely, reserves are reduced to reflect credit and collection improvements.
Intangible Assets. SSG has assets related to other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves management judgments. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances. On April 1, 2002, we adopted SFAS 142, which requires us to cease amortization of goodwill, to perform a transitional test for potential goodwill impairment upon adoption, and then test goodwill for impairment at least annually by reporting unit. See Note 5 - "Goodwill and Other Intangible Assets."
Income Taxes. We record a valuation allowance to reduce the amount of our deferred tax assets to the amount that management estimates is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event that we determined that we would not be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if it was determined that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
Sales Return Reserves. Our management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends and changes in customer demand for our products when evaluating the adequacy of the reserve for sales returns. Management judgments and estimates must be made and used in connection with establishing the sales return reserves in any accounting period. If actual sales returns increase above the historical return rates, then additional reserves may be required. Conversely, the sales return reserve could be decreased if the actual return rates are less than the historical return rates, which were used to establish such sales return reserve.
Cooperative Advertising Accruals. Cooperative advertising programs, promotions and other volume-based incentives, which are provided to retailers and distributors for advertising and sales promotions, are accounted for on an accrual basis as a reduction in net revenues in the period in which the related sales are recognized as per EITF 01-09 "Accounting for Consideration Given by a Vendor to a Customer." If additional cooperative advertising programs, promotions and other volume-based incentives are required to promote the Company's products, then additional reserves may be required. Conversely, reserves are decreased to reflect the lesser need for cooperative advertising programs.
RECENTLY-ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FASNo.106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003"(Act), which supersedes FASB Staff Position (FSP) No. 106-1, to provide guidance on accounting for the effects of the Act. The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The FSP provides guidance on measuring the accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost, and the effects of the Act on the APBO. In addition, the FSP addresses accounting for plan amendments and requires certain disclosures about the Act and its effects on the financial statements. This FSP was effective for the first interim or annual period beginning after June 15, 2004 for public entities. The implementation of this FSP did not have a material impact on the Company's financial statements.
During the fourth quarter of fiscal 2005 the Company elected to
early-adopt SFAS No. 123R, "Share-Based Payment" ("SFAS 123R") under the
modified retrospective approach applied only to prior interim periods in the
current year. As a result, the Company has applied SFAS 123R to new awards and
to awards modified, repurchased, or cancelled after April 1, 2004. Additionally,
compensation cost for the portion of awards for which the requisite service had
not been rendered that were outstanding as of April 1, 2004 are being recognized
as the requisite service is rendered on or after April 1, 2004 (generally over
the remaining option vesting period). The compensation cost for that portion of
awards has been based on the grant-date fair value of those awards as calculated
for pro forma disclosures under Statement 123. As a result of the early
adoption, under the provision of SFAS 123R, the Company has recorded
compensation costs of $289,000 during fiscal 2005 and eliminated compensation
costs, net of tax, of $1,247,000 ($0.05 per share) previously recorded in the
September 2004 quarter when 725,000 stock options were exercised in a cashless
manner. Prior to the adoption of SFAS 123R, the Company followed Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees:
("APB 25") and related Interpretations in accounting for its employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense was recognized. The Company adopted the
disclosure-only provisions under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). For the purposes of
SFAS 123 pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting periods.
In November 2004, the FASB issued SFAS No.151, "Inventory Costs", which
is an amendment of Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing". This Statement clarifies that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current period charges. The provisions of this statement are
effective for inventory costs incurred during the fiscal year beginning after
June 15, 2005 and are applied on a prospective basis. The Company does not
expect the impact of implementing this Statement to have a material effect on
its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INFLATION, FOREIGN CURRENCY, AND INTEREST RATES
Neither inflation nor currency fluctuations had a significant effect on our results of operations during fiscal 2005. Our 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 consumer electronics segment purchases virtually all of its products from manufacturers located in various Asian countries.
The interest on borrowings under our credit facilities is based on the prime rate. While a significant increase in interest rates could have an adverse effect on our financial condition and results of operations, management believes that given the present economic climate, interest rates are expected to increase, but not so significantly during the coming year as to have an adverse effect or our financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
o Report of Independent Registered Public Accounting Firm 52
o Consolidated Statements of Operations for the years ended March 31, 2005, 2004 and 2003 53
o Consolidated Balance Sheets as of March 31, 2005 and 2004 54
o Consolidated Statements of Changes in Shareholders' Equity for the years ended March 31, 2005, 2004 and 2003 55
o Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004 and 2003 56
o Notes to Consolidated Financial Statements 57
o Schedule II--Valuation and Qualifying Accounts and Reserves 97
o All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Emerson Radio Corp.
We have audited the accompanying consolidated balance sheets of Emerson Radio Corp. and Subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the management of Emerson Radio Corp. and Subsidiaries. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. 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 financial position of Emerson Radio Corp. and Subsidiaries at March 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
New York, New York
May 20, 2005, except Note 6,
as to which the date is
June 27, 2005.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Emerson Radio Corp.
We have audited only the consolidated statement of operations, shareholders' equity, and cash flows for the year ended March 31, 2003 of Emerson Radio Corp. and Subsidiaries. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the management of Emerson Radio Corp. and Subsidiaries. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluation the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Emerson Radio Corp. and Subsidiaries at March 31, 2003, and the consolidated results of its operations and cash flows for the year ended March 31, 2003, in conformity with U.S. 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.
As discussed in Note 5 to the consolidated financial statements, the Company adopted Statement of Accounting Standard No. 142, "Goodwill and Other Intangible Assets," effective April 1, 2002.
ERNST & YOUNG, LLP
New York, New York
May 19, 2003
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2005, 2004, AND 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005 2004 2003
---------------- -------------- -------------
NET REVENUES $ 320,704 $ 263,774 $ 330,315
COSTS AND EXPENSES:
Cost of sales 262,285 215,455 264,037
Other operating costs and expenses 5,889 5,254 4,348
Selling, general and administrative expenses 41,304 42,021 43,196
Acquisition costs (recovered) incurred (454) 1,553 --
Stock based compensation 377 523 49
---------------- -------------- -------------
309,401 264,806 311,630
---------------- -------------- -------------
OPERATING INCOME (LOSS) 11,303 (1,032) 18,685
Interest expense, net (1,562) (1,342) (2,492)
Minority interest in net (income) loss of
consolidated subsidiary (903) 789 731
---------------- -------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 8,838 (1,585) 16,924
Provision (benefit) for income taxes 2,983 2,150 (9,282)
---------------- -------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 5,855 (3,735) 26,206
Income from discontinued operations, net of tax 50 2,661 840
Cumulative effect of change in accounting principle -- -- (5,546)
---------------- -------------- -------------
NET INCOME (LOSS) $ 5,905 $ (1,074) $ 21,500
================ ============== =============
BASIC NET INCOME (LOSS) PER SHARE
Continuing operations $ .22 $ (.14) $ .95
Discontinued operations -- .10 .03
Cumulative effect of change in accounting principle -- -- (.20)
---------------- -------------- -------------
$ .22 (.04) .78
================ ============== =============
DILUTED NET INCOME (LOSS) PER SHARE
Continuing operations $ .22 $ (.14) $ .91
Discontinued operations -- .10 .03
Cumulative effect of change in accounting principle -- -- (.19)
---------------- -------------- -------------
$ .22 (.04) .75
================ ============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 26,991 27,227 27,716
Diluted 27,264 27,227 28,640
|
The accompanying notes are an integral part of the consolidated financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS 2005 2004
------------ -----------
Current Assets:
Cash and cash equivalents $ 2,954 $ 6,369
Cash securing bank loans 5,620 2,950
Accounts receivable (less allowances of $4,146 and $3,653, respectively) 29,634 19,948
Other receivables 1,620 2,821
Inventories 53,517 46,997
Prepaid expenses and other current assets 3,747 2,394
Deferred tax assets 4,923 5,887
------------ -----------
Total current assets 102,015 87,366
Property, plant, and equipment, net 8,275 7,822
Deferred catalog expenses 1,597 1,695
Trademarks and other intangible assets 5,078 5,168
Deferred tax assets 13,375 15,263
Other assets 828 1,355
------------ -----------
Total Assets $ 131,168 $ 118,669
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 13,044 $ 4,762
Current maturities of long-term borrowings 110 58
Accounts payable and other current liabilities 30,365 32,787
Accrued sales returns 2,137 2,521
Income taxes payable 243 509
------------ -----------
Total current liabilities 45,899 40,637
Long-term borrowings 14,970 15,027
Minority interest 16,696 15,793
Commitments and contingencies
Shareholders' Equity:
Preferred shares - 10,000,000 shares authorized; 3,677
shares issued and outstanding 3,310 3,310
Common shares -- $.01 par value, 75,000,000 shares authorized;
52,883,131 and 52,310,350 shares issued; 27,203,164 and 26,630,383
shares outstanding, respectively 529 523
Capital in excess of par value 116,788 116,304
Accumulated other comprehensive losses (87) (83)
Accumulated deficit (43,105) (49,010)
Treasury stock, at cost, 25,679,967 shares (23,832) (23,832)
------------ -----------
Total shareholders' equity 53,603 47,212
------------ -----------
Total Liabilities and Shareholders' Equity $ 131,168 $ 118,669
============ ===========
|
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 MARCH 31, 2005, 2004, AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON SHARES ISSUED ACCUMULATED
---------------------- CAPITAL OTHER TOTAL
PREFERRED NUMBER PAR TREASURY IN EXCESS OF COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
STOCK OF SHARES VALUE STOCK PAR VALUE LOSSES DEFICIT EQUITY
--------- ---------- --------- ---------- ------------ ------------ ------------ -------------
Balance - March 31, 2002 $ 3,310 51,475,511 $ 515 $(13,978) $114,451 $ (122) $ (69,436) $34,740
Purchase of treasury stock (5,697) (5,697)
Exercise of stock options
and warrants 505,920 5 622 627
Stock based costs 49 49
Comprehensive income:
Net income 21,500 21,500
Interest rate swap 20 20
Unrealized loss on
securities (2) (2)
Comprehensive ----------
income 21,518
--------- ---------- --------- ---------- ------------ ----------- ------------ ----------
Balance - March 31, 2003 3,310 51,981,431 520 (19,675) 115,122 (104) (47,936) 51,237
Purchase of treasury stock (4,157) (4,157)
Exercise of stock options
and warrants 328,919 3 281 284
Stock based costs 511 511
Tax benefit from exercise
of employee stock options 390 390
Comprehensive income (loss):
Net loss (1,074) (1,074)
Interest rate swap (16) (16)
Recognition of realized
loss in net loss 42 42
Unrealized loss on
securities (5) (5)
-----------
Comprehensive
income (loss) (1,053)
--------- ----------- --------- ---------- ------------ ----------- ------------ -----------
Balance - March 31, 2004 3,310 52,310,350 523 (23,832) 116,304 (83) (49,010) 47,212
Exercise of stock options
and warrants 572,781 6 107 113
Stock based costs 377 377
Comprehensive income:
Net income 5,905 5,905
Interest rate swap (4) (4)
-----------
Comprehensive income 5,901
--------- ----------- --------- ---------- ------------ ----------- ------------ -----------
Balance - March 31, 2005 $ 3,310 52,883,131 $ 529 $ (23,832) $ 116,788 $ (87) $ (43,105) $ 53,603
========= =========== ========= ========== ============ =========== ============ ===========
|
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 MARCH 31, 2005, 2004, AND 2003
(IN THOUSANDS)
2005 2004 2003
------------ ------------ -----------
Cash Flows from Operating Activities:
Income (loss) from continuing operations $ 5,855 $ (3,735) $ 20,660
Adjustments to reconcile income (loss) to net cash
provided by operating activities:
Minority interest 903 (789) (731)
Depreciation and amortization 3,284 3,375 2,968
Deferred tax expense (benefit) 2,852 1,483 (10,957)
Cumulative effect of accounting change -- -- 5,546
Asset allowances, reserves, and other 413 128 (40)
Changes in assets and liabilities:
Cash securing bank loans (2,670) (1,250) 50
Accounts receivable (10,324) (66) 5,132
Other receivables 968 (47) (363)
Inventories (6,293) (7,191) (3,590)
Prepaid expenses and other current assets (1,390) 2,944 (3,104)
Other assets (521) (72) (1,198)
Accounts payable and other current liabilities (2,118) 3,386 312
Income taxes payable (266) (243) 649
------------ ------------ -----------
Net cash provided by (used in) continuing operations (9,307) (2,077) 15,334
Net cash provided by (used in) discontinued operations (143) 2,394 91
------------ ------------ -----------
Net cash provided by (used in) operating activities (9,450) 317 15,425
------------ ------------ -----------
Cash Flows from Investing Activities:
Additions to property and equipment (2,598) (257) (512)
------------ ------------ -----------
Net cash used by continuing operations (2,598) (257) (512)
----------- ------------ -----------
Proceeds from sale of ATEC -- 10,517 --
Other investing activities of discontinued operations -- -- (110)
------------ ------------ -----------
Net cash provided by (used in) discontinued operations -- 10,517 (110)
------------ ------------ -----------
Net cash provided by (used in) investing activities (2,598) 10,260 (622)
------------ ------------ -----------
Cash Flows from Financing Activities:
Short-term borrowings (repayments) 8,282 2,844 (9,385)
Net borrowings (repayments) under line of credit facility 52 (11,556) 11,533
Purchases of common stock -- (4,157) (5,697)
Exercise of stock options and warrants 201 284 627
Long-term borrowings 148,962 146,655 123,457
Repayments of long-term borrowings (148,864) (149,691) (143,153)
------------ ------------ -----------
Net cash provided by (used in) financing activities 8,633 (15,621) (22,618)
------------ ------------ -----------
Net decrease in cash and cash equivalents (3,415) (5,044) (7,815)
Cash and cash equivalents at beginning of year 6,369 11,413 19,228
------------ ------------ -----------
Cash and cash equivalents at end of year $ 2,954 $ 6,369 $ 11,413
============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,366 $ 1,158 $ 2,184
============ ============ ===========
Cash paid for income taxes $ 587 $ 1,625 $ 1,226
============ ============ ===========
|
The accompanying notes are an integral part of the consolidated financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Emerson Radio Corp. ("Emerson", consolidated - the "Company") and its majority-owned subsidiaries, including Sport Supply Group, Inc. ("SSG"), which has been 53.2% owned since February 2002. All significant intercompany transactions and balances have been eliminated.
The Company operates in two business segments: consumer electronics and sporting goods. The consumer electronics segment designs, sources, imports and markets a variety of consumer electronic products and licenses the "[OBJECT OMITTED]" trademark for a variety of products domestically and internationally to certain licensees. The sporting goods segment, which is operated through SSG, manufactures and markets sports related equipment and leisure products to institutional customers in the United States.
From July 2003 through November 2003, certain of SSG's team dealer locations were discontinued. In November 2003, SSG sold all of the issued and outstanding capital stock of its wholly-owned subsidiary, Athletic Training Equipment Company, Inc. ("ATEC"). Collectively, SSG refers to these as "Discontinued Operations" and accordingly, the accompanying financial statements reflect these as discontinued operations for all periods presented. (See Note 17).
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
Short-term investments with original maturities of three months or less at the time of purchase are considered to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, cash securing bank loans, trade accounts receivable, accounts payable and accrued liabilities approximate fair value due to short-term maturity of these financial instruments. The carrying amounts of bank debt approximate their fair values due to their variable rate interest features.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INVESTMENTS
The Company determines the appropriate classifications of securities at the time of purchase and evaluates the continuing appropriateness of that classification thereafter. The investments held by the Company of approximately $175,000 and $3,000 at March 31, 2005 and 2004, respectively, were classified as "available-for-sale securities", and are included in prepaid expenses and other current assets. Realized gains and losses are reported separately as a component of income, and unrealized gains and losses are reported separately as a component of comprehensive income. Declines in the market value of securities deemed to be other than temporary are included in earnings.
CONCENTRATIONS OF CREDIT RISK
Certain financial instruments potentially subject the Company to concentrations of credit risk. Accounts receivable for the consumer electronics segment represent sales to retailers and distributors of consumer electronics throughout the United States and Canada. Accounts receivable for the sporting goods segment represent sales to all levels of public and private schools, colleges, universities, military academies, municipal and governmental agencies, military facilities, churches, clubs, camps, hospitals, youth sports leagues, non-profit organizations, team dealers and certain large retail sporting goods chains. The Company periodically performs credit evaluations of its customers but generally does not require collateral. The Company provides for any anticipated credit losses in the financial statements based upon management's estimates and ongoing reviews of recorded allowances. The allowance for doubtful accounts was approximately $545,000, $818,000, and $1,243,000 as of March 31, 2005, 2004, and 2003, respectively. (See Note 14)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is being computed using the straight-line method over the 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. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and betterments are capitalized and depreciated over the remaining estimated useful lives of the related assets. At time of disposal, the cost and related accumulated depreciation are removed from the Company's records and the difference between net carrying value of the asset and the sale proceeds is recorded as a gain or loss.
Depreciation of property, plant and equipment is provided by the straight-line method as follows:
|X| Buildings Thirty years to forty years |X| Machinery and Equipment Five years to ten years |X| Computer Equipment and Software Three years to ten years |X| Furniture & Fixtures and Office Equipment Five years to seven years |
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-LIVED ASSETS
The Company's long-lived assets include property and equipment, trademark and other amortizable intangibles. At March 31, 2005, the Company had approximately $8,275,000 of property and equipment, net of accumulated depreciation, and approximately $5,078,000 of trademark and other amortizable intangible assets, net of amortization, accounting for approximately 10% of the Company's total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposals of Long-Lived Assets". Recoverability of assets held and used are measured by a comparison of the carrying amount of an asset to estimated undiscounted pre-tax future net cash flows. Future events could cause the Company to conclude that impairment indicators exist and that long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations.
REVENUE RECOGNITION
Revenues are recognized at the time title passes to the customer. Under the Direct Import Program for the consumer electronics segment, title passes in the country of origin. Under the Domestic Program for the consumer electronics segment and the sporting goods segment, title passes primarily at the time of shipment. Estimates for possible returns are based upon historical return rates and netted against revenues. Customers in the sporting goods segment, subject to certain limitations, have the right to return product within a set period if they are not completely satisfied. In the consumer electronics segment, returns are not permitted unless defective.
COST OF SALES
Cost of sales includes actual product cost, change in inventory reserves, duty, buying costs, the cost of transportation to the Company's warehouses from its manufacturers, warehousing costs, and an allocation of depreciation and amortization.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses pertains only to the consumer electronics segment, and include costs associated with returned product received from retailers, the costs associated with the markdown of returned inventory, and an allocation of depreciation and amortization. Because we do not include other operating costs and expenses in cost of sales, our gross margin may not be comparable to those of other distributors that may include all costs related to the cost of product to their cost of sales and in the calculation of gross margin.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include all operating costs of the Company that are not directly related to the cost of procuring product or costs not included in other operating costs and expenses.
ACQUISITION COSTS (RECOVERED) INCURRED
Acquisition costs include all costs incurred by the Company in unsuccessful acquisition attempts. These costs are charged to operations when the potential acquisition is terminated.
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 results of operations.
The Company does not enter into foreign currency exchange contracts to hedge its exposures related to foreign currency fluctuations.
ADVERTISING AND DEFERRED CATALOG EXPENSES
Advertising expenses are charged to operations as incurred, except for production costs related to direct-response advertising activities, which are capitalized. Direct response advertising pertains to the sporting goods segment of the Company, which consists primarily of catalogs. Production and distribution costs, primarily printing and postage, associated with catalogs are amortized over twelve months which approximates average usage of the catalogs produced. Advertising and catalog amortization expenses, which are included in selling, general and administrative expenses, were approximately $3,810,000, $2,979,000, and $3,231,000 for fiscal 2005, 2004, and 2003, respectively.
COOPERATIVE ADVERTISING EXPENSES
Cooperative advertising programs and other volume-based incentives are accounted for on an accrual basis as a reduction in net revenue according to the requirements of Emerging Issue Task Force 01-09, "Accounting for Consideration Given By a Vendor to a Customer or a Reseller of the Vendor's Products" in the period in which the related sales are recognized. Cooperative advertising expenses were approximately $4,446,000, $2,671,000, and $4,632,000, for fiscal 2005, 2004, and 2003, respectively.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INTERNET EXPENSES
The Company expenses the operating and development costs of its Internet websites when incurred.
INCOME TAXES
Deferred income taxes are provided for the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets have been recorded, net of an appropriate valuation allowance, to the extent management believes it is more likely than not that such assets will be realized. (See Note 7).
COMPREHENSIVE INCOME
Comprehensive income or loss, as disclosed in the Consolidated Statements of Changes in Shareholders' Equity, is net income or loss adjusted for changes in the fair value of hedge instruments, unrealized gains or losses on securities, and foreign currency translation adjustments.
NET EARNINGS PER COMMON SHARE
Net earnings per share are based upon the weighted average number of common and common equivalent shares outstanding. Outstanding stock options and warrants are treated as common stock equivalents when dilution results from their assumed exercise.
STOCK- BASED COMPENSATION
During the fourth quarter of fiscal 2005, the Company elected to early-adopt Statement of Financial Accounting Standard No. 123R, "Share-Based Payment" ("SFAS 123R") under the modified retrospective approach applied only to prior interim periods in the current year. As a result, the Company has applied SFAS 123R to new awards and to awards modified, repurchased, or cancelled after April 1, 2004. Additionally, compensation cost for the portion of awards for which the requisite service had not been rendered that were outstanding as of April 1, 2004 are being recognized as the requisite service is rendered on or after April 1, 2004 (generally over the remaining option vesting period). The compensation cost for that portion of awards has been based on the grant-date fair value of those awards as calculated for pro forma disclosures under previously issued accounting standards. As a result of applying the provisions of SFAS 123R, the Company has recorded compensation costs of $289,000 during fiscal 2005 and eliminated compensation costs, net of tax, of $1,247,000 ($0.05 per share) previously recorded in the September 2004 quarter when 725,000 stock options were exercised in a cashless manner. Prior to the adoption of SFAS 123R, the Company followed Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
date of grant, no compensation expense was recognized. The Company adopted the disclosure-only provisions under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). For the purposes of SFAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information for fiscal 2004 and 2003 is as follows:
2004 2003
---------- ----------
Income (loss) from continuing
operations (in thousands):
As reported $(3,735) $26,206
Less: Stock-based compensation
expense (35) (110)
---------- ----------
Pro forma income (loss) $(3,770) $26,096
========== ==========
Income (loss) from continuing
operations per common share:
Basic - as reported $ (.14) $ .95
Basic - pro forma $ (.14) $ .94
Diluted - as reported $ (.14) $ .91
Diluted - pro forma $ (.14) $ .91
2004 2003
---------- ----------
Net income (loss) (in thousands):
As reported $(1,074) $21,500
Less: Stock-based compensation
expense (35) (110)
---------- ----------
Pro forma income (loss) $(1,109) $21,390
========== ==========
Net income (loss) per common share:
Basic - as reported $ (.04) $ .78
Basic - pro forma $ (.04) $ .77
Diluted - as reported $ (.04) $ .75
Diluted - pro forma $ (.04) $ .75
|
The fair value of Emerson's options for purposes of recording expenses under
SFAS 123R and pro forma disclosures under SFAS 123 were calculated using the
Black-Scholes option valuation model and the following assumptions for fiscal
2003 and 2005, respectively: (i) a risk free interest rate of 5.91% and 3.50%;
(ii) a weighted average expected life of 10 years and 5 years; (iii) an expected
volatility of 98% and 71%; and (iv) no dividend yield for both years. The
weighted average fair value of employee stock options granted for the Emerson
Plan in fiscal 2003 and 2005 was $0.68 and $1.78, respectively. No options were
granted by Emerson in fiscal 2004.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of SSG's options for purposes of recording expenses under SFAS 123R and pro forma disclosures under SFAS 123 were calculated using the Black-Scholes option valuation model and the following assumptions: (i) risk free interest rates of 4.00%, 4.00% and 4.10% for years 2005, 2004 and 2003 respectively; (ii) a weighted average expected life of five years; (iii) dividend yield of 0% for all years; and (iv) expected volatility of 54%, 36% and 36% for 2005, 2004 and 2003 respectively. The weighted average fair value of employee stock options granted for the SSG plan in fiscal 2005, 2004 and 2003 was $1.08, $.57 and $.49, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Emerson's and SSG's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for its interest rate protection agreement under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 requires all derivatives to be recorded as assets or liabilities and measured at fair value. Gains or losses resulting from changes in the values of derivatives are recognized immediately or deferred, depending on the use of the derivative and whether or not it qualifies as a hedge. The Company uses a derivative financial instrument to manage its interest rate risk associated with fluctuations in interest rates on its debt. (See Note 15).
RECENT PRONOUCEMENTS
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No.106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003"(Act), which supersedes FASB Staff Position (FSP) No. 106-1, to provide guidance on accounting for the effects of the Act. The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The FSP provides guidance on measuring the accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost, and the effects of the Act on the APBO. In addition, the FSP addresses accounting for plan amendments and requires certain disclosures about the Act and its effects on the financial statements. This FSP was effective for the first interim or annual period beginning after June 15, 2004 for public entities. The implementation of this FSP did not have a material impact on the Company's financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 2004, the FASB issued SFAS No.151, "Inventory Costs", which is an amendment of Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing". This Statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. The provisions of this statement are effective for inventory costs incurred during the fiscal year beginning after June 15, 2005 and are applied on a prospective basis. The Company does not expect the impact of implementing this Statement to have a material effect on its financial statements.
RECLASSIFICATIONS
Certain reclassifications were made to conform prior year's financial statements to the current presentation.
NOTE 2 -- INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for the consumer electronics segment and average cost for the sporting goods segment. As of March 31, 2005 and 2004, inventories consisted of the following:
MARCH 31, 2005 MARCH 31, 2004
---------------- ---------------
(IN THOUSANDS)
Raw materials $ 1,370 $ 1,138
Work-in-process 33 67
Finished goods 55,075 48,878
------------- ------------
56,478 50,083
Less inventory allowances (2,961) (3,086)
------------- ------------
$ 53,517 $ 46,997
============= ============
|
NOTE 3 - RELATED PARTY TRANSACTIONS
Effective March 1997, Emerson entered into a Management Services Agreement with SSG, under which each company provides various managerial and administrative services to the other company for fees at terms which management believes reflect arms length transaction. For the fiscal years 2005, 2004, and 2003, SSG billed Emerson fees of approximately $354,000, $626,000, and $627,000, respectively, while Emerson billed SSG fees of $148,000, $307,000, and $320,000, respectively. These charges have been eliminated in consolidation.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 -- PROPERTY, PLANT, AND EQUIPMENT:
As of March 31, 2005 and 2004, property, plant, and equipment is comprised of the following:
2005 2004
---------- -------------
(In thousands)
Land $ 9 $ 9
Buildings 2,368 1,192
Computer Equipment & Software 10,337 10,248
Furniture and fixtures 1,631 1,218
Machinery and equipment 2,548 2,228
Leasehold improvements 393 369
----------- -----------
17,286 15,264
Less accumulated depreciation and amortization (9,011) (7,442)
----------- -----------
$ 8,275 $ 7,822
=========== ===========
|
Depreciation and amortization of property, plant, and equipment from continuing operations amounted to $1,841,000, $2,007,000, and $2,021,000 for the years ended March 31, 2005, 2004 and 2003, respectively.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires that goodwill not be amortized but instead be tested for impairment at least annually by reporting unit. The Company adopted SFAS 142 effective April 1, 2002 and ceased amortizing goodwill on that date.
Goodwill was required to be tested for impairment in a transitional test upon adoption of SFAS 142 and then at least annually by reporting unit. Goodwill impairment testing must also be performed more frequently if events or other changes in circumstances indicate that goodwill might be impaired. Under the provisions of SFAS 142, a two step process is used to evaluate goodwill impairment. Under step one of the evaluation process, the carrying value of a reporting unit is compared to its fair value to determine if potential goodwill impairment exists. If potential goodwill impairment is identified during step one, then the amount of goodwill impairment, if any, is measured using a hypothetical purchase price allocation approach under step two of the evaluation process.
The results of our transitional step one analysis indicated that we had a potential impairment of goodwill. In our step two analysis, the fair value of the goodwill was determined through a fair evaluation. Through this evaluation, we determined the fair value of the assets and liabilities to be the price that they could be sold for in a current arms-length transaction between willing parties. As a result of our transitional impairment testing as of April 1, 2002, we recorded a non-cash charge of $5,546,000 as a "cumulative effect of accounting change" which brought the carrying value of goodwill to $0.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other intangible assets as of March 31, 2005 and related amortization expense for the year then ended, consist of the amounts shown below (in thousands). Trademarks relate to costs incurred in connection with the licensing agreements for the use of certain trademarks and service marks in conjunction with the sale of our products. The cost of intangible assets and related accumulated amortization are removed from our accounts during the year in which they become fully amortized.
FISCAL YEAR ENDED WEIGHTED AVERAGE
MARCH 31, 2005 GROSS CARRYING AMORTIZATION ACCUMULATED AMORTIZATION AMORTIZATION
AMOUNT EXPENSE AMORTIZATION PERIOD PERIOD
---------------- ------------- --------------- --------------- ----------------
Amortizable Intangible
Assets
Trademarks $ 7,224 $ 285 $ 3,574 10-40 years 17 years
Trade names 1,130 56 227 20 years 20 years
Patents 685 98 392 7 years 7 years
Other 350 22 118 10 years 10 years
------------ ------------ ----------
Total $ 9,389 $ 461 $ 4,311
============ ============ ==========
|
FISCAL YEAR ENDED WEIGHTED AVERAGE
MARCH 31, 2004 GROSS CARRYING AMORTIZATION ACCUMULATED AMORTIZATION AMORTIZATION
AMOUNT EXPENSE AMORTIZATION PERIOD PERIOD
------------------- -------------------------------------------------- ---------------------
Amortizable Intangible
Assets
Trademarks $ 6,848 $ 267 $ 3,285 10-40 years 17 years
Trade names 1,130 57 171 20 years 20 years
Patents 685 98 294 7 years 7 years
Other 350 23 95 10 years 10 years
------------ ------------ -----------
Total $ 9,013 $ 445 $ 3,845
============ ============ ===========
|
Amortization expense for the year ended March 31, 2003 was $516,000.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of March 31, 2005, estimated amortization expense of other intangible assets for each of the next five years, and thereafter, is as follows (in thousands):
2006 $ 477
2007 434
2008 329
2009 231
2010 231
Thereafter 3,376
---------
$ 5,078
=========
|
NOTE 6 -- BORROWINGS:
SHORT-TERM BORROWINGS
As of March 31, 2005 and 2004, short-term borrowings consisted of amounts outstanding under the Company's foreign bank facilities held by its foreign subsidiaries. Availability under this facility totals $21.0 million and is maintained by the pledge of bank deposits of approximately $5.6 million and $3.0 million as of March 31, 2005 and March 31, 2004, respectively.
2005 2004
--------------- --------------
(In thousands)
Foreign bank loan $ 13,044 $ 4,762
--------------- --------------
|
LONG -TERM BORROWINGS
As of March 31, 2005 and 2004, long-term borrowings consisted of the following:
2005 2004
--------------- --------------
(In thousands)
Emerson revolver $ 11,300 $ 8,000
Sport Supply revolver 3,010 6,972
Mortgage payable 715 -
Equipment notes and other 55 113
--------------- --------------
15,080 15,085
Less current maturities 110 58
--------------- --------------
Long-term debt and notes payable $ 14,970 $ 15,027
=============== ==============
|
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Emerson Credit Facility - At March 31, 2005, Emerson had borrowings of $11,300,000 under a $25 million line of credit which was due to expire on June 30, 2005, and the Company was in compliance with the covenants of that line of credit. On June 27, 2005, Emerson entered into a $42.5 million Revolving Credit and Term Loan Agreement (the "Emerson Loan Agreement") with two U.S. financial institutions. The Emerson Loan Agreement provides for a three year $35 million revolving line of credit (the "Emerson Revolver") and a $7.5 million term loan which is to be amortized over a three year period or repaid in full from the proceeds of a sale of significant assets. The $35 million revolving line of credit replaces Emerson's prior revolver of $25 million and is due to expire on June 30, 2008. The new revolver provides for revolving loans, subject to individual maximums which, in the aggregate, are not to exceed the lesser of $35 million or a "Borrowing Base" as defined in the Emerson Loan Agreement. The Borrowing Base amount is established by specified percentages of eligible accounts receivables and inventories. The revolver and the term loan bear interest ranging from Prime plus 0.00% to 1.50% or, at Emerson's election, LIBOR plus 1.50% to 3.00% depending on certain financial covenants. Pursuant to the Emerson Loan Agreement, Emerson is restricted from, among other things, paying certain cash dividends, and entering into certain transactions without the lender's prior consent and is subject to certain net worth and leverage financial covenants. Amounts outstanding under the Emerson Revolver, similar to the prior agreement, are secured by substantially all of Emerson's tangible assets and amounts outstanding under the Term Loan are secured by Emerson's trademarks.
Sport Supply Credit Facility - During the quarter ended December 31, 2003, SSG amended its Loan and Security Agreement (the "SSG Loan Agreement") to finance its working capital requirements through October 31, 2007. Under this amendment, SSG's line of credit was reduced from $25 million to $20 million; its borrowing rates were reduced from LIBOR plus 2.5% to LIBOR plus 2.25%; and its inventory and accounts receivable borrowing bases were increased. The SSG Loan Agreement provides for revolving loans and letters of credit which, in the aggregate, cannot exceed the lesser of $20 million or a "Borrowing Base" amount based upon specified percentages of eligible accounts receivable and inventories. Amounts outstanding under the SSG Loan Agreement are secured by substantially all of the assets of SSG and its subsidiaries. Pursuant to the SSG Loan Agreement, SSG is restricted from, among other things, paying cash dividends and entering into certain transactions without the lender's prior consent and it is required to maintain certain net worth levels.
Maturities of long-term borrowings as of March 31, 2005, by fiscal year and in the aggregate are as follows (in thousands):
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2006 $ 110
2007 93
2008 3,084
2009 11,374
2010 74
Thereafter 345
-----------
Total 15,080
Less current portion (110)
-----------
Total long term portion $ 14,970
===========
|
NOTE 7 - INCOME TAXES:
2005 2004 2003
------------ -------------- -----------
Current: (In thousands)
Federal $ -- $ -- $ --
Foreign, state and other 131 667 2,018
Deferred:
Federal 2,637 1,843 (11,300)
Foreign, state and other 215 (360) --
------------ ------------- -----------
$ 2,983 $ 2,150 $ (9,282)
============ ============= ===========
|
Emerson files a consolidated federal return and certain state and local income tax returns.
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 income before income taxes from continuing operations for the years ended March 31, 2005, 2004, and 2003 are analyzed below:
2005 2004 2003
----------- --------------- ----------
(In thousands)
Statutory provision (recovery) $ 3,004 $ (539) $ 5,389
Increase (decrease) in
valuation allowance (795) 1,981 (13,069)
Foreign income taxes (223) 434 (1,192)
State taxes 382 662 559
Minority interest 307 (268) (706)
Other, net 308 (120) (263)
----------- ------------ ----------
Total income tax (benefit) $ 2,983 $ 2,150 $ (9,282)
=========== ============ ==========
|
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of March 31, 2005 and 2004, the significant components of the Company's deferred tax assets and liabilities are as follows:
2005 2004
---------------- ---------------
(In thousands)
Deferred tax assets:
Accounts receivable reserves $ 2,417 $ 2,455
Inventory reserves 2,070 2,179
Intangible assets 864 1,060
Net operating loss carryforwards 18,363 21,977
Other 949 1,017
------------ -----------
Total deferred tax assets 24,663 28,688
Valuation allowance (5,386) (6,181)
------------ -----------
Net deferred tax assets 19,277 22,507
Deferred tax liabilities:
Property, Plant and Equipment (979) (1,357)
------------ -----------
Net deferred taxes $ 18,298 $ 21,150
============ ===========
|
Total deferred tax assets for the consumer electronics segment at March 31, 2005 and 2004 include the tax benefit on $90 million of net operating loss carryforwards as of March 31, 2005, are subject to limitations under IRC section 382 and expire in the years 2006 through 2019. The tax benefits related to these operating loss carryforwards and future deductible temporary differences are recorded to the extent management believes it is more likely than not that such benefits will be realized.
Total deferred tax assets for the sporting goods segment at March 31, 2005 and 2004 include the tax benefit of net operating loss carryforwards which total approximately $19.8 million of March 31, 2005, which expire in the years 2011 through 2023. The tax benefits related to these net operating loss carry forwards are recorded net of a valuation allowance of $5.4 million to reflect the extent to which management believes it is more likely than not that such tax benefits will be realized.
Income (loss) of foreign subsidiaries before taxes was $526,000, $(2,872,000), and $6,198,000 for the years ended March 31, 2005, 2004, and 2003, respectively.
No provision was made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries. Such earnings have been and will continue to be reinvested but could become subject to additional tax if they were remitted as dividends, or were loaned to the Company or a U.S. affiliate, or if the Company should sell its stock in the foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on the undistributed foreign earnings.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases warehouse and office space with annual commitments as follows (in thousands):
FISCAL YEARS AMOUNT
2006 $ 2,663
2007 1,884
2008 1,556
2009 511
2010 256
|
Rent expense from continuing operations, which includes month-to-month leases, aggregated $3,005,000, $3,228,000, and $3,051,000 for fiscal 2005, 2004, and 2003, respectively.
LETTERS OF CREDIT:
There were no letters of credit outstanding under the Emerson Loan Agreement (see Note 6) as of either March 31, 2005 or 2004. The Company's foreign subsidiaries also currently maintain various credit facilities aggregating $76.0 million with foreign banks subject to annual review consisting of the following: (i) four letter of credit facilities totaling $21.0 and (ii) four back-to-back credit facilities totaling $55.0 million. These facilities are used for inventory purchases and require the Company to pledge approximately $5.6 million of cash for such availability and for the benefit of its' foreign subsidiaries, who establish back-to-back letters of credit with the Company's customers. At March 31, 2005, there were $15.7 million of letters of credit outstanding under these credit facilities. These credit facilities require net worth covenants of the foreign subsidiaries, for which they were in compliance at March 31, 2005.
CAPITAL EXPENDITURE AND OTHER COMMITMENTS:
As of March 31, 2005, there were no material capital expenditure commitments and there were no substantial commitments for purchase orders outside the normal purchase orders used to secure product for either segment.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EMPLOYEE BENEFIT PLAN:
The Company currently sponsors defined contribution 401(k) retirement plans which are subject to the provisions of the Employee Retirement Income Security Act (ERISA). Under the consumer electronics segment plan, Emerson matches a percentage of the participants' contributions up to a specified amount. Under the sporting goods segment plan, SSG has not matched a percentage of the participant's contributions for the last three fiscal years. The consolidated contributions to the plans for fiscal 2005, 2004 and 2003 were $94,000, $103,000, and $72,000, respectively.
SHAREHOLDER TRANSACTION:
In January 2005, Geoffrey P. Jurick, the Chairman, Chief Executive Officer and President of Emerson Radio Corp., obtained a $16 million loan from a foreign financial institution. The loan (which, prior to extension, came due on April 20, 2005) currently matures on July 20, 2005, is guaranteed by a third party unaffiliated with Emerson and is secured by a pledge by Mr. Jurick of approximately 10 million shares of his Emerson common stock (approximately 38% of Emerson's common stock). If the loan term is not further extended and the loan is not repaid at maturity, the stock could be utilized to satisfy Mr. Jurick's obligations.
NOTE 9 -- STOCK BASED COMPENSATION:
CONSUMER ELECTRONICS SEGMENT:
In July 1994, Emerson adopted a Stock Compensation Program ("Program"). 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. In 2004 Emerson adopted the 2004 Employee Stock Options Plan. The provisions for exercise price, term and vesting schedule are, for the most part, the same as the previous Incentive Stock Option Plan. A summary of transactions during the last three years is as follows:
NUMBER OF WEIGHTED AVERAGE
Options Exercise Price
--------------- ----------------
Outstanding - March 31, 2002 1,501,000 $ 1.05
Exercised (366,397) 1.00
Cancelled (75,000) 1.00
--------------- ----------------
Outstanding - March 31, 2003 1,059,603 1.07
Exercised (277,269) 1.00
--------------- ----------------
Outstanding - March 31, 2004 782,334 1.09
--------------- ----------------
Granted 425,000 3.10
Exercised (700,000) 1.10
--------------- ----------------
Outstanding - March 31, 2005 507,334 $ 2.60
=============== ================
Exercisable at March 31, 2005 82,334 $ 1.01
=============== ================
|
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table provides additional information as to the options outstanding under the Stock Compensation Program and the 2004 Employee Stock Option Plan as of March 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------- ---------------------- ------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
RANGE OF AMOUNT REMAINING EXERCISE AMOUNT AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
--------------------- --------------- ---------------------- ------------- ------------ ---------------
$1.00 81,334 4.9 $ 1.00 81,334 $ 1.00
$1.50 1,000 6.0 1.50 1,000 1.50
$2.96 - $2.97 225,000 9.6 2.96 -- --
$3.26 200,000 9.6 3.26 -- --
--------------- ---------------------- ------------- ------------ ---------------
507,334 7.9 $ 2.60 82,334 $ 1.01
=============== ====================== ============= ============ ===============
|
Subject to the terms set forth in each option agreement, generally, the term of each option is ten years, except for incentive stock 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. Unless otherwise provided, 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 equal to or greater than the fair 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 value of the shares on the date of the grant. As of March 31, 2005, there were a total of 507,334 options outstanding with exercise prices ranging from $1.00 per share to $3.26 per share. As of March 31, 2005, 82,334 of the total options outstanding were fully vested with 425,000 options vesting through October 2007. At March 31, 2005, 2004 and 2003, the weighted average exercise price of exercisable options under the Program was $2.60, $1.09 and $1.07, respectively.
In October 1994, Emerson'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 was 300,000 shares. In 2004, Emerson's Board of Directors, and the stockholders subsequently approved the 2004 Non-Employee Director Stock Option Plan, the provisions for exercise price, term and vesting schedule being, for the most part, the same as the 1994 Non-Employee Director Stock Option Plan. A summary of transactions under the plan for the three years ended March 31, 2005 is as follows:
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------------- -----------------
Outstanding: March 31, 2002 175,000 $ 1.00
Exercised (41,667) 1.00
--------------- -----------------
Outstanding: March 31, 2003 133,333 1.00
Exercised (8,333) 1.00
--------------- -----------------
Outstanding - March 31, 2004 125,000 1.00
Granted 125,000 3.00
Exercised (125,000) 1.00
--------------- -----------------
Outstanding - March 31, 2005 125,000 3.00
=============== =================
Exercisable at March 31, 2005 -- $ --
=============== =================
|
The following table provides additional information as to the options outstanding under the Non-Employee Director Stock Option Plan as of March 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
AMOUNT REMAINING EXERCISE AMOUNT AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
------------------------------------------------ --------------------- ------------- --------------- ----------------
$3.00 125,000 9.4 $ 3.00 -- --
================ ===================== ============= =============== ================
|
All options granted under the Non-Employee Director Stock Option Plan during the fiscal years ending March 31, 2003, 2004 and 2005 were at exercise prices equal to or greater than the fair value of Emerson's stock on the date of the grant, which was accounted for by using APB25 for fiscal 2003 and 2004..
SPORTING GOODS SEGMENT:
SSG has a stock option plan that provides up to 2,000,000 shares of common stock for awards of incentive and non-qualified stock options to directors and employees (the "SSG Plan"). Under the SSG Plan, the exercise price of options will not be less than: the fair value of the common stock at the date of grant; or not less than 110% of the fair value for incentive stock options granted to certain employees, as more fully described in the Amended and Restated Stock Option Plan. Options expire ten years from the grant date, or five years from the grant date for incentive stock options granted to
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
certain employees, or such earlier date as determined by the Board of Directors of SSG (or a Stock Option Committee comprised of members of the Board of Directors).
A summary of transactions under the SSG Plan for the fiscal year ending March 31, 2005 is as follows:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------------- ----------------
Outstanding - March 31, 2002 926,179 $ 7.45
Granted 19,375 1.69
Canceled (637,112) 7.64
--------------- ----------------
Outstanding - March 31, 2003 308,442 6.70
Granted 11,250 1.73
Canceled (77,875) 6.38
--------------- ----------------
Outstanding - March 31, 2004 241,817 6.57
Granted 391,250 1.08
Canceled (71,825) 4.33
--------------- ----------------
Outstanding - March 31, 2005 561,242 $ 3.02
=============== ================
Exercisable at March 31, 2005 452,909 $ 3.48
=============== ================
|
The following table provides additional information as to the options outstanding under the SSG Plan as of March 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
AMOUNT REMAINING EXERCISE AMOUNT AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
------------------------------ --------------- ----------------- ------------- -------------- ---------------
$0.95 - $2.75 406,250 9.16 $ 1.13 297,917 $ 1.15
$6.13 - $7.50 57,617 3.81 7.19 57,617 7.19
$7.13 - $9.44 97,375 4.23 8.41 97,375 8.41
--------------- ----------------- ------------- -------------- --------------
561,242 7.75 $ 3.02 452,909 $ 3.48
================ ================== ============= ============== =============
|
All options granted under the SSG Plan during the fiscal year ending March 31, 2005 were at exercise prices equal to or greater than the fair value of SSG's stock on the date of the grant.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 -- SHAREHOLDER'S EQUITY:
COMMON SHARES:
Authorized common shares consists of 75,000,000 shares of common shares, par value $.01 per share, of which, 27,203,164 and 26,630,383 shares were issued and outstanding as of March 31, 2005 and 2004, respectively. Shares held in treasury at March 31, 2005 and 2004 were 25,679,967.
COMMON STOCK REPURCHASE PROGRAM:
In January 2000, September 2001 and September 2003, Emerson's Board authorized share repurchase programs for 5,000,000 shares, 1,000,000 shares, and 2,000,000 shares, respectively. In fiscal 2005 no shares were repurchased under these programs. In fiscal 2004, the Company repurchased 1,111,625 shares for $4,157,000, and in fiscal 2003, the Company repurchased 159,300 shares for $197,000, pursuant to the programs. The shares were repurchased in open market transactions within guidelines set forth by Rule 10b-18 of the Securities and Exchange Act of 1934 and were funded by working capital. As of March 31, 2005, 888,375 shares remain available for repurchase under the program established in September 2003.
SERIES A PREFERRED STOCK:
The Company has issued and outstanding 3,677 shares of Series A Preferred Stock, ("Preferred Stock") $.01 par value, with a face value of $3,677,000, which had no market value as of March 31, 2005. Effective March 31, 2002, the previously existing conversion feature of the Preferred Stock expired. Effective March 31, 2001, dividends are no longer accrued on these shares.
WARRANTS:
On August 1, 2002, in connection with a consulting agreement, Emerson granted 200,000 warrants with an exercise price of $2.20, of which 100,000 warrants vested after six months and 100,000 warrants vested one year from date of grant. The warrants were valued using the Black-Scholes option valuation model and were charged to earnings over the related service period of the consulting agreement with approximately $420,000 and $49,000 being charged to operations for fiscal 2004 and 2003, respectively. During February 2003, 100,000 of these warrants were exercised, and accordingly the Company issued 100,000 shares of common stock. In November 2003, the remaining 100,000 of these warrants were exercised under a cashless exercise and 45,544 shares of common stock were issued.
On October 7, 2003, in connection with a consulting arrangement, Emerson granted 50,000 warrants with an exercise price of $5.00 per share. These warrants were valued using the Black-Scholes option valuation model, which resulted in $90,500 being charged to earnings during fiscal 2004. As of March 31, 2005, these warrants had not been exercised.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On August 1, 2004, in connection with a consulting agreement, Emerson granted 50,000 warrants with immediate vesting and an exercise price of $3.00 per share with an expiration date of August 2009. These warrants were valued using the Black-Scholes valuation model, which resulted in $88,500 being charged to earnings during the fiscal year ended March 31, 2005. As of March 31, 2005, these warrants had not been exercised.
NOTE 11 -- NET EARNINGS (LOSS) PER SHARE:
The following table sets forth the computation of basic and diluted earnings per share for the years ended March 31, 2005, March 31, 2004, and March 31, 2003:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
2005 2004 2003
----------- ------------ ------------
NUMERATOR:
Net earnings (loss) before discontinued
operations and cumulative effect of
change in accounting principle -
for basic and diluted
earnings per share $ 5,855 $ (3,735) $ 26,206
=========== ============ ============
DENOMINATOR:
Denominator for basic earnings per share -
weighted average shares 26,991 27,227 27,716
Effect of dilutive securities:
Options and warrants 273 -- 924
----------- ------------ ------------
Denominator for diluted earnings per share -
weighted average shares and assumed conversions 27,264 27,227 28,640
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations $ .22 $ (.14) $ .95
Discontinued operations -- .10 .03
Cumulative effect of change in accounting principle -- -- (.20)
----------- ------------ ------------
Basic earnings (loss) per share $ .22 $ (.04) $ .78
=========== ============ ============
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations $ .22 $ (.14) $ .91
Discontinued operations -- .10 .03
Cumulative effect of change in accounting principle -- -- (.19)
----------- ------------ ------------
Diluted earnings (loss) per share $ .22 $ (.04) $ .75
=========== ============ ============
|
For fiscal 2004, loss per share does not include potentially dilutive securities assumed outstanding since the effects of such conversion would be anti-dilutive. For the year ended March 31, 2005, 50,000 shares attributable to outstanding stock warrants were excluded from the calculation of diluted earnings per share because the exercise price of the stock warrants exceeded the average price of the common shares, and therefore their inclusion would have been antidilutive.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- LICENSE AGREEMENTS:
Emerson has several license agreements that allow licensees to use its trademarks for the manufacture and/or the sale of consumer electronics and other products and are referred to as outbound licenses. These license agreements (i) allow the licensee to use Emerson's trademarks by a specific product category, or by a specific geographic area that primarily includes some or all of the countries located in North America, South America, Mexico and parts of Europe, or by a specific customer base, or by any combination of the above, or any other category that might be defined in the license agreement, (ii) may be subject to renewal at the initial expiration of the agreements and are governed by the laws of the United States and (iii) have expiration dates ranging from March 2006 through February 2010. License revenues recognized and earned in fiscal 2005, 2004, and 2003, including the amounts described in the next paragraph, were approximately $10,804,000, $10,973,000, and $10,388,000, respectively. Emerson records licensing revenues as earned over the term of the related agreements.
Effective January 1, 2001, Emerson entered into a license agreement ("Video License Agreement") with Funai Corporation, Inc. ("Funai"), which was amended to extend the Video License Agreement to December 31, 2006. The Video License Agreement provides that Funai will manufacture, market, sell and distribute specified products bearing the "[OBJECT OMITTED]" trademark to customers in the U.S., and Canadian markets. Under the terms of the agreement, Emerson will receive non-refundable minimum annual royalty payments of $4.3 million each calendar year and a license fee on sales of product subject to the Video License Agreement in excess of the minimum annual royalties. During fiscal 2005, 2004 and 2003, revenues of $8,555,000, $8,759,000 and $8,520,000 respectively, were recorded under this agreement.
NOTE 13-- LEGAL PROCEEDINGS:
Putative Class Actions
Between September 4, 2003 and October 30, 2003, several putative class action lawsuits were filed in the United States District Court for the District of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth Corby and John Raab (the "Individual Defendants") on behalf of purchasers of Emerson's publicly traded securities between January 29, 2003 and August 12, 2003 (the "Class Period.") On December 17, 2003, the Court entered a Joint Stipulation and Order consolidating these putative class actions under the caption In Re Emerson Radio Corp. Securities Litigation, 03cv4201 (JLL) (the "Consolidated Action.") Further to that Stipulation and Order, lead plaintiff was appointed and co-lead counsel and co-liaison counsel were approved by the Court in the Consolidated Action. Consistent with the Stipulation and Order, the plaintiffs filed an Amended Consolidated Complaint (the "Amended Complaint") that, among other things, added Jerome Farnum, one of Emerson's directors, as an individual defendant in the litigation.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED
Generally, the Amended Complaint alleges that Emerson and the Individual Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated there under, by (i) issuing certain positive statements during the Class Period regarding our ability to replace lost revenues attributable to the Hello Kitty(R) license and (ii) omitting to disclose that Emerson suffered allegedly soured relationships with its largest retail customers. The Amended Complaint further alleges that these statements were materially false and misleading when made because Emerson allegedly misrepresented and omitted certain adverse facts which then existed and disclosure of which was necessary to make the statements not false and misleading. Emerson and the Individual Defendants deny all allegations and have moved to dismiss the Complaint in its entirety for failure to state a claim. The motion to dismiss was fully briefed and was submitted to the Court on October 15, 2004. The Court's decision on the motion is pending. Emerson and the Individual Defendants intend to defend the lawsuit vigorously.
Other Matters
We are a party to various other litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our financial position, results or operations or cash flows.
NOTE 14 --BUSINESS SEGMENT INFORMATION AND MAJOR CUSTOMERS:
The Company has two business segments, the consumer electronics business and the sporting goods segment. Operations in these business segments are summarized below by geographic area (in thousands):
YEAR ENDED MARCH 31, 2005
------------------------------------------
U.S. FOREIGN CONSOLIDATED
------------------------------------------
Sales to external customers - consumer
electronics $ 226,551 $ 4,232 $ 230,783
Sales to external customers - sporting goods 89,570 351 89,921
------------------------------------------
Total sales to external customers $ 316,121 $ 4,583 $ 320,704
==========================================
Income (loss) before income taxes -
consumer electronics $ 7,414 $ (221) $ 7,193
|
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED
Income before income taxes - sporting goods 1,645 - 1,645
-----------------------------------------------
Total loss before income taxes $ 9,059 $ (221) $ 8,838
===============================================
Identifiable assets - consumer electronics $ 74,779 $ 11,832 $ 86,611
Identifiable assets - sporting goods 44,557 -- 44,557
-----------------------------------------------
Total identifiable assets $ 119,336 $ 11,832 $ 131,168
===============================================
YEAR ENDED MARCH 31, 2004
-----------------------------------------------
U.S. FOREIGN CONSOLIDATED
-----------------------------------------------
Sales to external customers - consumer
electronics $ 172,765 $ 7,187 $ 179,952
Sales to external customers - sporting goods 83,513 309 83,822
-----------------------------------------------
Total sales to external customers $ 256,278 $ 7,496 $ 263,774
===============================================
Income (loss) before income taxes and
cumulative effect of change in accounting
principle - consumer electronics $ 3,103 $ (104) $ 2,999
Loss before income taxes and cumulative effect of
change in accounting principle - sporting goods (4,584) -- (4,584)
-----------------------------------------------
Total loss before income taxes
and cumulative effect of change in
accounting principle $ (1,481) $ (104) $ (1,585)
==============================================
Identifiable assets - consumer electronics $ 62,288 $ 9,688 $ 71,976
Identifiable assets - sporting goods 46,693 -- 46,693
----------------------------------------------
Total identifiable assets $ 108,981 $ 9,688 $118,669
==============================================
YEAR ENDED MARCH 31, 2003
----------------------------------------------
U.S. FOREIGN CONSOLIDATED
----------------------------------------------
Sales to external customers - consumer
electronics $ 240,629 $ 4,587 $245,216
Sales to external customers - sporting goods 84,842 257 85,099
----------------------------------------------
Total sales to external customers $ 325,471 $ 4,844 $330,315
==============================================
Income (loss) before income taxes and
cumulative effect of change in accounting
principle - consumer electronics $ 19,595 $ (17) $ 19,578
Loss before income taxes and cumulative effect of change
in accounting principle - sporting goods (2,654) -- (2,654)
----------------------------------------------
|
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED
-----------------------------------------------
Total income (loss) before income taxes
and cumulative effect of change in
accounting principle $ 16,941 $ (17) $ 16,924
===============================================
Identifiable assets - consumer electronics $ 60,375 $ 9,504 $ 69,879
Identifiable assets - sporting goods 64,683 -- 64,683
-----------------------------------------------
Total identifiable assets $ 125,058 $ 9,504 $134,562
===============================================
|
Identifiable assets are those assets used in operations in each geographic area. In addition to operating assets, at March 31, 2005, 2004, and 2003, there were non-operating assets of $8,798,000, $11,437,000 and $9,492,000, respectively, located in foreign countries.
The Company's net sales to one customer aggregated approximately 30%, 25% and 25% of consolidated net revenues for the years ended March 31, 2005, 2004, and 2003, respectively. The Company's net sales to another customer aggregated 12%, 15%, and 17% for the years ended March 31, 2005, 2004, and 2003, respectively. The Company's net sales to a third customer, a customer that filed for voluntary bankruptcy protection in fiscal 2002, that has since emerged from bankruptcy, aggregated 7%, 4%, and 12% for the years ended March 31, 2005, 2004 and 2003. The trade accounts receivable balance for these three customers, net of specific reserves, approximated 27%, 1% and 5% of consolidated trade accounts receivable as of March 31, 2005, respectively, and approximated 0%, 2% and 4% of consolidated trade accounts receivable as of March 31, 2004, respectively. The Company has policies and procedures to limit its credit risk related to this and other customers.
NOTE 15 - - DERIVATIVE FINANCIAL INSTRUMENTS:
As of March 31, 2003, the Company had outstanding an interest swap agreement that converted $10 million of its variable rate Loan Agreement to a fixed rate instrument through 2004. This swap agreement was designated as a cash flow hedge and the change in fair value of the hedge is recorded in other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affected earnings. During fiscal 2003, the Company recorded a charge of approximately $100,000 related to a portion of the cash flow hedge. Subsequent to March 31, 2003, the Company terminated the interest rate swap agreement.
NOTE 16 - - QUARTERLY INFORMATION (UNAUDITED):
The following table sets forth certain information regarding the Company's results of operations for each full quarter within the fiscal years ended March 31, 2005 and March 31, 2004, with amounts in thousands, except for per share data. Due to rounding, quarterly amounts may not fully sum to yearly amounts. (In thousands, except per share data).
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FISCAL 2005 FISCAL 2004
------------------------------------------------------------------------------ --------------------------------------------
CONSOLIDATED STATEMENT
OF OPERATIONS 1ST QRT 2ND QRT 3RD QRT 4TH QRT 1ST QRT 2ND QRT 3RD QRT 4TH QRT
------------------------------------------------------------------------------ ---------------------------------------------
Net revenues $ 72,930 $ 83,129 $ 94,679 $ 69,966 $ 54,171 $ 78,873 $ 76,345 $ 54,385
Operating income (loss) 3,650 3,972 3,156 525 (31) 2,087 907 (3,995)
Income (loss ) before
income taxes 2,750 3,174 3,537 (623) (507) 1,823 313 (3,214)
Income (loss) from
continuing operations 1,805 2,162 1,905 (17) (440) 781 (340) (3,736)
Income (loss) from
discontinued operations -- -- -- 50 (5) (100) 3,153 (387)
-------------------------------------------------- ---------------------------------------------
Net income (loss) 1,805 2,162 1,905 33 (445) 681 2,813 (4,123)
================================================== =============================================
Basic net income (loss)
per share :
Continuing operations $ .07 $ .08 $ .07 $ -- $ (.02) $ .03 $ (.01) $ (.14)
Discontinued operations -- -- -- -- -- (.01) .11 (.01)
-------------------------------------------------- ---------------------------------------------
$ .07 $ .08 $ .07 $ -- $ (.02) $ .02 $ .10 $ (.15)
================================================== =============================================
Diluted net
income
(loss) per share:
Continuing operations $ .07 $ .08 $ .07 $ -- $ (.02) $ .03 $ (.01) $ (.14)
Discontinued operations -- -- -- -- -- (.01) .11 (.01)
-------------------------------------------------- ---------------------------------------------
$ .07 $ .08 $ .07 $ -- $ (.02) $ .02 $ .10 $ (.15)
================================================== =============================================
Weighted average shares
Outstanding - basic 26,630 27,076 27,103 27,154 27,416 27,560 27,189 26,741
Outstanding - diluted 27,261 27,216 27,239 27,154 27,416 28,428 27,189 26,741
|
As a result of the Company's adoption of SFAS No. 123R, "Share-Based Payments" in the fourth quarter of fiscal 2005, effective April 1, 2004, the amounts presented above for the second and third quarters of fiscal 2005 have increased (decreased) relative to the amounts previously reported for operating income by approximately $1.3 million and ($68,000), respectively, and for income from continuing operations as well as net income by $1.2 million and ($68,000), respectively. In addition, diluted net income per share increased by $.04 for the second quarter and remained unchanged for the third quarter.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 17 - DISCONTINUED OPERATIONS:
From July 2003 through November 2003, certain of SSG's team dealer locations were discontinued. In November 2003, SSG sold all of the issued and outstanding capital stock of ATEC. These closures and sales of assets, and related discontinued operations resulted in income, net of tax, of approximately $50,000 and $2.7 million for the fiscal years ended March 31, 2005 and March 31, 2004, respectively. On November 18, 2003, SSG sold all of the issued and outstanding capital stock of ATEC, resulting in a net gain of approximately $3.8 million, after a related deferred income tax charge of $2.2 million. The results of these transactions are included in discontinued operations in the accompanying Consolidated Statement of Operations for all years presented.
The following table summarizes the results of these discontinued operations, net of related income taxes, as applicable (in thousands).
2005 2004 2003
--------------- --------------- ---------------
Net revenues-ATEC $ -- $ 6,184 $ 10,189
Net revenues-Team Dealers -- 3,043 7,280
--------------- --------------- ---------------
Net revenues - Total -- 9,227 17,469
--------------- --------------- ---------------
Income from operations - ATEC -- 478 1,630
Loss from operations - Team Dealers -- (724) (790)
Loss on sale of Team Dealers -- (885) --
Gain on sale of ATEC, net of tax 50 3,792 --
--------------- --------------- ---------------
Total discontinued operations, net $ 50 $ 2,661 $ 840
=============== =============== ===============
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As previously reported in a Form 8-K dated April 2, 2004, on March 31, 2004, we retained the services of BDO Seidman LLP as our independent auditors to replace our former independent auditors, Ernst & Young LLP. This engagement and replacement was approved by our Audit Committee. During the fiscal year, and any subsequent interim period prior to March 31, 2004, we did not consult with BDO Seidman LLP regarding any matters noted in Items 304(a) of Regulation S-K. BDO Seidman LLP has provided tax services to us during the fiscal years ending March 31, 2002, 2003 and 2004 and is expected to continue to provide such services to us.
There have been no "disagreements" within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or any events of the type listed in Item 304(a)(1)(v)(A) through (D) of Regulation S-K, involving Ernst & Young that occurred within the fiscal year and the interim period prior to March 31, 2004. Ernst & Young's report on our financial statements for the fiscal year ended March 31, 2003 did not contain any adverse opinions or disclaimers of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
We provided Ernst & Young with a copy of the disclosures made pursuant to the Form 8-K (which disclosures are consistent with the disclosures noted above) and Ernst & Young furnished the Company with a letter addressed to the Commission stating that it agrees with the statements made by the Company in the Form 8-K filing, a copy of which was filed as an exhibit to the Form 8-K.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures.
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting.
There have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required is incorporated herein by reference to Emerson's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before July 29, 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated herein by reference to Emerson's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before July 29, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required is incorporated herein by reference to Emerson's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before July 29, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated herein by reference to Emerson's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before July 29, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required is incorporated herein by reference to Emerson's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before July 29, 2005.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) Financial Statements and Schedules. See Item 8
(b) Exhibits
3.1 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).
3.2 Amended and Restated Certificate of Incorporation of Sport
Supply Group, Inc. (incorporated by reference to Exhibit 4.1
of Sport Supply's Registration Statement on Form S-8,
Registration No. 33-80028).
3.3 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Sport Supply Group, Inc. (incorporated
by reference to Exhibit 4.1 of Sport Supply's Registration
Statement on Form S-8, Registration No. 33-80028).
3.4 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).
3.5 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).
3.6 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).
3.7 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).
3.8 Amended and Restated Bylaws of Sport Supply Group, Inc.
(incorporated by reference to Exhibit 3.2 of Sport Supply's
Annual Report on Form 10-K for the year ended November 1,
1996).
10.4 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(af) of
Emerson's Annual Report on Form 10-K for the year ended
March 31, 1996).
10.5 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).
86
|
10.6 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).
10.7 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).
10.9 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).
10.12 License Agreement effective as of January 1, 2001 by and
between Funai Corporation and Emerson (incorporated by
reference to Exhibit (10) (z) of Emerson's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000).
10.12.1 First Amendment to License Agreement dated February 19, 2002
by and between Funai Corporation and Emerson (incorporated
by reference to Exhibit (10.12.1) of Emerson's Annual Report
on Form 10-K for the year ended March 31, 2002).
10.12.2 Second Amendment to License Agreement effective August 1,
2002 by and between Funai Corporation and Emerson
(incorporated by reference to Exhibit (10.12.2) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
10.12.3 Third Amendment to License Agreement effective February 18,
2004 by and between Funai Corporation and Emerson
(incorporated by reference to Exhibit 10.12.3 of Emerson's
Annual Report on Form 10-K for the year ending March 31,
2004)
10.12.4 Fourth Amendment to License Agreement effective December 3,
2004 by and between Funai Corporation, Inc. and Emerson
(incorporated by reference to Exhibit (10.12.4) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December
31, 2004).
10.12.5 Fifth Amendment to License Agreement effective May 18, 2005
by and between Funai Corporation, Inc. and Emerson. *
10.13 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).
87
|
10.13.1 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).
10.13.2 Fourth Lease Modification made the 12th day of February,
2003 between Hartz Mountain Parsippany and Emerson
(incorporated by reference to Exhibit (10.13.2) of Emerson's
Annual Report on Form 10-K for the year ended March 31,
2003).
10.13.3 Lease Agreement dated as of October 8, 2004 between Sealy TA
Texas, L.P., a Georgia limited partnership, and Emerson
Radio Corp. (incorporated by reference to Exhibit (10.13.3)
of Emerson's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004).
10.13.4 Fifth Lease Modification Agreement made the 2nd day of
December, 2004 between Hartz Mountain Industries, Inc. and
Emerson (incorporated by reference to Exhibit (10.13.3) of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2004).
10.14.1 Purchasing Agreement, dated March 5, 1999, between
AFG-Elektronik GmbH and Emerson Radio International Ltd.
(incorporated by reference to Exhibit (10) (aa) of
Emerson's Annual Report on Form 10-K for the year ended
April 2, 1999).
10.15 Second Amendment to Lease made the 10th day of June, 2004
between ProLogis and Sport Supply Group, Inc. (incorporated
by reference to Exhibit 10.15 of Emerson's Annual Report on
Form 10-K for the year ended March 31, 2004).
10.16 Letter of Employment for Patrick Murray, dated May 3, 2001
(incorporated by reference to Exhibit 10.16 of Emerson's
Annual Report on Form 10-K for the year ended March 31,
2001).
10.17 Form of Indemnification Agreement entered into between Sport
Supply and each of the directors of Sport Supply and Sport
Supply's General Counsel (incorporated by reference to
Exhibit 10.3 of Sport Supply's Registration Statement on
Form S-1, Registration No. 33-39218).
10.18 Sport Supply Group, Inc. Amended and Restated Stock Option
Plan (incorporated by reference to Exhibit 4.1 of Sport
Supply's Registration Statement on Form S-1, Registration
No. 33-27193).
10.18.1 Emerson Radio Corp. 2004 Employee Stock Incentive Plan
(incorporated by reference to Exhibit 1 of Emerson's 2004
Proxy Statement).
10.18.2 Emerson Radio Corp. 2004 Non-Employee Outside Director Stock
Option Plan (incorporated by reference to Exhibit 2 of
Emerson's 2004 Proxy Statement).
88
|
10.19 Assignment and Assumption Agreement, dated to be effective
as of February 28, 1992, by and between Aurora and Sport
Supply Group, Inc. (incorporated by reference to Exhibit
10.27 of Sport Supply's Annual Report on Form 10-K for the
year ended 1991).
10.21 License Agreement, dated as of September 23, 1991, by and
between Proacq Corp. and Sport Supply Group, Inc.
(incorporated by reference to Exhibit 10.17 of Sport
Supply's Annual Report on Form 10-K for the year ended
1991).
10.22 Sport Supply Group Employees' Savings Plan dated June 1,
1993 (incorporated by reference to Exhibit 10.27 of Sport
Supply's Annual Report on Form 10-K for the year ended
1993).
10.23 Management Services Agreement dated July 1, 1997 to be
effective as of March 7, 1997 by and between Sport Supply
Group, Inc. and Emerson (incorporated by reference to
Exhibit 10.2 of Sport Supply's Quarterly Report on Form 10-Q
for the quarter ended August 1, 1997 ).
10.26 Employment Agreement between Emerson Radio Corp. and John J.
Raab, effective as of September 1, 2001 (incorporated by
reference to Exhibit 10.26 of Emerson's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001).
10.26.1 Employment Agreement between Emerson Radio Corp. and
Elizabeth J. Calianese McPartland, effective as of September
1, 2001 (incorporated by reference to Exhibit 10.26.1 of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001).
10.26.2 Letter re Employment Agreement between Emerson Radio Corp.,
Emerson Radio International Ltd., Emerson Radio (Hong Kong)
Limited and Geoffrey P. Jurick, effective as of September 1,
2001 (incorporated by reference to Exhibit 10.26.2 of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001).
10.26.3 Employment Agreement extension letter between Emerson Radio
Corp., Emerson Radio International Ltd., Emerson Radio (Hong
Kong Limited and Geoffrey P. Jurick effective as of
September 1, 2004 (incorporated by reference to Exhibit
10.26.3 of Emerson's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2004).
10.26.4 Employment Agreement extension letter between Emerson Radio
Corp. and John J. Raab effective as of September 1, 2004
(incorporated by reference to Exhibit 10.26.4 of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December
31, 2004).
89
|
10.26.5 Employment Agreement extension letter between Emerson Radio
Corp. and Elizabeth J. Calianese McPartland effective as of
September 1, 2004 (incorporated by reference to Exhibit
10.26.5 of Emerson's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2004).
10.27 Revolving Credit and Term Loan Agreement dated June 28, 2002
among Emerson Radio Corp., Majexco Imports, Inc., Emerson
Radio (Hong Kong) Ltd., and Emerson Radio International Ltd.
Jointly and Severally, and PNC Bank, National Association
(incorporated by reference to Exhibit 10.27 of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December
31, 2002).
10.27.1 Amendment to Revolving Credit and Term Loan Agreement
(Number One) dated November 7, 2003 among Emerson Radio
Corp., Majexco Imports, Inc., Emerson Radio (Hong Kong)
Ltd., and Emerson Radio International Ltd. Jointly and
Severally, and PNC Bank, National Association (incorporated
by reference to Exhibit 10.27.1 of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31,
2003).
10.27.2 Amendment to Revolving Credit and Term Loan Agreement
(Number Two) dated December 31, 2003 among Emerson Radio
Corp., Majexco Imports, Inc., Emerson Radio (Hong Kong)
Ltd., and Emerson Radio International Ltd. Jointly and
Severally, and PNC Bank, National Association (incorporated
by reference to Exhibit 10.27.2 of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31,
2003).
10.27.3 Amendment to Revolving Credit and Term Loan Agreement
(Number Three) and Waiver dated June 28, 2004, among Emerson
Radio Corp., Majexco Imports, Inc., Emerson Radio (Hong
Kong) Ltd., and Emerson Radio International Ltd. Jointly and
Severally, and PNC Bank, National Association (incorporated
by reference to Exhibit 10.27.3 of Emerson's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
10.27.4 Amendment and Restated Revolving Credit and Term Loan
Agreement dated as of June 27, 2005, among Emerson Radio
Corp., Emerson Radio Macao Commercial Offshore Limited,
Majexco Imports, Inc., Emerson Radio (Hong Kong) Ltd., and
Emerson Radio International Ltd., and PNC Bank, National
Association. *
10.28 Common Stock Purchase Warrant Agreement entered into on
August 1, 2002 by and between Emerson Radio Corp. and
Further Lane Asset Management LP (incorporated by reference
to Exhibit 10.28 of Emerson's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
90
|
10.28.1 Form of Common Stock Warrant Agreement entered into on
October 7, 2003 by and between Emerson Radio Corp. and
Ladenburg Thalmann & Co., Inc. (incorporated by reference to
Exhibit 10.28.1 of Emerson's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2003).
10.28.2 Common Stock Purchase Warrant Agreement entered into on
August 1, 2004 by and between Emerson Radio Corp. and EPOCH
Financial Services, Inc. (incorporated by reference to
Exhibit 10.28.2 of Emerson's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004).
10.29 Separation Agreement dated September 15, 2003 between SSG
and John P. Walker (incorporated by reference to Exhibit
10.1 of Sport Supply's Quarterly Report on Form 10-Q for the
quarter ended September 26, 2003).
10.35 Loan and Security Agreement dated March 27, 2001 by and
between Sport Supply Group, Inc. and Congress Financial
Corporation (incorporated by reference to Exhibit 10.29 of
Sport Supply's Annual Report on Form 10-K for the year ended
March 30, 2001).
10.35.1 First Amendment to the Loan and Security Agreement dated
October 1, 2002 by and between Sport Supply Group, Inc. and
Congress Financial Corporation (incorporated by reference to
Exhibit 10.2 of Sport Supply's Quarterly Report on Form 10-Q
for the quarter ended December 27, 2002).
10.35.2 Second Amendment to Loan and Security Agreement dated June
27, 2003 by and between Sport Supply Group, Inc. and
Congress Financial Corporation (incorporated by reference to
Exhibit 10.1 of Sport Supply's Quarterly Report on Form 10-Q
for the quarter ended June 27, 2003).
10.35.3 Third Amendment to Loan and Security Agreement dated
November 6, 2003 by and between Sport Supply Group, Inc. and
Congress Financial Corporation (incorporated by reference to
Exhibit 10.4 of Sport Supply's Quarterly Report on Form 10-Q
for the quarter ended September 26, 2003).
10.35.4 Fourth Amendment to Loan and Security Agreement dated
December 29, 2003 by and between Sport Supply Group, Inc.
and Congress Financial Corporation (incorporated by
reference to Exhibit 10.1 of Sport Supply's Quarterly Report
on Form 10-Q for the quarter ended December 26, 2003).
10.35.5 Fifth Amendment to Loan and Security Agreement dated
February 19, 2004 by and between Sport Supply Group, Inc.
and Congress Financial Corporation (incorporated by
reference to Exhibit 10.35.5 of Emerson's Annual Report on
Form 10-K for the year ended March 31, 2004).
91
|
14.1 Code of Ethics for Senior Financial Officers (incorporated
by reference to Exhibit 14.1 of Emerson's Annual Report on
Form 10-K for the year ended March 31, 2004).
21.1 Subsidiaries of the Company as of March 31, 2005. *
23.1 Consent of Independent Registered Public Accounting Firm -
BDO Seidman, LLP. *
23.2 Consent of Independent Registered Public Accounting Firm -
Ernst & Young, LLP. *
31.1 Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
32 Certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.*
-------------------
|
* 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 29, 2005
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Geoffrey P. Jurick Chairman of the Board, June 29, 2005
Geoffrey P. Jurick Chief Executive Officer and
President
(Principal Executive Officer)
/s/ Guy A. Paglinco Vice President, June 29, 2005
Guy A. Paglinco Chief Financial Officer
(Principal Finance and
Accounting Officer)
/s/ Robert H. Brown, Jr. Director June 29, 2005
Robert H. Brown, Jr.
/s/ Peter G. Bunger Director June 29, 2005
Peter G. Bunger
/s/ Jerome H. Farnum Director June 29, 2005
Jerome H. Farnum
/s/ Herbert A. Morey Director June 29, 2005
Herbert A. Morey
|
EXHIBIT 10.12.5
FIFTH AMENDMENT TO LICENSE AGREEMENT
This Fifth Amendment to License Agreement is dated effective as of May 18, 2005 and is made by and between Emerson Radio Corp. ("Licensor") and Funai Corporation, Inc. ("Licensee").
WHEREAS, Licensor and Licensee are parties to that License Agreement dated effective January 1, 2001, as amended (collectively, the "Agreement"); and
WHEREAS, the parties hereto wish to amend the Agreement.
NOW, THEREFORE, the parties agree to the following:
1. Second Amended Exhibit A II of the Agreement. Amended Exhibit A, Section II of the Agreement shall be amended to read as set forth on the attached Second Amended Exhibit A.
2. Capitalized Terms. All capitalized terms not defined herein shall have the same meaning as in the Agreement.
3. Counterparts. This Fifth Amendment and any future amendments may be executed in several counterparts that together shall constitute but one and the same document.
4. All Other Provisions of the Agreement. All other provisions of the Agreement not amended herein shall continue to have their full force and effect.
IN WITNESS WHEREOF, this Fifth Amendment has been executed by the duly authorized representative of each party effective as of the date first set forth above.
EMERSON RADIO CORP. FUNAI CORPORATION, INC. "Licensor" "Licensee" By: /s/ John J. Raab By: /s/ Takeshi Ito |
Name: John J. Raab Name: Takeshi Ito Title: COO/Senior Executive Vice President Title: President
Exhibit 10.27.4
AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT
dated as of June 27, 2005
among
EMERSON RADIO CORP.,
EMERSON RADIO MACAO COMMERCIAL OFFSHORE LIMITED,
MAJEXCO IMPORTS, INC.,
EMERSON RADIO (HONG KONG) LIMITED,
And EMERSON RADIO INTERNATIONAL LTD.,
as the Borrower
PNC BANK, NATIONAL ASSOCIATION
AND THE OTHER LENDERS PARTY HERETO,
as Lenders
and
PNC BANK, NATIONAL ASSOCIATION, as Agent
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 DEFINITIONS.......................................................2
Section 1.1 Defined Terms............................................2
Section 1.2 Other Definitional Provisions...........................21
ARTICLE 2 AMOUNT AND TERMS OF COMMITMENTS..................................21
Section 2.1 Revolving Credit Commitments............................21
Section 2.2 Revolving Credit Note...................................22
Section 2.3 Procedure for Revolving Credit Borrowings...............22
Section 2.4 Commitment and Other Fees...............................24
Section 2.5 Termination/Reduction of Commitments....................24
Section 2.6 Term Loans..............................................31
Section 2.7 Term Notes..............................................31
Section 2.8 Procedure for Term Loan Borrowing.......................31
Section 2.9 Prepayments.............................................32
Section 2.10 Conversion and Continuation Options.....................33
Section 2.11 Minimum Amounts of Tranches/Number of Tranches..........34
Section 2.12 Interest Rates and Payment Dates........................34
Section 2.13 Inability to Determine Interest Rate....................35
Section 2.14 Payments/Funding........................................36
Section 2.15 Change in Legality......................................37
Section 2.16 Increased Costs.........................................37
Section 2.17 Indemnity...............................................40
Section 2.18 Intentionally omitted...................................41
Section 2.19 Purpose of Loans........................................41
ARTICLE 3. REPRESENTATIONS AND WARRANTIES..................................41
Section 3.1 Financial Condition.....................................41
Section 3.2 No Material Adverse Change..............................42
Section 3.3 Corporate Existence; Compliance with Law................42
Section 3.4 Corporate Power; Authorization;
Enforceable Obligations...............................42
Section 3.5 No Legal Bar............................................43
Section 3.6 No Material Litigation..................................43
Section 3.7 No Default..............................................43
Section 3.8 Ownership of Property; Liens............................43
Section 3.9 Intellectual Property...................................43
Section 3.10 No Burdensome Restrictions..............................44
Section 3.11 Taxes...................................................44
Section 3.12 Federal Regulations.....................................44
Section 3.13 Investment Company Act; Public Utility
Holding Company Act; Other Regulations................44
Section 3.14 Subsidiaries............................................44
|
Section 3.15 Employee Grievances.....................................45
Section 3.16 ERISA...................................................45
Section 3.17 ER Intercompany Payable.................................46
ARTICLE 4. CONDITIONS PRECEDENT............................................49
Section 4.1 Conditions to Effective Date............................49
Section 4.2 Conditions to Each Loan.................................51
ARTICLE 5. AFFIRMATIVE COVENANTS...........................................52
Section 5.1 Financial Statements, Budgets and Forecasts.............52
Section 5.2 Certificates; Other Information.........................53
Section 5.3 Payment of Obligations..................................54
Section 5.4 Conduct of Business and Maintenance of Existence........54
Section 5.5 Maintenance of Property; Insurance......................54
Section 5.6 Inspection of Property; Books and
Records; Discussions..................................55
Section 5.7 Notices.................................................56
Section 5.8 ERISA Compliance........................................56
Section 5.9 Taxes and Claims........................................57
Section 5.10 Environmental Matters...................................57
Section 5.11 Shipping Documents......................................57
Section 5.12 Significant Subsidiary..................................58
Section 5.13 Waivers and Consents....................................58
Section 5.14 Hedging Agreement.......................................59
Section 5.15 Lockbox Account.........................................58
ARTICLE 6. NEGATIVE COVENANTS..............................................58
Section 6.1 Limitation on Indebtedness..............................58
Section 6.2 Limitation on Liens.....................................59
Section 6.3 Limitation on Contingent Obligations....................60
Section 6.4 Limitations on Fundamental Changes......................60
Section 6.5 Limitation on Sale of Assets............................61
Section 6.6 Limitation on Investments, Loans and Advances...........61
Section 6.7 Limitation on Optional Payments and
Modifications of Debt Instruments.....................62
Section 6.8 Transactions with Affiliates............................63
Section 6.9 Fiscal Year.............................................63
Section 6.10 Limitation on Conduct of Business.......................63
Section 6.11 Net Worth...............................................63
Section 6.12 Fixed Charge Coverage Ratio.............................64
Section 6.13 Senior Funded Debt to EBITDA............................64
Section 6.14 Intentionally omitted...................................64
Section 6.15 ERISA Obligations.......................................65
Section 6.16 Restricted Payments.....................................65
ARTICLE 7. EVENTS OF DEFAULT...............................................65
Section 7.1 Events of Default.......................................65
ii
|
ARTICLE 8. THE AGENT.......................................................69
Section 8.1 Actions.................................................69
Section 8.2 Exculpation.............................................69
Section 8.3 Successor...............................................70
Section 8.4 Credit Decisions........................................70
Section 8.5 Notices, etc. from Agent................................71
Section 8.6 Security Documents......................................71
ARTICLE 9. PURCHASING LENDER...............................................71
Section 9.1 Purchasing Lender.......................................71
Section 9.2 Disclosure of Information...............................72
Section 9.3 Pledges to Federal Reserve Bank.........................73
ARTICLE 10. MISCELLANEOUS..................................................73
Section 10.1 Amendments and Waivers.................................73
Section 10.2 Notices................................................75
Section 10.3 No Waiver; Cumulative Remedies.........................76
Section 10.4 Survival of Representations and Warranties.............76
Section 10.5 Payment of Expenses and Taxes..........................76
Section 10.6 Successors and Assigns.................................77
Section 10.7 Set-off/Sharing........................................77
Section 10.8 Foreign Subsidiaries...................................78
Section 10.9 Judgment Currency/Withholding Tax......................79
Section 10.10 Counterparts...........................................79
Section 10.11 Severability...........................................79
Section 10.12 Integration............................................80
Section 10.13 Governing Law..........................................80
Section 10.14 Submission To Jurisdiction; Waivers....................80
Section 10.15 Acknowledgments........................................80
Section 10.16 Waivers of Jury Trial..................................81
Section 10.17 SSG.81
EXHIBITS
Exhibit A Revolving Credit Note
Exhibit A-1 Swing Loan Note
Exhibit B Term Note
Exhibit C Borrowing Base Certificate
Exhibit D Omitted
Exhibit E Assumption Agreement
Exhibit F Omitted
Exhibit G Omitted
Exhibit H Stock Pledge Agreement
Exhibit I Intellectual Property Security Agreement
Exhibit J Omitted
iii
|
Exhibit K Landlord/Warehouse Waiver Exhibit L Omitted Exhibit M Borrowing Request SCHEDULES --------- Pricing Schedule Schedule I Commitments Schedule II Consents (ss. 3.4(b)) Schedule III Litigation (ss. 3.6) Schedule IV Subsidiaries (ss. 3.14) Schedule V Employee Grievances (ss. 3.15) Schedule VI ERISA Plans (ss. 3.16) Schedule VII Liens (ss. 6.2(g)) Schedule VIII Existing Permitted Investments Schedule IX Omitted Schedule X Affiliated Agreements (ss.6.8) Schedule XI Notice Addresses Schedule VI (a) Insurance (ss.3.18) Schedule VI (b) Material Contracts (ss.3.17) Schedule VI (c) Environmental Matters (ss.3.21) Schedule 4.1 (n) Closing Checklist |
AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT
AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT,
dated as of June 27, 2005 among EMERSON RADIO CORP. ("ERC US"), a Delaware
corporation, EMERSON RADIO MACAO COMMERCIAL OFFSHORE LIMITED, a Macao
corporation ("ER MACAO"), MAJEXCO IMPORTS, INC. ("MI"), a California
corporation, EMERSON RADIO (HONG KONG) LIMITED ("ER HONG KONG") a Hong Kong
corporation, and EMERSON RADIO INTERNATIONAL LTD. ("ER BVI"), a British Virgin
Islands company, jointly and severally as co-borrowers and co-obligors, except
as expressly set forth herein in Section 10.8 hereof, (collectively, the
"Borrower"), PNC BANK, NATIONAL ASSOCIATION (in its capacity as lender, "PNC")
and each other lender signatory hereto or which becomes a Lender pursuant to
Section 9.1 (each a "Lender" and, collectively, the "Lenders") and PNC BANK,
NATIONAL ASSOCIATION as agent for the Lenders (in such capacity, the "Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders are parties to the Revolving Credit and Term Loan Agreement, dated June 28, 2002, pursuant to which the Lenders extended certain credit facilities to the Borrower (the "Original Credit Agreement");
WHEREAS, the Borrower has requested that the Lenders amend and restate the terms and conditions of the Original Credit Agreement and extend certain additional credit facilities to the Borrower; and
WHEREAS, the Lenders have agreed, upon the terms and conditions set forth herein, to amend and restate the Original Credit Agreement and to extend such additional credit facilities to the Borrower.
NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Lenders, the Agent and the Borrower hereby agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1. Defined Terms.
As used in this Agreement, the following terms shall have the following meanings:
"A Stock" when used in reference to inventory, new product (manufactured of new material and parts and not repaired, remanufactured or rebuilt), which has not been subjected to use after original manufacture (but excluding in any event seconds, opened returns and inventory held for resale).
"Adjusted EBITDA" Consolidated EBITDA for ERC US and its Subsidiaries other than SSG and the Foreign Subsidiaries.
"Affiliate" as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person whether by contract or otherwise.
"Agent" (a) PNC Bank, National Association; or (b) such other bank or financial institution as shall have been subsequently appointed as successor Agent pursuant to Section 8.3 of this Agreement.
"Agreement" this Amended and Restated Revolving Credit and Term Loan Agreement, as amended, supplemented or otherwise modified from time to time.
"Anti-Terrorism Laws" shall mean any Laws relating to terrorism or money laundering, including Executive Order No. 13224, the USA Patriot Act, the Laws comprising or implementing the Bank Secrecy Act, and the Laws administered by the United States Treasury Department's Office of Foreign Asset Control (as any of the foregoing Laws may from time to time be amended, renewed, extended, or replaced).
"Applicable Fee Rate" means a rate per annum determined in accordance with the Pricing Schedule. The Agent shall set the Applicable Fee Rate based on Level II Pricing on the Pricing Schedule until receipt by the Agent of the financial statements of Borrower for the fiscal quarter ending September 30, 2005 and thereafter the Agent shall set the Applicable Fee Rate for each fiscal quarter based upon the financial statements of Borrower for the immediately preceding fiscal quarter delivered pursuant to Section 5.1. The Applicable Fee Rate as so determined shall apply effective as of the date the relevant financial statements are received by the Agent. If the Borrower shall fail to deliver financial statements as required by Section 5.1, the Applicable Fee Rate shall be set as determined by Level IV Pricing on the Pricing Schedule for each fiscal quarter for which such financials are not delivered to the Agent for the period from the beginning of such fiscal quarter to the date such financial statements are delivered and from such date to the end of such fiscal quarter the Applicable Fee Rate shall be set by Agent based upon such financial statements.
"Applicable Margin" means a rate per annum determined in accordance with the Pricing Schedule. The Agent shall set the Applicable Margin based on Level II Pricing on the Pricing Schedule until receipt by the Agent of the financial statements of Borrower for the fiscal quarter ending September 30, 2005 and thereafter the Agent shall set the Applicable Margin for each fiscal quarter based upon the financial statements of Borrower for the immediately preceding fiscal quarter delivered pursuant to Section 5.1. The Applicable Margin as so determined shall apply effective as of the date the relevant financial statements are received by the Agent. If the Borrower shall fail to deliver financial statements as required by Section 5.1, the Applicable Margin shall be set as determined by Level IV Pricing on the Pricing Schedule for each fiscal quarter for which such financials are not delivered to the Agent for the period from the beginning of such fiscal quarter to the date such financial statements are delivered and from such date to the end of such fiscal quarter the Applicable Margin shall be set by Agent based upon such financial statements.
"Assignment and Acceptance" as defined in Section 9.1.
"Assumption Agreement" an agreement substantially in the form of Exhibit E hereto (with such changes therein as are reasonably acceptable to the Agent) to be delivered to the Agent pursuant to Section 5.12.
"Available Commitment" at any time with respect to Revolving Credit Loans for each Lender, an amount equal to (i) the amount of such Lender's Commitment at such time to make Revolving Credit Loans minus (ii) the sum of the aggregate principal amount of all then outstanding Revolving Credit Loans and Letters of Credit Outstanding made by such Lender.
"Base Rate" on any date the higher of (i) the Prime Rate then in effect and (ii) the Federal Funds Open Rate then in effect plus 1/2%.
"Base Rate Loans" Loans whose interest rate is based on the Base Rate.
"Blocked Person" the meaning assigned to such term in Section 3.22.
"Board" the Board of Governors of the Federal Reserve System of the United States.
"Borrowing Base" means an amount equal to (A) the sum of (x)
80% of the value of Eligible Receivables of ERC US for the most recently ended
Calculation Period (excluding therefrom in all cases the Special Receivables)
plus (y) 65% of the value of the Special Receivables of ERC US for the most
recently ended Calculation Period plus (z) the lesser of (i) 55% (or such
greater percentage as the Required Lenders may approve with respect to any
Calculation Period) of the aggregate value of unsold Eligible Inventory of ERC
US and MI for the most recently ended Calculation Period, (ii) 85% (or such
greater percentage as the Required Lenders may approve with respect to any
Calculation Period) of the Net Recovery Value and (iii) $21,000,000, during the
period from and including January 1 to and including March 31 in each calendar
year and $25,000,000, during the period from and including April 1 to and
including December 31 in each calendar year, less (B) (x) the Rental Reserve
until the Agent shall have received landlord/warehousemen waivers as required by
Section 5.13 in form and substance satisfactory to the Agent from all Persons
providing warehouse and leasehold premises to ERC US, (y) the amount of the
California unitary tax assessed against ERC US (and all penalties, interest and
other amounts payable with respect thereto) in the event a Lien is filed with
respect to such tax by any Governmental Authority so long as such tax is not
paid (provided if ERC US enters into an agreement with the relevant Governmental
Authority assessing such tax in form and substance satisfactory to the Required
Lenders with respect to a schedule for payment of such assessed tax (and any
penalties, interest or other amounts payable with respect thereto), the amount
reserved with respect to such assessed tax shall be limited to all payments
under such agreement due prior to the second anniversary of any date of
determination so long as ERC US is not in breach of such agreement and no
proceedings have been initiated to enforce or foreclose upon the Lien with
respect thereto), (z) at any time during the period from and including January
1st to and including March 31st in each year, an amount equal to 10% of the net
accounts receivable reflected on the then most recent Borrowing Base Certificate
delivered with respect to such period, and (aa) such additional reserves as
Agent shall deem appropriate in its reasonable business judgment in the event
the inventory of any Person constituting the Borrower is underinsured (in
Agent's reasonable business judgment) by the insurance in force pursuant to
Section 5.5. If the Required Lenders shall have approved a change in any
percentage used in determining the Borrowing Base for any Calculation Period,
they shall have no further or future obligation to do so with respect to any
other Calculation Period.
"Borrowing Base Certificate" a certificate in the form of Exhibit C hereto to be delivered by the ERC US for each Calculation Period.
"Borrowing Date" any Business Day specified in a notice pursuant to Section 2.3 as a date on which a Borrower requests the Lenders to make Loans.
"Business Day" a day other than Saturday, Sunday or other day on which commercial banks in Pittsburgh, Pennsylvania are authorized or required by law to be closed and, in the case of Eurodollar Loans, a day which is also a Working Day.
"CAPEX" for any period, the cost attributed in accordance with GAAP consistent with those applied in preparation of the financial statements referred to in Section 5.1 hereof to acquisitions during such period by ERC US and/or its consolidated Subsidiaries (other than SSG) of any asset, tangible or intangible, or replacements or substitutes therefor or additions thereto which are treated as a non current asset on such financial statements, including, without limitation, the acquisition or construction of assets having a useful life of more than one year.
"Calculation Period" In the case of the initial Loan, the Calculation Period shall be as of June 24, 2005 and then as of the end of each successive calendar month until the first date, if any, Undrawn Availability falls below $2,500,000, on which date the Calculation Period shall, until the Undrawn Availability equals or exceeds $2,500,000 for a thirty- (30) day period, be each successive seven day period beginning on a Saturday and ending on the following Friday.
"Capital Lease Obligations" of any Person for any period, the obligations of such Person to pay rent and other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, for such period, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP.
"Capital Stock" any and all shares, interests, participations or other equivalents (however designated) of shares of capital or capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing.
"Change in Control" means the acquisition by any Person, or two or more Persons acting in concert (other than any individuals who are members of ERC US's senior management on the Effective Date or any entity, if and so long as, the majority of equity and voting interests in which is owned by one or more of such individuals), of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of greater than 30% (or such greater percentage as the Required Lenders may agree to in writing) of the outstanding shares of voting stock of ERC US.
"Closing Date" the date on which the Lenders make the initial Loans.
"Code" the Internal Revenue Code of 1986, as amended from time to time.
"Commitment" for each Lender at any time from and including
the Effective Date to but excluding the Maturity Date the lesser of (i) the
amount set forth opposite such Lender's name in Schedule I under the heading
"Commitment" as such amount may be adjusted pursuant to Sections 2.5 or 9.1 and
(ii) the product of such Lender's Percentage and the Borrowing Base for the then
immediately preceding Calculation Period.
"Consolidated EBITDA" means, for any fiscal period, (a) Consolidated Net Income (Loss) for such period plus, (b) the sum of (i) other non-cash charges in accordance with GAAP (including expenses related to stock options pursuant to FAS 123R), (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization of intangible assets and (v) federal, state, local and foreign income taxes; all computed and calculated in accordance with GAAP.
"Consolidated Intangibles" at a particular date, all assets of ERC US and its consolidated Subsidiaries (excluding SSG), that would be classified as intangible assets in accordance with GAAP, but in any event including, without limitation, unamortized organization and reorganization expense and goodwill.
"Consolidated Interest Expense" for any period, the total interest expense paid for such period (including, without limitation, that attributable to Capital Lease Obligations in accordance with GAAP) of ERC US and its consolidated Subsidiaries (excluding SSG) with respect to all outstanding Indebtedness of ERC US and its consolidated Subsidiaries (excluding SSG).
"Consolidated Net Income" for any period, the consolidated net income (or net loss) of ERC US and its consolidated Subsidiaries (excluding SSG) for such period, determined in accordance with GAAP.
"Consolidated Net Worth" at a particular date, the sum of all amounts which would be included under shareholders' equity on a consolidated balance sheet of ERC US and its consolidated Subsidiaries (excluding SSG) determined in accordance with GAAP as at such date.
"Consolidated Tangible Net Worth" as used in Section 7.1(h) at a particular date, (a) the sum of all amounts which would be included under shareholders' equity on a consolidated balance sheet of ERC US and its consolidated Subsidiaries (excluding SSG) determined in accordance with GAAP as at such date minus (b) Consolidated Intangibles as at such date.
"Contamination" shall mean the presence or release or threat of release of Regulated Substances in, on, under or emanating to or from the Property, which pursuant to Environmental Safety Laws requires notification or reporting to an official body, or which pursuant to Environmental Safety Laws requires the investigation, cleanup, removal, remediation, containment, abatement of or other response action or which otherwise constitutes a violation of Environmental Safety Laws.
"Contingent Obligation" as to any Person any guarantee of payment, collection or performance by such Person of any Indebtedness or other obligation of any other Person, or any agreement to provide financial assurance with respect to the financial condition, or the payment of the obligations of, such other Person (including, without limitation, purchase or repurchase agreements, reimbursement agreements with respect to letters of credit or acceptances, indemnity arrangements, grants of security interests to support the obligations of another Person, keepwell agreements and take-or-pay or through-put arrangements) which has the effect of assuring or holding harmless any third Person against loss with respect to one or more obligations of such other Person; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business or indemnities entered into in the ordinary course of business in connection with the sale of inventory or licensing of intellectual property or other proprietary information. The amount of any Contingent Obligation of any Person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made and (b) the maximum amount for which such contingently liable Person may be liable pursuant to the terms of the instrument embodying such Contingent Obligation, unless such primary obligation and the maximum amount for which such contingently liable Person may be liable are not stated or determinable, in which case the amount of such Contingent Obligation shall be such contingently liable Person's maximum reasonably anticipated liability in respect thereof as determined by the contingently liable Person in good faith.
"Contractual Obligation" as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
"Controlled Group" as set forth in Section 1563(a) of the Code.
"Default" any of the events specified in Section 7.1, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied.
"Director Share" one ordinary share of the Capital Stock of ER Hong Kong held by Paul Gullett, an individual, or a replacement reasonably acceptable to Agent.
"Dollar" and "$" lawful currency of the United States of America.
"Effective Date" as set forth in Section 4.1.
"Eligible Inventory" all A Stock goods of ERC US and MI excluding work in progress, any inventory purchased from a Person not constituting the Borrower in which ERC US or MI does not have title, which is subject to a Lien (other than in favor of the Agent and the Lender), which has not been shipped to, or at the direction of, ERC US or MI, in which the Agent does not have a first priority perfected security interest, with respect to which any representations or warranties contained in the Loan Documents are untrue or as to which any Person constituting the Borrower has breached its covenants in the Loan Documents, and excluding any inventory in any warehouse or other facility for which Agent does not have a Waiver and Consent in form and substance satisfactory to it, and any other inventory which the Agent deems to be otherwise unacceptable in its reasonable judgment (including, without limitation, by reason of its being unacceptable due to age, type, category or quantity).
"Eligible Receivables" all accounts receivable of ERC US other than accounts receivable (i) which have remained unpaid for more than 90 days after the date of their creation; (ii) which are owed by any Person where 50% or more of the receivables owed by such Person would be excluded by reason of clause (i) of this definition (the "50% Rule"); (iii) which are owed by any Person constituting the Borrower or any Affiliate of any Person constituting the Borrower; (iv) which are payable by any Person not incorporated in a jurisdiction which is part of the United States of America, Canada or any state or province thereof; (v) as to which the goods which gave rise to the receivable have been or are being returned or as to which a credit has been claimed but only to the extent of such return or claimed credit; (vi) as to which (collectively, "Contras") the account party has (or claimed the right to) set off against or has netted out (or claimed the right to net out) charge backs or other amounts due such account party by any Person constituting the Borrower but only to the extent of such Contra; (vii) as to which there are accrued and unpaid late charges, to the extent of such late charges (provided, that this clause (vii) shall not derogate from the provisions of clause (i) above); (viii) which are payable by any Person which is the subject of any voluntary or involuntary bankruptcy or insolvency proceeding (state or federal), which has made a general assignment for the benefit of creditors or had a receiver, trustee or other similar official appointed with respect to all or a substantial portion of its properties or which has ceased doing business; or (ix) which the Agent deems to be otherwise unacceptable in its reasonable judgment.
"Environmental Complaint" shall mean any written complaint by any Person or setting forth a cause of action for personal injury or property damage, natural resource damage, contribution or indemnity for response costs, civil or administrative penalties, criminal fines or penalties, or declaratory or equitable relief arising under any Environmental Laws or any order, notice of violation, citation, subpoena, request for information or other written notice or demand of any type issued by an official body pursuant to any Environmental Safety Laws.
"Environmental Liabilities" shall mean any and all claims, demands, penalties, fines, liabilities, settlements, damages, losses, costs and expenses (including, without limitation, reasonable attorneys' and reasonable consultants' fees and disbursements, remedial investigation and feasibility study costs, clean-up costs and other response costs under the Environmental and Safety Laws, currently in existence or which may be enacted in the future, laboratory fees, court costs and litigation expenses) of whatever kind or nature, known or unknown, contingent or otherwise, arising out of or in any way related to (i) the presence, disposal or release of any Hazardous Materials which are on, from or which affect any real property owned or leased by any Person constituting the Borrower or any part thereof, including, without limitation, soil, water, vegetation, buildings, equipment, personal property, or which affect Persons, animals or otherwise; (ii) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials or damage to wetlands whether or not relating to Hazardous Materials; (iii) any lawsuit brought or threatened, settlement reached, or government order or directive relating to such Hazardous Materials; and/or (iv) any violation of any Requirement of Law or requirements or demands of any Governmental Authority, which are based upon or in any way related to such Hazardous Materials and which are paid or incurred by the Agent or any Lender.
"Environmental and Safety Laws" shall mean all Requirements of Law relating to the environment and workplace safety including, without limitation, the Clean Air Act ("CAA"), the Clean Water Act ("CWA"), the Toxic Substances Control Act ("TSCA"), the Hazardous Materials Transportation Act ("HMTA"), the Resource Conservation and Recovery Act, as amended ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as modified by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Emergency Planning and Community Right to Know Act ("EPCRA"), the Noise Control Act ("NCA"), the Occupational Safety and Health Act ("OSHA"), the Safe Drinking Water Act and the Federal Insecticide, Fungicide and Rodenticide Act, as any such Requirements of Laws may be amended, supplemented or otherwise modified from time to time.
"Environmentally Sensitive Area" shall mean (i) any wetland as defined by applicable Environmental Laws; (ii) any area designated as a coastal zone pursuant to applicable laws, including Environmental Safety Laws; (iii) any area of historic or archeological significance or scenic area as defined or designated by applicable laws, including Environmental Safety Laws; (iv) habitats of endangered species or threatened species as designated by applicable laws, including Environmental Safety Laws; or (v) a floodplain or other flood hazard area as defined pursuant to any applicable Laws.
"ERC Intercompany Payable" the net Indebtedness owed by ERC US to the Foreign Subsidiaries, including, but not limited to, Indebtedness owed by ERC US to ER Hong Kong and ER BVI pursuant to a Letter Agreement, dated March 15, 1984, between ERC US and ER Hong Kong.
"ERISA" means the Employee Retirement Income Security Act of 1974 (and any sections of the Code amended by it), as the same from time to time may be amended, supplemented or modified, and all regulations promulgated thereunder.
"ERISA Affiliate" means each trade or business (whether or not incorporated) which together with any Person constituting the Borrower would be deemed to be a single employer under Section 414 of the Code.
"Eurodollar Loans" Loans whose rate of interest is based upon the Eurodollar Rate.
"Eurodollar Rate" shall mean, with respect to any Tranche for any Interest Period, the interest rate per annum determined by the Agent by dividing (the resulting quotient rounded upwards, if necessary, to the nearest 1/100th of 1% per annum) (i) the rate of interest determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the average of the London interbank offered rates for U.S. Dollars quoted by the British Bankers' Association as set forth on Dow Jones Markets Service (formerly known as Telerate) display page 3750 (or appropriate successor or, if the British Bankers' Association or its successor ceases to provide such quotes, a comparable replacement determined by the Agent) two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such Tranche and having a borrowing date and a maturity comparable to such Interest Period by (ii) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The Eurodollar Rate may also be expressed by the following formula:
The Eurodollar Rate shall be adjusted with respect to any Tranche outstanding on the effective date of any change in the Euro-Rate Reserve Percentage as of such effective date. The Agent shall give prompt notice to the Borrower of the Eurodollar Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.
"Euro-Rate Reserve Percentage" shall mean the maximum percentage (expressed as a decimal rounded upward to the nearest 1/100 of 1%) as determined by the Agent which is in effect during any relevant period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in such System.
"Event of Default" as defined in Section 7.1.
"Executive Order No. 13224" shall mean the Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, as the same has been, or shall hereafter be, renewed, extended, amended or replaced.
"Federal Funds Effective Rate" for any day shall mean the rate per annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided, if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day on which such rate was announced.
"Federal Funds Open Rate" shall mean the rate per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the "open" rate for federal funds transactions as of the opening of business for federal funds transactions among members of the Federal Reserve System arranged by federal funds brokers on such day, as quoted by Garvin Guybutler, any successor entity thereto, or any other broker selected by the Agent, as set forth on the applicable Telerate display page; provided, however, that if such day is not a Business Day, the Federal Funds Open Rate for such day shall be the "open" rate on the immediately preceding Business Day, or if no such rate shall be quoted by a Federal funds broker at such time, such other rate as determined by the Agent in accordance with its usual procedures.
"Fixed Charge Coverage Ratio" means, as of the last day of any
fiscal quarter of ERC US, the ratio of (i) Consolidated EBITDA less the sum of
(x) cash federal, state, local and foreign income tax expense, (y) CAPEX
(excluding the cost of acquisitions of interests in other Persons) and (z)
distributions (whether denominated as redemptions, dividends or otherwise and
whether paid in cash or in kind) by ERC US to any holder of any of its Capital
Stock for the four consecutive fiscal quarters of ERC US and its consolidated
Subsidiaries ending on such date to (ii) the sum of (x) Consolidated Interest
Expense, plus (y) scheduled principal payments on any Indebtedness of ERC US and
its Consolidated Subsidiaries (other than SSG) for such period.
"Foreign Subsidiaries" shall mean each of ER Hong Kong, ER BVI, Emerson Global Limited and Emerson Radio Macao Commercial Offshore Limited.
"Funded Debt" at any date of determination, for ERC US and its Subsidiaries other than SSG (determined on a consolidated basis without duplication in accordance with GAAP): obligations created, issued or incurred for borrowed money (whether by loan or the issuance and sale of debt securities or otherwise), all Contingent Obligations relating to obligations created, issued or incurred for borrowed money, all Capital Lease Obligations and all reimbursement and other obligations of each such Person in respect of letters of credit, acceptances and similar obligations issued or created for the account of such Person (but excluding, in the case of the Foreign Subsidiaries, (i) reimbursement obligations under back to back letter of credit facilities so long as no issuer of any letter of credit under any such facilities to a Foreign Subsidiary as beneficiary, or for its account, has failed to honor a draw thereunder for any reason, and (ii) the Other Unsecured Foreign Obligations).
"GAAP" generally accepted accounting principles in the United
States of America consistent with those utilized in preparing the audited
financial statements referred to in Section 5.1(a). Unless otherwise
specifically provided herein, any accounting term used in the Agreement shall
have the meaning customarily given such term in accordance with GAAP, and all
financial computations hereunder shall be computed in accordance with GAAP
consistently applied. That certain items or computations are explicitly modified
by the phrase "in accordance with GAAP" shall in no way be construed to limit
the foregoing. If any "Accounting Changes" (as defined below) occur and such
changes result in a change in the calculation of the financial covenants,
standards or terms used in the Agreement or any other Loan Document, then
Borrower, Agent and Lenders agree to enter into negotiations in order to amend
such provisions of the Agreement so as to equitably reflect such Accounting
Changes with the desired result that the criteria for evaluating Borrower's and
its Subsidiaries' financial condition shall be the same after such Accounting
Changes as if such Accounting Changes had not been made; provided, however, that
the agreement of Required Lenders to any required amendments of such provisions
shall be sufficient to bind all Lenders. "Accounting Changes" means (i) changes
in accounting principles required by the promulgation of any rule, regulation,
pronouncement or opinion by the Financial Accounting Standards Board of the
American Institute of Certified Public Accountants or the Securities and
Exchange Commission (or successor thereto or any agency with similar functions),
(ii) changes in accounting principles concurred in by Borrower's certified
public accountants; (iii) purchase accounting adjustments under A.P.B. 16 or 17
and EITF 88-16, and the application of the accounting principles set forth in
FASB 109, including the establishment of reserves pursuant thereto and any
subsequent reversal (in whole or in part) of such reserves and (iv) the reversal
of any reserves established as a result of purchase accounting adjustments. If
the Required Lenders and Borrower agree upon the required amendments, then after
appropriate amendments have been executed and the underlying Accounting Change
with respect thereto has been implemented, any reference to GAAP contained in
the Agreement or in any other Loan Document shall, only to the extent of such
Accounting Change, refer to GAAP, consistently applied after giving effect to
the implementation of such Accounting Change. If the Required Lenders and
Borrower cannot agree by the date which is 15 days prior to the required
reporting date under Section 5.1 upon the required amendments to reflect any
Accounting Change which has become effective, then all financial statements
delivered and all calculations of financial covenants and other standards and
terms in accordance with the Agreement and the other Loan Documents shall be
prepared, delivered and made without regard to the underlying Accounting Change.
"Governmental Authority" any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
"Hazardous Materials" shall mean, without limitation, any flammable material, explosives, radioactive materials, gasoline, petroleum products, asbestos, urea formaldehyde, polychlorinated biphenyls, hazardous materials, hazardous wastes, hazardous or toxic substances, or related materials as defined in the Environmental and Safety Laws.
"HK Subordination Agreement" the Subordination Agreement in the form annexed hereto in Exhibit K to be executed and delivered by ER Hong Kong, ER BVI and ERC US in favor of the Agent as the same may be amended, modified or supplemented from time to time.
"Inactive Subsidiary" any Subsidiary which is not a Significant Subsidiary.
"Indebtedness" of any Person at any date (without duplication):
(a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices),
(b) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument,
(c) all Capital Lease Obligations of such Person,
(d) all reimbursement and other obligations of such Person in respect of letters of credit, acceptances and similar obligations issued or created for the account of such Person,
(e) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof,
(f) net liabilities of such Person under interest rate cap and or collar agreements, interest rate swap agreements, foreign currency exchange agreements and other hedging agreements or arrangements,
(g) all Contingent Obligations of such Person, and
(h) withdrawal liabilities of such Person under a Plan.
The Indebtedness of any Person shall include any Indebtedness of any partnership in which such Person is a general partner and Indebtedness of any limited liability company of which such Person is a member to the extent, if any, the organizational documents of such entity provide that members are liable for its obligations.
"Indemnified Liabilities" has the meaning ascribed thereto in
Section 10.5.
"Intellectual Property" has the meaning ascribed thereto in
Section 3.9.
"Intellectual Property Security Agreements" the Intellectual Property Security Agreements in the form of Exhibit I hereto, to be executed and delivered by ERC US and Scott to the Agent, as the same may be amended, supplemented or modified from time to time.
"Interest Payment Date" (a) as to any Base Rate Loan, the first day of each calendar month to occur while such Loan is outstanding, beginning on the first day of the first full calendar month occurring after the date of such Loan, (b) in addition, as to any Eurodollar Loan, the last day of each Interest Period with respect thereto, and (c) in addition, as to any Eurodollar Loan with an Interest Period of six months duration, on the last day of the third calendar month thereof. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period.
"Interest Period" with respect to any Eurodollar Loan:
(a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, given with respect thereto, subject to availability; and
(b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three, or six months thereafter, as selected by the Borrower by irrevocable notice to the Agent given not less than three Business Days prior to the last day of the then current Interest Period with respect thereto, subject to availability;
provided that, the foregoing provisions relating to Interest Periods are subject to the following:
(1) if any Interest Period would end on a day other than a Business Day such Interest Period shall be extended to the next Business Day unless, in the case of a Eurodollar Loan, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day;
(2) in the case of a Eurodollar Loan, if an Interest Period commences on the last day in a calendar month that is a Business Day, such Interest Period shall end on the last day that is a Business Day in the month that is the specified number of months after the month in which such Interest Period commenced;
(3) an Interest Period that otherwise would extend beyond the Maturity Date shall end on the Maturity Date; and
(4) Borrower shall elect Interest Periods for Eurodollar Loans so as to create, if necessary, a principal amount of Base Rate Loans on each Term Loan Payment Date sufficient to permit any prepayments required pursuant to Section 2.6(b), and 2.9(f) without requiring the prepayment of outstanding Eurodollar Loans.
"Letter of Credit" shall have the meaning assigned to such term in Section 2.5A1.
"Letter of Credit Borrowing" shall have the meaning assigned to such term in Section 2.5A3.4.
Letter of Credit Fee" shall have the meaning assigned to such term in Section 2.5A2.
"Letters of Credit Outstanding" shall mean at any time the sum
of (i) the aggregate undrawn face amount of outstanding Letters of Credit and
(ii) the aggregate amount of all unpaid and outstanding Reimbursement
Obligations and Letter of Credit Borrowings.
"Lien" any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), other charge or security interest; or any preference, priority or other agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Capital Lease Obligations having substantially the same economic effect as any of the foregoing). A precautionary filing of a financing statement by a lessor of property (other than with respect to a Capital Lease Obligation) covering only such property shall not constitute a Lien.
"Loan" any loan made by the Lenders pursuant to this Agreement (whether denominated as a Base Rate Loan, Eurodollar Loan, Revolving Credit Loan, Term Loan, Swing Loan or otherwise).
"Loan Documents" this Agreement, the Notes, the Security Documents, the HK Subordination Agreement and each other agreement or instrument executed and delivered pursuant hereto or thereto (other than any Lender Hedge Agreements).
"Material Adverse Effect" a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of the Borrower, taken as a whole, or (b) the validity or enforceability of (i) this Agreement, any of the Notes or the other Loan Documents or (ii) the rights or remedies of the Lender hereunder or thereunder.
"Maturity Date" June 30, 2008.
"Multiemployer Plan" a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
"Net Recovery Value" at any time the net orderly liquidation value of the Eligible Inventory as set forth in the then most recent valuation report prepared for the Agent and the Lenders by Ozer Group or other independent appraiser selected by the Agent.
"Notes" the collective reference to the Revolving Credit Notes, Swing Loan Note and Term Notes.
"Obligations" all obligations (monetary or otherwise) of each Person constituting the Borrower to the Lenders and/or the Agent arising under or in connection with this Agreement (including, without limitation, the net amount owed to any Lender pursuant to any Lender Hedge Agreement), the Notes and the other Loan Documents. The nominal amount with respect to which any Lender Hedge Agreements are entered into shall not constitute Obligations for any purpose.
"Original Credit Agreement" the meaning given to such term in the recitals hereto.
"Other Unsecured Foreign Obligations" an amount equal to (a) the reimbursement obligations and obligations in respect of trust receipts, advances and other loans and extensions of credit to the Foreign Subsidiaries under all credit facilities opened by financial institutions other than the Lenders minus (b) any cash collateral held by such other financial institutions securing such obligations.
"Payment Office" as specified in Section 2.14(a).
"PBGC" the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA, and any entity succeeding to any or all of its functions under ERISA.
"Percentage" of any Lender means, at any time, with respect to Revolving Credit Loans, the percentage set forth opposite such Lender's name on Schedule I hereto under the heading "Revolving Credit Loans."
"Permitted Additional Share Repurchases" any purchases of Capital Stock permitted pursuant to clauses (ii) and (iii) of Section 6.6(b) hereof.
"Permitted Investments"
(a) marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within six months from the date of acquisition thereof; (b) marketable general obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings generally obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc.;
(c) without limiting the provisions of subsection (d) of this definition, commercial paper maturing no more than six months from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 (or the equivalent) or higher from Standard & Poor's Corporation and P-1 (or the equivalent) or higher from Moody's Investors Service, Inc.;
(d) commercial paper maturing no more than six months from the date of acquisition thereof and issued by (i) the holding company of any Lender or (ii) the holding company of any other bank that has (A) combined capital, surplus and undivided profits (less any undivided losses) of not less than $250 million, (B) a Keefe Bank Watch Rating of C or better and (C) commercial paper having a rating of A-2 (or the equivalent) from Standard & Poor's Corporation or P-2 (or the equivalent) or higher from Moody's Investors Service, Inc.;
(e) domestic and Eurodollar certificates of deposit, time or demand deposits or bankers' acceptances maturing within six months from the date of acquisition issued or guaranteed by or placed with, and money market deposit accounts issued or offered by:
(1) any Lender,
(2) any other commercial bank organized under the laws of the United States of America, any state thereof or the District of Columbia, Hong Kong or the British Virgin Islands having combined capital, surplus and undivided profits (less any undivided losses) of not less than $500 million (or its equivalent in other currencies),
(3) any branch located in the United States of America of a commercial bank organized under the laws of the United Kingdom or Canada having combined capital, surplus and undivided profits (less any undivided losses) of not less than $500 million or
(4) any domestic commercial bank the deposits of which are guaranteed by the Federal Deposit Insurance Corporation, provided that (A) the full amount of the deposits of the Person making such Permitted Investment are so guaranteed and (B) the aggregate amount of all Permitted Investments under this clause (iv) does not exceed $500,000;
(5) fully collateralized repurchase agreements with a term of not more than 30 days for underlying securities of the type described in subsections (a) and (b) of this definition, entered into with any institution meeting the qualifications specified in clause (d) or subclauses (i) through (iii) of clause (e) of this definition; provided, in each case, that such obligations are payable in Dollars; and
(6) those investments listed on Schedule VIII to the extent in existence on the date hereof.
"Person" an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.
"Plan" any employee benefit plan which is subject to ERISA and which covers the employees or former employees of any Person constituting the Borrower or an ERISA Affiliate, under which any Person constituting the Borrower or an ERISA Affiliate has any obligation or liability or under which such Person or an ERISA Affiliate has made contributions within the preceding five years. References herein to a Plan shall include any Multiemployer Plan.
"PNC" the meaning given to such term in the recitals hereto.
"Pricing Schedule" means the Schedule identified as such, attached hereto and made a part hereof.
"Prime Rate" means the rate of interest per annum publicly announced from time to time by PNC as its prime rate. The Prime Rate is not intended to be the lowest rate of interest charged by PNC in connection with extensions of credit to debtors.
"Property" shall mean all real property, both owned and leased, of any Borrower or Subsidiary of a Borrower.
"Purchasing Lender" as defined in Section 9.1.
"Regulated Substances" shall mean, without limitation, any substance, material or waste, regardless of its form or nature, defined under Environmental Safety Laws as a "hazardous substance," "pollutant," "pollution," "contaminant," "hazardous or toxic substance," "extremely hazardous substance," "toxic chemical," "toxic substance," "toxic waste," "hazardous waste," "special handling waste," "industrial waste," "residual waste," "solid waste," "municipal waste," "mixed waste," "infectious waste," "chemotherapeutic waste," "medical waste," or "regulated substance" or any other material, substance or waste, regardless of its form or nature, which otherwise is regulated by Environmental Safety Laws.
"Regulation U" Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time.
"Reimbursement Obligation" the meaning assigned to such term in Section 2.5A3.2.
"Rental Reserve" the aggregate charges to ERC US from each warehouseman and space lessor of ERC US in the United States of America from whom a Waiver and Consent satisfactory to the Agent shall not have been obtained for the next three (3) month period at any date of determination.
"Reportable Event" any event set forth in Section 4043(b) of ERISA or the regulations thereunder.
"Required Environmental Notices" shall mean all notices, reports, plans, forms or other filings which pursuant to Environmental Safety Laws, Required Environmental Permits or at the request or direction of an official body either must be submitted to an official body or which otherwise must be maintained.
"Required Environmental Permits" shall mean all permits, licenses, bonds, consents, programs, approvals or authorizations required under Environmental Safety Laws to own, occupy or maintain the Property or which otherwise are required for the operations and business activities of the Borrower.
"Required Lenders" means, if there are less than three Lenders, the Lenders holding 100% of the aggregate Commitments, if no Loans are outstanding, and, otherwise, Lenders holding 100% of outstanding Loans and, if there are three or more Lenders, the Lenders holding 51% of the aggregate Commitments, if no Loans are outstanding, and, otherwise, Lenders holding 51% of outstanding Loans.
"Requirement of Law" as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
"Responsible Officer" in such Person's capacity as such, the chief executive officer of any Person constituting the Borrower or the president of such Person (if not the chief executive officer) and, with respect to financial matters, the chief financial officer or corporate controller of such Person constituting the Borrower; provided, in the case of ER Hong Kong, ER Macao and ER BVI, "Responsible Officer" shall mean a director of ER Hong Kong, ER Macao or ER BVI, as the case may be.
"Revolving Credit Loans" as defined in Section 2.1(a).
"Revolving Credit Note" as defined in Section 2.2.
"Revolving Loan Commitment" as to any Lender, the obligation of such Lender to make Revolving Credit Loans to the Borrower as set forth on Schedule I hereto, and "Revolving Loan Commitments" shall mean the aggregate Revolving Loan Commitments of all of the Lenders.
"Revolving Facility Usage" the sum of (i) aggregate amount of all Revolving Credit Loans outstanding plus (ii) the Letters of Credit Outstanding.
"Scott" H.H. Scott, Inc., a New Jersey corporation and wholly owned subsidiary of ERC US.
"Security Agreements" the Security Agreements in the form of Exhibit G hereto, to be executed and delivered by ERC US and MI to the Agent, as the same may be amended, supplemented or modified from time to time.
"Security Documents" the collective reference to the Security Agreements, Intellectual Property Security Agreements and the Stock Pledge Agreements.
"Senior Funded Debt" all Funded Debt less Subordinated Debt of ERC US and its consolidated Subsidiaries other than SSG.
"Significant Subsidiary" at any time a Subsidiary of ERC US (other than SSG) which meets the definition of a "significant subsidiary" contained as of the date hereof in Regulation S-X of the Securities and Exchange Commission.
"Special Receivables" all account receivables of ERC US so designated by the Agent in its reasonable discretion due to the level of dilution with respect to payments due thereunder (as is currently the case with accounts receivable due from "Walmart" and "Target"), but are otherwise Eligible Receivables. In addition to the accounts receivables in which "Walmart" and "Target" are the account debtors, the Agent reserves the right to designate otherwise Eligible Receivables to be Special Receivables from time to time in its reasonable discretion.
"SSG" collectively, Sport Supply Group, Inc. a Delaware corporation and its wholly owned Subsidiaries.
"Standby Letter of Credit" a Letter of Credit issued to support obligations of the Borrower, contingent or otherwise, which finance the working capital and business needs of the Borrower incurred in the ordinary course of business.
"Stock Pledge Agreements" collectively, each Stock Pledge Agreement in the form of Exhibit H hereto, to be executed and delivered by ERC US, ER Hong Kong and Emerson Global Limited to the Agent, as the same may be amended, supplemented or modified from time to time.
"Subordinated Debt" means any unsecured Indebtedness of any Person constituting the Borrower (a) no part of the principal of which is stated to be payable or is required to be paid (whether by way of mandatory sinking fund, mandatory redemption, mandatory prepayment or otherwise) prior to October 1, 2005, and the payment of the principal of and interest on which and other obligations of the Borrower in respect thereof are subordinated to the prior payment in full of the principal of and interest (including post-petition interest) on the Notes and all other Obligations hereunder on terms and conditions approved in writing by the Required Lenders and (b) otherwise containing terms, covenants and conditions satisfactory in form and substance to the Required Lenders, as evidenced by their prior written approval thereof.
"Subsidiary" as to any Person (a "Parent") (a) any other Person in which the Parent owns or controls, directly or indirectly, more than 50% of the Capital Stock of such Person, (b) any other Person of which such percentage of Capital Stock shall at the time be owned or controlled by the Parent or one or more of its Subsidiaries as defined in clause (a) or by one or more such Subsidiaries, or (c) any other Person of which Capital Stock having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such Person are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Parent.
"Subsidiary Borrower" means Majexco Imports, Inc., Emerson Radio Macao, ER Hong Kong or ER BVI, and each Subsidiary which executes and delivers an Assumption Agreement pursuant to Section 5.12, as the case may be, and, collectively, the "Subsidiary Borrowers."
"Swing Loan Commitment" shall mean PNC's commitment to make Swing Loans to the Borrower pursuant to Section 2.1A hereof in an aggregate principal amount of up to $500,000, subject in all cases to activation pursuant to said Section 2.1A.
"Swing Loan Note" shall mean the Swing Loan Note of the Borrower in the form of Exhibit A-1 evidencing the Swing Loans, together with all amendments, extensions, renewals, replacements, refinancings or refundings thereof in whole or in part.
"Swing Loan Request" shall mean a request for Swing Loans made in accordance with Section 2.3A hereof.
"Swing Loans" shall mean collectively and Swing Loan shall mean separately all Swing Loans or any Swing Loan made by PNC to the Borrower pursuant to Section 2.1.A hereof.
"Term Loan Commitment" the commitment of each Lender to make a Term Loan as set forth on Schedule I hereto.
"Term Loans" as defined in Section 2.6.
"Term Loan Payment Date" shall mean the last Business Day of each March, June, September and December occurring prior to the Maturity Date beginning September 30, 2005.
"Term Notes" as defined in Section 2.7.
"Tranche" the collective reference to Eurodollar Loans whose Interest Periods begin on the same date and end on the same later date (whether or not such Loans originally were made on the same day).
"Transfer" any direct or indirect sale, conveyance, lease, transfer, option to purchase or other disposition. (including without limitation, a sale-leaseback transaction), or a series of related sales, conveyances, leases, transfers, options to purchase or other dispositions.
"Type" as to any Loan, its nature as a Base Rate Loan or a Eurodollar Loan.
"Undrawn Availability" at a particular date shall mean an amount equal to (a) the lesser of (i) the Borrowing Base, or (ii) the maximum Commitments of the Lenders set forth on Schedule I for Revolving Credit Loans minus (b) the then outstanding principal amount of all Revolving Credit Loans.
"USA Patriot Act" shall mean the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56, as the same has been, or shall hereafter be, renewed, extended, amended or replaced.
"Waiver and Consent" means a landlord/warehouse waiver substantially in the form of Exhibit L.
"Working Day" any Business Day on which dealings in foreign currencies and exchange between banks may be carried on in London, England.
Section 1.2 Other Definitional Provisions.
(a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto.
(b) As used herein and in the Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to ERC US and its Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP.
(c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
ARTICLE 2.
AMOUNT AND TERMS OF COMMITMENTS
Section 2.1 Revolving Credit Commitments.
(a) Subject to the terms and conditions of this Agreement, each Lender severally agrees to make revolving credit loans ("Revolving Credit Loans") to the Borrower from time to time from the date hereof to but excluding the Maturity Date in an aggregate principal amount at any one time outstanding for the Borrower not to exceed the then Available Commitment of such Lender. The Borrower may borrow and prepay the Revolving Credit Loans in whole or in part, and reborrow Revolving Credit Loans, all in accordance with the terms and conditions hereof. All then outstanding Revolving Credit Loans shall be paid in full on the Maturity Date.
(b) The Revolving Credit Loans may from time to time be Eurodollar Loans, Base Rate Loans or a combination thereof, as determined by the Borrower and notified to the Agent in accordance with Section 2.3 and Section 2.10, provided that no Revolving Credit Loan shall be made as a Eurodollar Loan after the day that is one month prior to the Maturity Date.
Section 2.1A Swing Loan Commitment.
Subject to the terms and conditions of this Agreement, PNC may, at its option, cancelable at any time for any reason whatsoever, make swing loans (the "Swing Loans") to the Borrower at any time or from time to time after the date hereof to, but not including, the Maturity Date, in an aggregate principal amount up to but not in excess of $500,000 (the "Swing Loan Commitment"), provided that the aggregate principal amount of PNC's Swing Loans and the Revolving Credit Loans of all the Lenders at any one time outstanding shall not exceed the Revolving Credit Commitments of all the Lenders. Within such limits of time and amount and subject to the other provisions of this Agreement, the Borrower may borrow, repay and reborrow pursuant to this Section 2.1A. Swing Loans shall be made in the form of Base Rate Loans only. The foregoing notwithstanding, the Swing loan Commitment shall not be effective and no Swing Loans shall be requested or made hereunder, unless and until said commitment is activated by written notice to PNC from the Required Lenders.
Section 2.2 Revolving Credit Note.
The Revolving Credit Loans made by each Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A, with appropriate insertions as to date and principal amount (each a "Revolving Credit Note"), payable to the order of such Lender and in a principal amount equal to such Lender's Revolving Loan Commitment. Each Lender is hereby authorized to record the date, Type and amount of each Revolving Credit Loan, each continuation thereof, each conversion of all or a portion thereof to another Type, the date and amount of each payment or prepayment of principal thereof and, in the case of Eurodollar Loans, the length of each Interest Period with respect thereto, on the schedule annexed to and constituting a part of each Revolving Credit Note, and any such recordation shall constitute rebuttable presumptive evidence of the accuracy of the information so recorded. Each Revolving Credit Note shall (x) be dated the Closing Date, (y) be stated to mature on the Maturity Date and (z) provide for the payment of interest in accordance with Section 2.12.
2.2A Swing Loan Note.
The obligation of the Borrower to repay the unpaid principal amount of the Swing Loans made to it by PNC together with interest thereon shall be evidenced by a Swing Loan Note in a face amount equal to the Swing Loan Commitment.
Section 2.3 Procedure for Revolving Credit Borrowings.
(a) The Borrower may borrow under the Commitment for Revolving
Credit Loans prior to the Maturity Date on any Business Day. The Borrower shall
give the Agent irrevocable notice (which notice must be received by the Agent
prior to 10:00 a.m., Pittsburgh time, three Business Days prior to the requested
Borrowing Date, if all or any part of the requested Revolving Credit Loans are
to be initially Eurodollar Loans and on the requested Borrowing Date in the case
of Base Rate Loans), specifying (1) the amount to be borrowed, (2) the requested
Borrowing Date, (3) whether the borrowing is to be of Eurodollar Loans or Base
Rate Loans or a combination thereof and (4) if the borrowing is to be entirely
or partly of Eurodollar Loans, the amount of such Loans and the length of the
initial Interest Period therefor. Each Revolving Credit Loan shall be in an
amount equal to (x) in the case of Base Rate Loans, $250,000 or a whole multiple
of $50,000 in excess thereof (or, if less, the then Available Commitment) and
(y) in the case of Eurodollar Loans $500,000 or a whole multiple of $100,000 in
excess thereof. The Agent shall promptly notify the Lenders of its receipt of
any such irrevocable notice of borrowing from the Borrower.
(b) On or before 2:00 p.m., Pittsburgh time, on the Business Day specified in the Borrower's notice of borrowing, each Lender shall provide the Agent with funds at the Payment Office in an amount equal to such Lender's Percentage of the requested borrowing. The proceeds of each borrowing shall be made available by the Agent to the Borrower pursuant to Section 2.14(d). No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. Neither the Agent nor any Lender shall have any liability for the failure of any Lender (other than itself) to fund a Loan.
(c) With respect to any Loan, unless the Agent shall have been notified in writing by any Lender prior to the date of making such Loan that such Lender does not intend to make available to the Agent such Lender's portion of the Loan to be made on such date, the Agent may (but shall not be obligated to) assume that such Lender has made such amount available to the Agent on that date and, in reliance on such assumption, the Agent may make available to the Borrower a corresponding amount. If such amount is not made available by such Lender to the Agent on the date of making such Loan, such Lender shall be obligated to pay such amount to the Agent and shall pay to the Agent on demand interest on such amount at the Federal Funds Effective Rate for the number of days from and including the date of making such Loan to the date on which such Lender's portion of the Loan becomes immediately available to the Agent. The Agent shall also be entitled to recover such amount, with interest thereon at the rate per annum then applicable to the Loans comprising such borrowing, upon demand, from the Borrower. A statement of the Agent submitted to any Lender with respect to any amounts owing under this Section 2.3(c) shall be conclusive and binding in the absence of demonstrable error. Nothing in this Section 2.3(c) shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder.
2.3A Procedure for Swing Loan Borrowing.
Except as otherwise provided herein, the Borrower may from time to time prior to the Maturity Date request PNC to make Swing Loans by delivery to PNC not later than 10:00 a.m. Pittsburgh time on the proposed Borrowing Date a request in writing or by telephone (immediately confirmed in writing by letter, facsimile or telex) (each, a "Swing Loan Request"), it being understood that the Agent may rely on the authority of any individual making such a telephonic request without the necessity of receipt of such written confirmation. Each Swing Loan Request shall be irrevocable and shall specify the proposed Borrowing Date and the principal amount of such Swing Loan, which shall be not less than $250,000.
So long as PNC elects to make Swing Loans, PNC shall, after receipt by it of a Swing Loan Request pursuant to this Section, fund such Swing Loan to the Borrower in immediately available funds at the Payment Office prior to 2:00 p.m. Pittsburgh time on the Borrowing Date.
Section 2.4 Commitment and Other Fees.
(a) The Borrower agrees to pay to the Agent for the benefit of and disbursement to the Lenders a nonrefundable commitment fee in respect of the Commitments to make Revolving Credit Loans, for the period from and including the date hereof to the Maturity Date, computed at a rate per annum equal to the Applicable Fee Rate for each calendar quarter, calculated on the basis of a 360-day year for the actual days elapsed, on the average daily amount of the aggregate Available Commitments during the period for which payment is made, payable quarterly in arrears on the first Business Day of each April, July, October and January and on the Maturity Date or such earlier date as the Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. As soon as practicable the Agent shall notify the Borrower and the Lenders of each determination of the Applicable Fee Rate.
(b) The Borrower agrees to pay to PNC Capital Markets an arrangement fee in an amount and pursuant to the terms set forth in the letter agreement, dated May 20, 2005, between the Borrower and PNC Capital Markets.
(c) The Borrower agrees to pay to the Agent, for its own account, an administrative agent's fee in the amount set forth in the letter agreement, dated May 20, 2005, between the Borrower and PNC Capital Markets in consideration of PNC's acting as Agent hereunder. The Agent's compensation shall be paid on the dates set forth in said letter.
(d) The Borrower agrees to pay to the Agent, for distribution to the Lenders in accordance with their pro rata shares, a closing fee in the amount set forth in the letter agreement, dated May 20, 2005, between the Borrower and PNC Capital Markets. The Agent's compensation shall be paid on the dates set forth in said letter.
Section 2.5 Termination/Reduction/Increase of Commitments.
(a) ERC US shall have the right, upon not less than five Business Days' written notice to the Agent, to terminate the Revolving Loan Commitments or, from time to time, to reduce the amount of such Commitments, provided that at no time may the Revolving Loan Commitments be reduced by the Borrower to an amount less than the sum of the outstanding principal amount of Revolving Credit Loans. Any such reduction shall be in an amount equal to $1,000,000 or a whole multiple of $250,000 in excess thereof and shall reduce permanently the Revolving Loan Commitments then in effect. Any such reduction in the Revolving Loan Commitment shall be binding on the Subsidiary Borrowers whether or not they have notice thereof.
(b) Each reduction in the Revolving Loan Commitments shall be permanent and irrevocable. All reductions in the Revolving Loan Commitments shall be made pro rata to the Revolving Loan Commitments of the Lenders. The Agent shall promptly notify each Lender of the amount of any reduction of its Revolving Loan Commitment.
(c) After delivery by ERC US of the annual financial statements to be provided under Section 5.1(a) for the fiscal year ended March 31, 2006 and provided that at the time of such request there does not exist an Event of Default or Default, the Borrower may request a pro rata increase of the Revolving Credit Commitments, in an amount not less than $5,000,000.00 or greater than $10,000,000.00 in the aggregate by written notice to the Lenders requesting each Lender's proportional increase, and the Lenders agree to respond to the Borrower's request for an increase within thirty (30) calendar days following receipt of same; provided, however, that the failure of any Lender to respond within such time period shall not in any manner constitute an agreement by such Lender to said increase of its proportionate share of its Commitment. If all Lenders elect to increase their proportionate share of their Commitments as proposed above, this Agreement and the relevant Notes shall be amended to reflect such increases, all at the cost and expense of the Borrower. If one or more Lenders decline to so increase their proportionate share of the Commitments or do not respond to Borrower's request, the provisions of Section 2.5(d) shall apply.
(d) In the event that one or more Lenders do not agree to the
increase of its proportionate share of the Commitments pursuant to Section
2.5(c) or do not respond to Borrower's request for an increase within the time
required under Section 2.5(c) (each a "Non-Increasing Bank"), then the Lenders
that have agreed to such increase within the time required under Section 2.5(c)
(the "Increasing Banks") may elect to increase their Commitments proportionately
up to the amounts of the Commitments that would have otherwise been assumed by
the Non-Increasing Bank. Any amount of the Commitments not assumed by the
Increasing Banks pursuant to the immediately preceding sentence is referred to
as the "Additional Commitments". Should there exist any Additional Commitments
not assumed by the Increasing Banks, then the Agent and the Borrower may arrange
to have one or more other banks (each a "New Increasing Bank") included as a
Lender hereunder with respect to the Additional Commitments and all other
rights, interests and obligations of a Lender under this Agreement and the other
Loan Documents. Any such assumption shall be (1) pursuant to an assumption
agreement substantially similar to an Assumption Agreement, (2) subject to and
in accordance with this Section 2.5, and (3) effective on the last day of the
Interest Period if any Loans are Eurodollar Loans. Upon the effectiveness of the
increase in the Commitments by the Increasing Banks or the New Increasing Banks,
as the case may be, pursuant to this Section 2.5(d), (i) this Agreement and the
relevant Notes shall be amended and/or restated to reflect the reduction and/or
increase of each Lender's pro rata share of the Commitments contemplated in this
Section 2.5(d) (as determined by the Agent), (ii) the Borrower will issue new
Notes to any New Increasing Bank to evidence the Borrower's obligations with
respect to such New Increasing Bank's Commitment, and (iii) each New Increasing
Bank shall be deemed to be a Lender for all purposes of this Agreement and the
other Loan Documents, all at the cost and expense of the Borrower.
2.5A Letter of Credit Subfacility.
2.5A1 Issuance of Letters of Credit.
The Borrower may request the issuance of a letter of credit
(each a "Letter of Credit") by delivering to the Agent a completed application
and agreement for letters of credit in such form as the Agent may reasonably
specify from time to time by no later than 10:00 a.m., Pittsburgh time, at least
five (5) Business Days, or such shorter period as may be agreed to by the Agent,
in advance of the proposed date of issuance. Each Letter of Credit shall be a
Standby Letter of Credit denominated in Dollars. Subject to the terms and
conditions hereof and in reliance on the agreements of the other Lenders set
forth in this Section 2.5.A1, the Agent will issue a Letter of Credit provided
that each Letter of Credit shall (A) have a maximum maturity of twelve (12)
months from the date of issuance, and (B) in no event expire later than ten (10)
Business Days prior to the Maturity Date and providing that in no event shall
(i) the amount of Letters of Credit Outstanding exceed, at any one time,
$1,000,000 or (ii) the Revolving Facility Usage exceed, at any one time, the
Available Commitment.
2.5A2 Letter of Credit Fees.
The Borrower shall pay (i) to the Agent for the ratable account of the Lenders a fee (the "Letter of Credit Fee") equal to the Applicable Margin for Eurodollar Loans then in effect, and (ii) to the Agent for its own account a fronting fee equal to 0.125% per annum (computed on the basis of a year of 360 days and actual days elapsed), which fees shall be computed on the daily average amount of Letters of Credit Outstanding and shall be payable quarterly in arrears commencing with the first Business Day of each April, July, October and January following issuance of each Letter of Credit and on the Maturity Date. The Borrower shall also pay to the Agent for the Agent's sole account the Agent's then in effect customary fees and administrative expenses payable with respect to the Letters of Credit as the Agent may generally charge or incur from time to time in connection with the issuance, maintenance, modification (if any), assignment or transfer (if any), negotiation, and administration of Letters of Credit.
2.5A3 Disbursements, Reimbursement.
2.5A3.1 Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Agent a participation in such Letter of Credit and each drawing thereunder in an amount equal to such Lender's pro rata share of the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively (based on such Lender's Percentage).
2.5A3.2 In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Agent will promptly notify the Borrower. Provided that it shall have received such notice, the Borrower shall reimburse (such obligation to reimburse the Agent shall sometimes be referred to as a "Reimbursement Obligation") the Agent prior to 12:00 noon, Pittsburgh time on each date that an amount is paid by the Agent under any Letter of Credit (each such date, a "Drawing Date") in an amount equal to the amount so paid by the Agent. In the event the Borrower fails to reimburse the Agent for the full amount of any drawing under any Letter of Credit by 12:00 noon, Pittsburgh time, on the Drawing Date, the Agent will promptly notify each Lender thereof, and the Borrower shall be deemed to have requested that Base Rate Loans be made by the Lenders to be disbursed on the Drawing Date under such Letter of Credit, subject to the amount of the unutilized portion of the Revolving Credit Commitment and subject to the conditions set forth in Section 4.2 other than any notice requirements. Any notice given by the Agent pursuant to this Section 2.5A3.2 may be oral if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice.
2.5A3.3 Each Lender shall upon any notice pursuant to Section 2.5A3.2 make available to the Agent an amount in immediately available funds equal to its pro rata share (based on such Lender's Percentage) of the amount of the drawing, whereupon the participating Lenders shall (subject to Section 2.5A3.3.4) each be deemed to have made a Base Rate Loan to the Borrower in that amount. If any Lender so notified fails to make available to the Agent for the account of the Agent the amount of such Lender's pro rata share (based on such Lender's Percentage) of such amount by no later than 2:00 p.m., Pittsburgh time on the Drawing Date, then interest shall accrue on such Lender's obligation to make such payment, from the Drawing Date to the date on which such Lender makes such payment (i) at a rate per annum equal to the Federal Funds Effective Rate during the first three days following the Drawing Date and (ii) at a rate per annum equal to the rate applicable to Base Rate Loans on and after the fourth day following the Drawing Date. The Agent will promptly give notice of the occurrence of the Drawing Date, but failure of the Agent to give any such notice on the Drawing Date or in sufficient time to enable any Lender to effect such payment on such date shall not relieve such Lender from its obligation under this Section 2.5A3.3.
2.5A3.4 With respect to any unreimbursed drawing that is not
converted into a Base Rate Loan of the Borrower in whole or in part as
contemplated by Section 2.5A3.3, because of the Borrower's failure to satisfy
the conditions set forth in Section 4.2 other than any notice requirements or
for any other reason, the Borrower shall be deemed to have incurred from the
Agent a borrowing (each a "Letter of Credit Borrowing") in the amount of such
drawing. Such Letter of Credit Borrowing shall be due and payable on demand
(together with interest) and shall bear interest at the rate per annum
applicable to Base Rate Loans. Each Lender's payment to the Agent pursuant to
Section 2.5A3.3 shall be deemed to be a payment in respect of its participation
in such Letter of Credit Borrowing and shall constitute a "Participation
Advance" from such Lender in satisfaction of its participation obligation under
this Section 2.5A3.
2.5A4 Repayment of Participation Advances.
2.5A4.1 Upon (and only upon) receipt by the Agent for its account of immediately available funds from the Borrower (i) in reimbursement of any payment made by the Agent under the Letter of Credit with respect to which any Lender has made a Participation Advance to the Agent, or (ii) in payment of interest on such a payment made by the Agent under such a Letter of Credit, the Agent will pay to each Lender, in the same funds as those received by the Agent, the amount of such Lender's pro rata share (based on such Lender's Percentage) of such funds, except the Agent shall retain the amount of the pro rata share (based on such Lender's Percentage) of such funds of any Lender that did not make a Participation Advance in respect of such payment by Agent.
2.5A4.2 If the Agent is required at any time to return to Borrower, or to a trustee, receiver, liquidator, custodian, or any official in any insolvency proceeding, any portion of the payments made by the Borrower to the Agent pursuant to Section 2.5A4.1 in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Lender shall, on demand of the Agent, forthwith return to the Agent the amount of its pro rata share (based on such Lender's Percentage) of any amounts so returned by the Agent plus interest thereon from the date such demand is made to the date such amounts are returned by such Lender to the Agent, at a rate per annum equal to the Federal Funds Effective Rate in effect from time to time.
2.5A5 Documentation.
The Borrower agrees to be bound by the terms of the Agent's application and agreement for letters of credit and the Agent's written regulations and customary practices relating to letters of credit, though such interpretation may be different from such Borrower's own. In the event of a conflict between such application or agreement and this Agreement, this Agreement shall govern. It is understood and agreed that, except in the case of gross negligence or willful misconduct, the Agent shall not be liable for any error, negligence and/or mistakes, whether of omission or commission, in following any Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments or supplements thereto.
2.5A6 Determinations to Honor Drawing Requests.
In determining whether to honor any request for drawing under any Letter of Credit by the beneficiary thereof, the Agent shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit.
2.5A7 Nature of Participation and Reimbursement Obligations.
Each Lender's obligation in accordance with this Agreement to
make the Revolving Credit Loans or Participation Advances, as contemplated by
Section 2.5A3, as a result of a drawing under a Letter of Credit, and the
obligations of the Borrower to reimburse the Agent upon a draw under a Letter of
Credit, shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Section 2.5A under all
circumstances, including the following circumstances:
(i) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Agent, the Borrower or any other Person for any reason whatsoever;
(ii) the failure of the Borrower or any other Person to comply, in connection with a Letter of Credit Borrowing, with the conditions set forth in Section 2.1, 2.3, or 4.2 or as otherwise set forth in this Agreement for the making of a Revolving Credit Loan, it being acknowledged that such conditions are not required for the making of a Letter of Credit Borrowing and the obligation of the Lenders to make Participation Advances under Section 2.5A3;
(iii) any lack of validity or enforceability of any Letter of Credit;
(iv) the existence of any claim, setoff, defense or other right which any Borrower or any Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the Agent or any Lender or any other Person or, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between any Borrower or Subsidiaries of a Borrower and the beneficiary for which any Letter of Credit was procured);
(v) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect even if the Agent has been notified thereof;
(vi) payment by the Agent under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit;
(vii) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of any Borrower or Subsidiaries of a Loan Party;
(viii) any breach of this Agreement or any other Loan Document by any party thereto;
(ix) the occurrence or continuance of an insolvency proceeding with respect to any Borrower;
(x) the fact that an Event of Default or a Default shall have occurred and be continuing;
(xi) the fact that the Maturity Date shall have passed or this Agreement or the Commitments hereunder shall have been terminated; and
(xii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.
2.5A8 Indemnity.
The Borrower hereby agrees to protect, indemnify, pay and save harmless the Agent from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which the Agent may incur or be subject to as a consequence, direct or indirect, of the issuance of any Letter of Credit, other than as a result of (A) the gross negligence or willful misconduct of the Agent as determined by a final judgment of a court of competent jurisdiction or (B) the wrongful dishonor by the Agent of a proper demand for payment made under any Letter of Credit, except if such dishonor resulted from any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Governmental Acts").
2.5A9 Liability for Acts and Omissions.
As between any Borrower and the Agent, such Borrower assumes all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for an issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged (even if the Agent shall have been notified thereof); (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any such Letter of Credit, or any other party to which such Letter of Credit may be transferred, to comply fully with any conditions required in order to draw upon such Letter of Credit or any other claim of the Borrower against any beneficiary of such Letter of Credit, or any such transferee, or any dispute between or among any Borrower and any beneficiary of any Letter of Credit or any such transferee; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Agent, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of the Agent's rights or powers hereunder. Nothing in the preceding sentence shall relieve the Agent from liability for the Agent's gross negligence or willful misconduct in connection with actions or omissions described in such clauses (i) through (viii) of such sentence. In no event shall the Agent or the Agent's Affiliates be liable to the Borrower for any indirect, incidental, punitive, exemplary or special damages or expenses (including without limitation attorneys' fees), or for any damages resulting from any change in the value of any property relating to a Letter of Credit.
Without limiting the generality of the foregoing, the Agent and each of its Affiliates (i) may rely on any oral or other communication believed in good faith by the Agent or such Affiliate to have been authorized or given by or on behalf of the applicant for a Letter of Credit; (ii) may honor any presentation if the documents presented appear on their face substantially to comply with the terms and conditions of the relevant Letter of Credit; (iii) may honor a previously dishonored presentation under a Letter of Credit, whether such dishonor was pursuant to a court order, to settle or compromise any claim of wrongful dishonor, or otherwise, and shall be entitled to reimbursement to the same extent as if such presentation had initially been honored, together with any interest paid by the Agent or its Affiliates; (iv) may honor any drawing that is payable upon presentation of a statement advising negotiation or payment, upon receipt of such statement (even if such statement indicates that a draft or other document is being delivered separately), and shall not be liable for any failure of any such draft or other document to arrive, or to conform in any way with the relevant Letter of Credit; (v) may pay any paying or negotiating bank claiming that it rightfully honored under the laws or practices of the place where such bank is located; and (vi) may settle or adjust any claim or demand made on the Agent or its Affiliate in any way related to any order issued at the applicant's request to an air carrier, a letter of guarantee or of indemnity issued to a carrier or any similar document (each an "Order") and honor any drawing in connection with any Letter of Credit that is the subject of such Order, notwithstanding that any drafts or other documents presented in connection with such Letter of Credit fail to conform in any way with such Letter of Credit.
In furtherance and extension and not in limitation of the specific provisions set forth above, any action taken or omitted by the Agent under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put the Agent under any resulting liability to the Borrower or any Lender.
Section 2.6 Term Loans.
(a) Subject to the terms and conditions hereof, each Lender severally agrees to make a term loan (each a "Term Loan") to the Borrower on the Closing Date in an amount not to exceed the amount of the Term Loan Commitment of such Lender. The Term Loans may, from time to time, be Base Rate Loans, Eurodollar Loans or a combination thereof, as determined by the Borrower and notified to the Agent in accordance with Section 2.8 and 2.10. Any portion of the Term Loan Commitment which is unused on the Closing Date shall irrevocably terminate on such date.
(b) The Borrower shall repay the outstanding principal amount of the Term Loans on each Term Loan Payment Date in an amount equal to $625,000. The then outstanding principal amount of the Term Loans shall be repaid in full on the Maturity Date.
Section 2.7 Term Notes.
The Term Loan made by each Lender shall be evidenced by a promissory note of the Borrower substantially in the form of Exhibit B (each a "Term Note"), with appropriate insertions therein as to date and principal amount, payable to the order of such Lender and in a principal amount equal to such Lender's Term Loan. Each Lender is hereby authorized to record the date and amount of each payment or prepayment of principal of its Term Loan, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of Eurodollar Loans, the length of each Interest Period with respect thereto, on the schedule annexed to and constituting a part of the Term Note, and any such recordation shall constitute rebuttable presumptive evidence of the accuracy of the information so recorded.
Section 2.8 Procedure for Term Loan Borrowing.
The Borrower shall give the Agent irrevocable notice (which notice must be received by the Agent prior to 12:00 noon, New Jersey time, one Business Day prior to the Closing Date) requesting that the Lenders make Term Loans on the Closing Date and specifying (1) the amount to be borrowed, (2) whether the Term Loans are to be initially a Eurodollar Loan or Base Rate Loan or a combination thereof, and (3) if the Term Loans are to be entirely or partly a Eurodollar Loan, the amount of such Loan and the length of the initial Interest Period therefore. Each portion of the Term Loan which is maintained as a Eurodollar Loan shall be in a principal amount of $500,000 or a multiple of $100,000 in excess thereof. The Agent shall promptly notify the Lenders of its receipt of any notice from the Borrower pursuant to this Section.
Section 2.9 Prepayments.
(a) From time to time the Borrower may voluntarily prepay the Loans, in whole or in part, subject to the provisions of Section 2.17 but otherwise without premium or penalty, upon at least three (3) Business Days' irrevocable notice to the Agent, in the case of Eurodollar Loans and otherwise by 12:00 noon on the date of payment, specifying the date and amount of prepayment. Partial prepayments of Revolving Loans shall be in an aggregate principal amount of $100,000 or a whole multiple in excess thereof or, if less, the then outstanding principal amount of the Revolving Loans. Partial prepayments of Term Loans shall be in an aggregate principal amount of $1,000,000 or a whole multiple of $50,000 in excess thereof or, if less, the outstanding principal amount of the Loan being prepaid. All prepayments shall be allocated to the Lenders based on their respective Total Percentages (as such term is used in the definition of "Percentage"). The Borrower shall further instruct the Lenders whether to apply such prepayment to Revolving Loans or Term Loans or both; provided such instructions shall require the same pro rata allocation by each Lender among the Revolving Loans and Term Loans held by them.
(b) If any notice of prepayment is given, the amount specified in such notice shall be due and payable on the date specified therein. Prepayments of the Loans shall be accompanied by payment or accrued interest to the payment date on the principal amount prepaid.
(c) Partial prepayments of the Term Loans shall be applied to the installments of principal under the Term Loans in the inverse order of their respective scheduled maturities.
(d) Amounts prepaid on account of the Term Loans may not be reborrowed.
(e) [Intentionally omitted].
(f) In the event that (i) any Person constituting the Borrower
or any Subsidiary of any Person constituting the Borrower (other than SSG) shall
effect a Transfer of any Capital Stock issued by ERC US or SSG owned by such
Person constituting the Borrower or any such Subsidiary or (ii) ERC US shall
issue any additional Capital Stock or effect a Transfer of any of its Capital
Stock held as treasury shares or otherwise (other than (1) in satisfaction of
the exercise of stock options held by any employee or director of ERC US
pursuant to ERC US' stock option plan, (2) the issuance of warrants (and Capital
Stock in satisfaction thereof) to brokerage houses in connection with the
marketing of the Capital Stock of ERC US, (3) the issuance of Capital Stock of
ERC US pursuant to exchange offers in connection with investments in other
Persons permitted by the terms hereof and (4) or (iii) any Person constituting
the Borrower or any Subsidiary of any Person constituting the Borrower (other
than SSG) shall effect a Transfer of any assets (other than Transfers of
inventory in the ordinary course of business and Transfers of equipment which is
or to be replaced in the ordinary course within three (3) months from the date
of Transfer); in each case described in the preceding clauses (i), (ii) and
(iii) for a price in excess of $500,000 in the aggregate in any fiscal year
(whether such Transfers are made in one or more transactions); the Borrower
shall, simultaneously with the consummation of any such Transfers, prepay the
Term Loans in an amount equal to the net proceeds of such Transfer(s) (including
the first $500,000 thereof but after deducting reasonable attorneys' fees and
other customary costs of Transfer). Each such prepayment shall be applied to
required payments of the principal of the Term Loan pursuant to Section 2.6(b)
in the inverse order of maturity until the Term Loan is paid in full. Principal
amounts repaid pursuant to this Section 2.9(f) may not reborrowed. No Transfer
referred to in this Section 2.9(f) shall be effected except on arms length
business terms.
(g) The Agent shall disburse all prepayments of the Loans to the Lenders on a pro rata basis.
2.9A Borrowings to Repay Swing Loans.
PNC may, at its option, exercisable at any time for any reason whatsoever, demand repayment of the Swing Loans, and each Lender shall make a Revolving Credit Loan in an amount equal to such Lender's pro rata share (in accordance with such Lender's Percentage) of the aggregate principal amount of the outstanding Swing Loans, plus, if PNC so requests, accrued interest thereon, provided that no Lender shall be obligated in any event to make Revolving Credit Loans in excess of its Revolving Loan Commitment. Revolving Credit Loans made pursuant to the preceding sentence shall be Base Rate Loans and shall be deemed to have been properly requested in accordance with Section 2.3 without regard to any of the requirements of that provision. PNC shall provide notice to the Lenders (which may be telephonic or written notice by letter, facsimile or telex) that such Revolving Credit Loans are to be made under this Section 2.9A and of the apportionment among the Lenders, and the Lenders shall be unconditionally obligated to fund such Revolving Credit Loans (whether or not the conditions specified in Section 2.3 are then satisfied) by the time PNC so requests, which shall not be earlier than 3:00 p.m. New Jersey time on the Business Day next after the date the Lenders receive such notice from PNC.
Section 2.10 Conversion and Continuation Options.
The Borrower shall have the right at any time upon prior irrevocable notice to the Agent (i) not later than 12:00 noon, New Jersey time, on any Business Day, to convert any Eurodollar Loan to a Base Rate Loan, (ii) not later than 12:00 noon, New Jersey time, three Business Days prior to conversion or continuation, to convert any Base Rate Loan into a Eurodollar Loan or to continue any Eurodollar Loan as a Eurodollar Loan for any additional Interest Period, and (iii) not later than 10:00 noon, Pittsburgh time, three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Loan to another permissible Interest Period, subject in each case to the following (provided, that Swing Loans shall only be Base Rate Loans):
(a) a Eurodollar Loan may not be converted at a time other than the last day of the Interest Period applicable thereto;
(b) any portion of a Loan maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Loan;
(c) no Eurodollar Loan may be continued as such and no Base Rate Loan may be converted to a Eurodollar Loan when any Event of Default has occurred and is continuing;
(d) any portion of a Eurodollar Loan that cannot be converted into or continued as a Eurodollar Loan by reason of Section 2.10(b) or 2.10(c) or otherwise automatically shall be converted at the end of the Interest Period in effect for such Loan to a Base Rate Loan;
(e) on the last day of any Interest Period for Eurodollar Loans, if the Borrower has failed to give notice of conversion or continuation as described in this subsection or if such conversion or continuation is not permitted pursuant to Section 2.10(d) or otherwise, such Loans shall be converted to Base Rate Loans on the last day of such then expiring Interest Period;
(f) accrued interest on a Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion.
Section 2.11 Minimum Amounts of Tranches/Number of Tranches.
All borrowings, conversions and continuations of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections that, after giving effect thereto, the aggregate principal amount of the Loans comprising each Eurodollar Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof. No more than six Eurodollar Tranches may be outstanding at any time.
Section 2.12 Interest Rates and Payment Dates.
(a) Subject to the provisions of Section 2.12(c), each Base Rate Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 days, or 366 days in a leap year equal to the Base Rate plus the Applicable Margin for Base Rate Loans.
(b) Subject to the provisions of Section 2.12(c), each Eurodollar Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Eurodollar Rate for the Interest Period in effect for such Eurodollar Loan plus the Applicable Margin for Eurodollar Loans in effect for such Interest Period.
(c) If all or a portion of (A) the principal amount of any Loan, (B) any interest payable thereon or (C) any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall, upon notice to the Borrower from the Agent, bear interest at a rate per annum which is
(1) in the case of overdue principal, the rate that otherwise would be applicable thereto pursuant to the foregoing provisions of this subsection plus 2% per annum or such other lower rate as a court may impose, or
(2) in the case of overdue interest or fees or other amounts, the Base Rate plus 2% per annum or such other lower rate as a court may impose,
in each case from the date of such nonpayment until such amount is paid in full (as well as after, to the extent permitted by law, as before judgment). In no event shall any interest to be paid pursuant to this Agreement exceed the maximum rate permitted by law.
(d) Interest shall be payable in arrears on each Interest
Payment Date, provided that interest accruing on overdue amounts pursuant to
Section 2.12(c) shall be payable on demand.
(e) As soon as practicable the Agent shall notify the Borrower and the Lenders of (A) each determination of a Eurodollar Rate and Applicable Margin and (B) the effective date and the amount of each change in the interest rate on a Loan. Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of clearly demonstrable error. At the request of the Borrower, the Agent shall deliver to the Borrower a statement showing the quotations used by the Agent in determining any interest rate pursuant to Sections 2.12(a), (b) or (c).
Section 2.13 Inability to Determine Interest Rate.
If prior to the first day of any Interest Period:
(a) the Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or
(b) a Lender notifies the Agent and Borrower that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lender of making or maintaining the Eurodollar Loans during such Interest Period, or
(c) The Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that Dollar deposits in the principal amounts of the Eurodollars Loans to which such Interest Period is to be applicable are not generally available in the London Interbank Market,
the Agent shall give notice thereof to the Borrower by fax or telephone as soon as practicable thereafter. If such notice is given (A) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, and (B) any Loans that were to have been converted to or continued as Eurodollar Loans on the first day of such Interest Period shall be converted to or continued as Base Rate Loans. Until such notice has been withdrawn by the Agent, no Loans shall be made as or converted to or continued as Eurodollar Loans.
Section 2.14 Payments/Funding.
(a) All payments (including prepayments) made by the Borrower hereunder and under the Notes, whether on account of principal, interest, fees, or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 noon, New Jersey time, on the due date thereof to the Agent, for the account of the Lenders in Dollars and in immediately available funds to the Agent's account at such address as the Agent shall give notice to the Borrower and the Lenders (the "Payment Office"). Except for payments received by the Agent for the account of the Agent in its capacity as such, for the account of PNC in connection with Swing Loans or for the account of a specific Lender in accordance with the provisions of this Agreement, the Agent shall, within one Business Day of funds collection, distribute like funds relating to the payment of principal, interest or fees pro rata to the Lenders (based on their Percentages) to which such payment is due and payable for their accounts and at the addresses as each such Lender shall specify in its notice to the Agent made in accordance with Section 10.2 of this Agreement. If the Agent fails to so distribute funds within the time set forth in the preceding sentence, the Agent shall pay interest on the amount to be distributed at a rate equal to the Federal Funds Effective Rate from the date such funds were to be distributed to the date of distribution.
Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may (but shall not be obligated to) assume that the Borrower has made such payment in full to the Agent on such date, and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand the amount distributed to such Lender together with interest thereon, at the rate equal to the Federal Funds Effective Rate, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent.
(b) If any principal payment hereunder (other than payments on Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment date shall be extended to the next succeeding Business Day, and interest thereon shall be payable at the then applicable rate during such extension. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day (and interest shall accrue during such extension of time) unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day.
(c) If on any date a payment is due hereunder, the Borrower shall pay less than the amount stated to be due or on any date the Agent shall receive any payment under any Security Document or pursuant to any proceeding to enforce the Obligations of any Person constituting the Borrower, such proceeds shall be distributed to the Lenders pro rata based on their respective Percentages and shall be applied first to costs of collection incurred by each Lender, second to accrued and unpaid interest, third to principal and then to the payment of any other amounts due hereunder or the other Loan Documents.
(d) The Agent shall fund each Loan by depositing the proceeds thereof into the account (the "Account") of ERC US (account no. 8019335317) at PNC's office at Two Tower Center Boulevard, East Brunswick, New Jersey 08817 or as otherwise directed in a writing from the Borrower to the Agent directing payment for purposes permitted by the terms hereof; provided that the proceeds of each Loan shall first be applied to principal prepayments or payments due on the date of such Loan (without derogating from the Borrower's obligation to repay) and proceeds of any conversion or continuation of a Loan to or as a particular Type shall be applied by the Agent solely to effect such conversion or continuation. Each Lender is hereby authorized to debit the accounts of each Person constituting the Borrower for all payments due hereunder; provided the foregoing shall not derogate from the Borrower's obligation to pay or restrict any Lender's recourse to any particular fund or source of monies. The Borrower agrees to maintain its primary depository accounts with PNC's office at Two Tower Center Boulevard, East Brunswick, New Jersey 08817.
Section 2.15 Change in Legality.
Notwithstanding any other provision herein, if any change in any Requirement of Law or in the interpretation or application thereof by a Governmental Authority shall make it unlawful for a Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the Commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert Loans to Eurodollar Loans forthwith shall be canceled and (b) such Loans then outstanding as Eurodollar Loans, if any, automatically shall be converted to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 2.17.
Section 2.16 Increased Costs.
(a) If the adoption of, or any change in, any Requirement of Law or in the interpretation or application thereof by a Governmental Authority or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:
(1) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for the imposition of and changes in the rate of tax on the overall net income of the Lender);
(2) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of a Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder, including, without limitation, the imposition of any reserves with respect to Eurocurrency Liabilities under Regulation D of the Board; or
(3) shall impose on a Lender any other condition;
(4) and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans hereunder or to reduce any amount receivable hereunder in respect thereof then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If a Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Agent and the Borrower of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection submitted by a Lender to the Borrower and Agent shall include a computation thereof and be conclusive in the absence of clearly demonstrable error. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder.
(5) Each Lender agrees, as promptly as practicable after it becomes aware of any circumstances referred to above that would result in such increased cost, the affected Lender shall, to the extent not inconsistent with such Lender's internal policies of general application, use reasonable commercial efforts to minimize costs and expenses incurred by it and payable to it by the Borrower.
(b) In the event that a Lender shall have determined that any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such change or compliance (taking into consideration Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Agent) of a written request therefore (which shall contain a computation of the compensating amount to be paid, such computation to be conclusive in the absences of demonstrable error), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction.
(c) In the event that by reason of any change in any Requirement of Law (including, without limitation, the lapse or termination of any treaty) or in the interpretation thereof, or the adoption of any new law, regulation or requirement by any Governmental Authority, or the imposition of any requirement of any central bank whether or not having the force of law, (i) the Agent or any Lender shall, with respect to this Agreement, the Loans, the Notes or its obligation to make Loans under this Agreement, be subjected to any withholding or other tax, levy, impost, charge, fee, duty or deduction of any kind whatsoever (other than franchise taxes imposed by the jurisdiction in which the Agent or such Lender is domiciled and other than any tax generally imposed or based upon the net income or branch profits of the Agent or such Lender) (collectively, "Taxes") or (ii) any change shall occur in the taxation of the Agent or such Lender with respect to any Loan, the interest payable thereon or any fees payable hereunder or referred to herein (other than franchise taxes imposed by the jurisdiction in which the Agent or such Lender is domiciled and other than any change which affects, and to the extent that it affects, the taxation of the net income or branch profits of the Agent or such Lender), and if any such measures or any other similar measure shall result in an increase in the cost to the Agent or such Lender of making or maintaining any Loan or a reduction in the amount of principal, interest or fees receivable by the Agent or such Lender in respect thereof, the Agent or such Lender promptly after learning of the imposition of such cost or reduction in any amount shall notify the Borrower and the Agent (if applicable) stating the reasons therefor. The Borrower shall thereafter pay to the Agent or such Lender, upon demand from time to time, as additional consideration hereunder, such additional amounts as will fully compensate the Agent or such Lender for such increased costs or reduced amounts and shall promptly provide the Agent or such Lender, as the case may be, with official tax receipts or other evidence of the payment of any taxes paid by the Borrower. A certificate as to the increased costs or reduced amounts setting forth the calculations therefor, shall be submitted promptly by the Agent or such Lender to the Borrower and the Agent (if applicable) and, in the absence of demonstrable error, shall be conclusive and binding as to the amount thereof. If the Agent or Lender receives any additional amounts from the Borrower pursuant to this subsection (c) if requested by Borrower, the Agent or such Lender shall (at the Borrower's expense) attempt to obtain a refund, reduction, deduction or credit for any Taxes with respect to the additional amounts paid under this subsection (c). If the Agent or such Lender actually receives or enjoys the benefit of any such refund, reduction, deduction or credit for any such Taxes, the Agent or such Lender shall reimburse the Borrower if and to the extent, but only the extent, that the Agent or such Lender determines that it has actually received (i) a refund of taxes or other amounts (together with any interest actually received thereon from the respective Governmental Authority) which refund is attributable to the Taxes with respect to which such additional amounts were paid; or (ii) an effective net reduction (through a reduction, deduction, credit or otherwise) in any taxes or other amounts otherwise payable by the Agent or such Lender (including any taxes imposed on or measured by the net income of the Agent or such Lender), which reduction is attributable to the Taxes with respect to which such additional amounts were paid. If, at any time after the Agent or such Lender makes a payment to the Borrower pursuant to the preceding sentence, the Agent or such Lender determines that it was not entitled to the full amount of any refund (together with the interest thereon) reimbursed to the Borrower as aforesaid or that its taxes are not reduced by a credit or deduction for the full amount of Taxes reimbursed to the Borrower as aforesaid, the Borrower upon the demand of the Agent or such Lender will promptly pay to the Agent or such Lender the amounts so refunded to which the Agent or such Lender was not so entitled, or the amount by which the taxes of the Agent or such Lender were not so reduced, as the case may be.
(d) If Borrower is required to pay additional amounts under this Section 2.16 to any Lender, the Borrower may, at its own expense, require such Lender to transfer and assign in whole or in part, without recourse all or part of its interests, rights and obligations under this Agreement to an assignee (which may be another Lender, if a Lender accepts such assignment) which shall assume such assigned obligations in a writing in form and substance reasonably acceptable to the Agent; provided that (i) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority, (ii) the Borrower shall have received a written consent of the Agent in the case of any entity that is not a Lender, which consent shall not be unreasonably withheld, and (iii) the Borrower or such assignee shall have paid to the assigning Lender in immediately available funds the principal of, and interest accrued to the date of such payment on, the Loans made by it hereunder and all other amounts owed to it hereunder as of such date.
Section 2.17 Indemnity.
(a) The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of
(1) default by the Borrower in payment when due of any portion of the principal amount of or interest on any Eurodollar Loan,
(2) default by Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after Borrower has given a notice requesting the same in accordance with the provisions of this Agreement,
(3) default by Borrower in making any prepayment after Borrower has given a notice thereof in accordance with the provisions of this Agreement, or
(4) the making of a payment or a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto,
including, without limitation, in each case, any such loss or expense arising from the reemployment of funds obtained by such Lender or from fees payable to terminate the deposits from which such funds were obtained.
(b) For the purpose of calculation of all amounts payable to a Lender under this subsection such Lender shall be deemed to have actually funded its relevant Eurodollar Loan through the purchase of a deposit bearing interest at the Eurodollar Rate in an amount equal to the amount of that Eurodollar Loan and having a maturity comparable to the relevant Interest Period; provided, however, that each Lender may fund each of its Eurodollar Loans in any manner it sees fit, and the foregoing assumption shall be utilized only for the calculation of amounts payable under this subsection. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder.
Section 2.18 Intentionally omitted.
Section 2.19 Purpose of Loans.
(a) The proceeds of the Loans shall be used for working
capital needs of the Borrower, general corporate purposes and to fund the cash
consideration of the repurchase of certain Capital Stock pursuant to Section 6.6
(b) hereof.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES
To induce the Agent and the Lenders to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to the Agent and the Lenders that as of the Effective Date:
Section 3.1 Financial Condition.
(a) The consolidated balance sheets of ERC US and its consolidated Subsidiaries as at March 31, 2005 and the related consolidated statements of income and of cash flows for the fiscal period ended on each such date, copies of which have heretofore been furnished to each Lender, present fairly in all material respects the consolidated financial condition of ERC US and its consolidated Subsidiaries as at such dates, and the consolidated results of their operations and their consolidated cash flows for the fiscal years then ended.
(b) All such financial statements, including the related schedules, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants and as disclosed therein).
(c) Neither ERC US nor any of its consolidated Subsidiaries (other than SSG) had, at the date of the most recent balance sheet delivered to the Agent pursuant to Section 3.1(a) or 5.1 hereof, any material Contingent Obligation, material contingent liability or material liability for taxes, or any material long-term lease or material unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction or other financial derivative, except as reflected in the foregoing statements or in the notes thereto or would not reasonably be expected to have a Material Adverse Effect.
(d) During the period from April 1, 2005, to and including the Effective Date hereof there has been no sale, transfer or other disposition by ERC US or any of its consolidated Subsidiaries (other than SSG) of any material part of its business or property (other than in the ordinary course of business) and no purchase or other acquisition of any business or property (including any Capital Stock of any other Person, other than Capital Stock of ERC US by ERC US, in any case, other than in the ordinary course of business) material in relation to the consolidated financial condition of the Borrower and its consolidated Subsidiaries at March 31, 2005.
Section 3.2 No Material Adverse Change.
Since March 31, 2005, there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect.
Section 3.3 Corporate Existence; Compliance with Law.
Each of ERC US and its Subsidiaries (other than Inactive Subsidiaries) (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except where the failure to so qualify or be in good standing therewith would not have a Material Adverse Effect and (d) is in compliance with all Requirements of Law except where the failure to comply therewith would not, in the aggregate, have a Material Adverse Effect.
Section 3.4 Corporate Power; Authorization; Enforceable Obligations.
(a) Each Person constituting the Borrower has the corporate power and authority, and the legal right, to make, deliver and perform this Agreement, the Notes and each other Loan Document to which it is a party and to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement, the Notes and each other Loan Document to which it is a party and to authorize the execution, delivery and performance of this Agreement, the Notes and each other Loan Document to which it is a party.
(b) Except for consents, authorizations, approvals, notices and filings described on Schedule II, all of which have been obtained, made or waived, no consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or the Notes or any other Loan Document.
(c) This Agreement has been, and each Note and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of each Person constituting the Borrower.
(d) This Agreement constitutes, and each Note and each other Loan Document when executed and delivered will constitute, a legal, valid and binding obligation of each Person constituting the Borrower enforceable against each such Person in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
Section 3.5 No Legal Bar.
The execution, delivery and performance of this Agreement and the Notes, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of any Person constituting the Borrower and will not result in, or require, the creation or imposition of any Lien on any of its respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation.
Section 3.6 No Material Litigation.
Except as set forth on Schedule III or disclosed in writing to the Lenders, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the any Person constituting the Borrower, threatened by or against any Person constituting the Borrower or against any of its respective properties or revenues (a) with respect to this Agreement, the Notes or any of the transactions contemplated hereby, or (b) which if adversely determined would have a Material Adverse Effect.
Section 3.7 No Default.
No Person constituting the Borrower is in default under or with respect to any of their respective Contractual Obligations in any respect which would reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.
Section 3.8 Ownership of Property; Liens.
Each Person constituting the Borrower has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property, and none of such property is subject to any Lien except as permitted by Section 6.2.
Section 3.9 Intellectual Property.
Each Person constituting the Borrower owns, or is licensed to use, all trademarks, tradenames, copyrights, patents, technology, know-how and processes necessary for the conduct of its business as currently conducted (collectively, the "Intellectual Property") except where the failure to own or license any such Intellectual Property would not have a Material Adverse Effect. The Intellectual Property owned or licensed by each Person constituting the Borrower is set forth on Exhibit I. Except as set forth on Exhibit I, no claim has been asserted in writing and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property which would have a Material Adverse Effect, nor does any Person constituting the Borrower know of any valid basis for any such claim which, if asserted, would have a Material Adverse Effect. To the best of the knowledge of the Borrower, the use of such Intellectual Property by each Person constituting the Borrower does not infringe the rights of any Person.
Section 3.10 No Burdensome Restrictions.
No Requirement of Law or Contractual Obligation of any Person constituting the Borrower has, or could reasonably be expected to have, a Material Adverse Effect.
Section 3.11 Taxes.
Each Person constituting the Borrower has filed or caused to be filed all tax returns which, to the knowledge of such Person, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of such Person constituting the Borrower or its respective Subsidiaries, as the case may be); no tax Lien has been filed, and, to the knowledge of such Person, no claim is being asserted, with respect to any such tax, fee or other charge in any case which would have a Material Adverse Effect, except, there is currently a California unitary tax assessed against ERC US in an amount of approximately $1,100,000 and no Lien has been filed with respect thereto.
Section 3.12 Federal Regulations.
No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board as now and from time to time hereafter in effect or for any purpose which violates the provisions of any Regulations of the Board. If requested by any Lender at any time, each Person constituting the Borrower will furnish to such Lender a statement in conformity with the requirements of FR Form U-1 referred to in Regulation U.
Section 3.13 Investment Company Act; Public Utility Holding Company Act; Other Regulations.
No Person constituting the Borrower is (a) an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, or (b) a "holding company" as defined in, or otherwise subject to regulation under, the Public Utility Holding Company Act of 1935. No Person constituting the Borrower is subject to regulation under any federal or state statute or regulation which limits its ability to incur Indebtedness.
Section 3.14 Subsidiaries.
All the Subsidiaries of ERC US as of the Effective Date and the ownership of the Capital Stock of such Subsidiaries are listed on Schedule IV to this Agreement. None of the Capital Stock of any such Subsidiary is subject to a Lien in favor of any Person (except Liens in favor of the Agent and Lenders). The aggregate value of the assets of each Person constituting the Borrower is equal to an amount that is not less than 95% of the aggregate value of the assets of ERC US and all of its Subsidiaries, after adjusting for investments in Subsidiaries and intercompany balances.
Section 3.15 Employee Grievances.
Except as set forth on Schedule V hereof, as of the Effective Date no Person constituting the Borrower is a party to any collective bargaining agreement or, to the best knowledge of such Person, subject to any current effort to organize, and there are no actions or proceedings pending or, to the best of the knowledge of such Person, threatened against it, by or on behalf of, or with, its employees, other than employee grievances arising in the ordinary course of business which are not, in the aggregate, material.
Section 3.16 ERISA.
(a) Except as set forth in Schedule VI hereof, as of the Effective Date no Person constituting the Borrower has any Plan (including without limitation any Multiemployer Plan) or any similar arrangement (a "Foreign Plan") under the law of their domicile, in the case of the Foreign Subsidiaries, or have made or make any payments to any Plan or Foreign Plan.
(b) Each Person constituting the Borrower is and has at all times been in substantial compliance with all applicable provisions of ERISA, except where a failure to be in such compliance would not have a Material Adverse Effect. Each Foreign Subsidiary is in compliance with all Requirements of Law related to any Foreign Plan.
(c) No Person constituting the Borrower has engaged in a
transaction in connection with which such Person or any ERISA Affiliate could be
subject to a material liability for either a civil penalty assessed pursuant to
Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code.
(d) There has been no termination of a Plan or trust created under any Plan that would give rise to a material liability to the PBGC on the part of any Person constituting the Borrower or any ERISA Affiliate. No material liability to the PBGC has been or is expected to be incurred with respect to any Plan by any Person constituting the Borrower or any ERISA Affiliate. The PBGC has not instituted proceedings to terminate any Plan. There exists no condition or set of circumstances which presents a material risk of termination or partial termination of any Plan by the PBGC. Each Person constituting the Borrower and each ERISA Affiliate have paid all premiums to the PBGC when due. No Foreign Subsidiary has incurred any material liability to any Governmental Authority or other Person with respect to any Foreign Plan.
(e) Full payment has been made of all amounts which are required under the terms of each Plan to have been paid as contributions to such Plan as of the last day of the most recent fiscal year of such Plan ended on or before the date of this Agreement, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any Plan. No Person constituting the Borrower nor any ERISA Affiliate has failed to make a required installment under Section 412(m) of the Code or any other payment required under Section 412 of the Code on or before the due date.
(f) The value of the benefit liabilities (as defined in
Section 4001(a)(16) of ERISA) of each Plan (based on the actuarial assumptions
contained in Title IV of ERISA) does not exceed the fair market value of the
assets of such Plan. No Person constituting the Borrower nor any ERISA Affiliate
is required to provide security to a Plan under Section 401(a)(29) of the Code.
(g) No Person constituting the Borrower nor any ERISA Affiliate has made a complete or partial withdrawal from a Multiemployer Plan. To the best knowledge of each Person constituting the Borrower the liability to which such Person or any ERISA Affiliate would become subject under ERISA if such Person and all ERISA Affiliates were to withdraw completely from all Multiemployer Plans as of the most recent valuation date, together with any secondary liability for withdrawal liability such Person and any ERISA Affiliate may have as of the date hereof, would not have a Material Adverse Effect. To the best knowledge of each Person constituting the Borrower no such Multiemployer Plan is in reorganization (as such term is defined in Section 4241 of ERISA) or is insolvent (as such term is defined in Section 4245 of ERISA).
(h) No Person constituting the Borrower (i) has any liability for any Plan or Multiemployer Plan to which any Subsidiary of ERC US (other than the Subsidiary Borrowers) contributes or as to which such Subsidiary has any liability; or (ii) makes any contribution to any such Plan or Multiemployer Plan; or (iii) has any employees enrolled in or covered by any such Plan or Multiemployer Plan.
Section 3.17 ER Intercompany Payable.
The ER Intercompany Payable is not evidenced by any note or other instrument or writing except only by entries on the books and records of the Foreign Subsidiaries. The Foreign Subsidiaries will make a notation on such books and records to reflect the subordination of the ER Intercompany Payable pursuant to the HK Subordination Agreement. In the event the ER Intercompany Payable becomes evidenced by a note, instrument or other writing, the Foreign Subsidiaries will (prior to its execution) cause the form thereof to contain a reference to the provisions of the HK Subordination Agreement satisfactory in form and substance to Agent and shall promptly deliver a copy of such note, instrument or other writing to the Agent as executed.
Section 3.18 Insurance.
Schedule 3.18 lists all material insurance policies and other bonds to which any Borrower or Subsidiary of any Borrower is a party, all of which are valid and in full force and effect. No notice has been given or claim made and no grounds exist to cancel or avoid any of such policies or bonds or to reduce the coverage provided thereby. Such policies and bonds provide adequate coverage from reputable and financially sound insurers in amounts sufficient to insure the assets and risks of each Borrower and each Subsidiary of each Borrower in accordance with prudent business practice in the industry of each Borrower and their Subsidiaries.
Section 3.19 Security Interests.
The Liens and security interests granted to the Agent for the benefit of the Lenders pursuant to the Security Documents constitute and will continue to constitute Prior Security Interests under the Uniform Commercial Code as in effect in each applicable jurisdiction (the "Uniform Commercial Code") or other applicable Law entitled to all the rights, benefits and priorities provided by the Uniform Commercial Code or such law. Upon the filing of financing statements relating to said security interests in each office and in each jurisdiction where required in order to perfect the security interests described above, taking possession of any relevant stock certificates or other certificates, and recordation of the Intellectual Property Security Agreements in the United States Patent and Trademark Office and United States Copyright Office, as applicable, all such action as is necessary or advisable to establish such rights of the Agent will have been taken, and there will be upon execution and delivery of the Security Documents, such filings and such taking of possession, no necessity for any further action in order to preserve, protect and continue such rights, except the filing of continuation statements with respect to such financing statements within six months prior to each five-year anniversary of the filing of such financing statements. All filing fees and other expenses in connection with each such action have been or will be paid by the Borrower.
Section 3.20 Material Contracts; Burdensome Restrictions.
Schedule 3.20 lists all material contracts relating to the business operations of each Borrower and each Subsidiary of each Borrower, including all employee benefit plans and labor contracts. All such material contracts are valid, binding and enforceable upon such Borrower or Subsidiary and each of the other parties thereto in accordance with their respective terms, and there is no material default thereunder, to the Borrower's knowledge, with respect to parties other than such Borrower or Subsidiary. None of the Borrowers or their Subsidiaries is bound by any contractual obligation, or subject to any restriction in any organization document, or any requirement of law which could result in a Material Adverse Effect
Section 3.21 Environmental Matters.
Except as disclosed on Schedule 3.21:
(i) The Borrower has not received any material Environmental Complaint, whether directed or issued to Borrower or relating or pertaining to any prior owner, operator or occupant of the Property, and has no reason to believe that it might receive a material Environmental Complaint.
(ii) To Borrower's knowledge, no activity of any Borrower at the Property is being or has been conducted in violation of any Environmental Safety Law or Required Environmental Permit and to the knowledge of Borrower no activity of any prior owner, operator or occupant of the Property was conducted in violation of any Environmental Safety Law.
(iii) Borrower is unaware of any Regulated Substances present on, in, under, or emanating from, or to Borrower's knowledge emanating to, the Property or any portion thereof that result in Contamination.
(iv) Each Borrower has all Required Environmental Permits and all such Required Environmental Permits are in full force and effect.
(v) Each Borrower has submitted to an official body and/or maintains, as appropriate, all Required Environmental Notices.
(vi) To Borrower's knowledge, no structures, improvements, equipment, fixtures, impoundments, pits, lagoons or aboveground or underground storage tanks located on the Property contain or use, except in compliance with Environmental Safety Laws and Required Environmental Permits, Regulated Substances or otherwise are operated or maintained except in compliance with Environmental Safety Laws and Required Environmental Permits. To the knowledge of Borrower, no structures, improvements, equipment, fixtures, impoundments, pits, lagoons or aboveground or underground storage tanks of prior owners, operators or occupants of the Property contained or used, except in compliance with Environmental Safety Laws, Regulated Substances or otherwise were operated or maintained by any such prior owner, operator or occupant except in compliance with Environmental Laws.
(vii) To the knowledge of Borrower, no facility or site to which Borrower, either directly or indirectly by a third party, has sent Regulated Substances for storage, treatment, disposal or other management has been or is being operated in violation of Environmental Safety Laws or pursuant to Environmental Safety Laws is identified or proposed to be identified on any list of contaminated properties or other properties which pursuant to Environmental Safety Laws are the subject of an investigation, cleanup, removal, remediation or other response action by an official body.
(viii) To Borrower's knowledge, no portion of the Property is identified or to the knowledge of Borrower proposed to be identified on any list of contaminated properties or other properties which pursuant to Environmental Safety Laws are the subject of an investigation or remediation action by an official body, nor to the knowledge of Borrower is any property adjoining or in the proximity of the Property identified or proposed to be identified on any such list.
(ix) To Borrower's knowledge, no portion of the Property constitutes an Environmentally Sensitive Area.
No Borrower is aware of any lien or other encumbrance authorized by Environmental Safety Laws against the Property or any reason to believe that such a lien or encumbrance may be imposed.
Section 3.22 Anti-Terrorism Laws.
(i) General.
None of the Borrower or any Affiliate of any Borrower, is in violation of any Anti-Terrorism Law or engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.
(ii) Executive Order No. 13224.
None of the Borrower, or any Affiliate of any Borrower, or their respective agents acting or benefiting in any capacity in connection with the Loans, Letters of Credit or other transactions hereunder, is any of the following (each a "Blocked Person"):
(a) a Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224;
(b) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224;
(c) a Person or entity with which any Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;
(d) a Person or entity that commits, threatens or conspires to commit or supports "terrorism" as defined in the Executive Order No. 13224;
(e) a Person or entity that is named as a "specially designated national" on the most current list published by the U.S. Treasury Department Office of Foreign Asset Control at its official website or any replacement website or other replacement official publication of such list, or
(f) a person or entity who is affiliated or associated with a person or entity listed above.
No Borrower or to the knowledge of any Borrower, any of its agents acting in any capacity in connection with the Loans, Letters of Credit or other transactions hereunder (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, or (ii) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order No. 13224.
Section 3.23 Tax Shelter Regulations.
No Borrower intends to treat the Loans and/or Letters of Credit and related transactions as being a "reportable transaction" (within the meaning of Treasury Regulation Section 1.6011-4). In the event any Borrower determines to take any action inconsistent with such intention, the Borrower will promptly (1) notify the Agent thereof, and (2) deliver to the Agent a duly completed copy of IRS Form 8886 or any successor form. If the Borrower so notifies the Agent, the Borrower acknowledges that one or more of the Lenders may treat its Loans and/or Letters of Credit as part of a transaction that is subject to Treasury Regulation Section 301.6112-1, and such Lender or Lenders, as applicable, will maintain the lists and other records required by such Treasury Regulation.
ARTICLE 4.
CONDITIONS PRECEDENT
Section 4.1 Conditions to Effective Date.
This Agreement shall become effective on the date (the "Effective Date") on which each condition listed in Section 4.2 is satisfied and each of the following shall have occurred:
(a) The Agent shall have received counterparts of (i) this Agreement, executed and delivered by a duly authorized officer of each Person constituting the Borrower and each Lender, and (ii) each Security Document and other Loan Document executed by each Person party thereto. Each Lender shall have received a Revolving Credit Note and Term Note, and PNC shall have received a Swing Loan Note, in each case, conforming to the requirements hereof and executed by a duly authorized officer of each Person constituting the Borrower.
(b) The Agent shall have received an officer's certificate of a duly authorized officer of each Person constituting the Borrower and Scott dated as of the Effective Date and certifying that the Secretary's Certificates delivered to the Agent by each Person constituting a Borrower (except for ER Macao) and Scott on June 28, 2002, and except as set forth on said certificate all attachments thereto remain accurate and have not been amended, modified, revoked or rescinded.
(c) The Agent shall have received the executed legal opinion of Lowenstein Sandler PC, US counsel to the Persons constituting the Borrower, together with the opinions of Baker & McKenzie, Hong Kong counsel to ER Hong Kong, Conyers, Dill & Pearman, British Virgin Islands counsel to ER BVI and Emerson Global Limited, and Macao counsel to ER Macao, substantially in the form of Exhibit J. Such legal opinions shall cover such matters incident to the transactions contemplated by this Agreement as the Agent and the Lenders reasonably may require.
(d) The Agent shall have received a certificate of Emerson Radio Macao dated as of the Effective Date and certifying (1) that attached thereto is a true, complete and correct copy of resolutions duly adopted by its Board of Directors authorizing (x) the execution, delivery and performance of this Agreement and the Notes and the other Loan Documents and (y) the borrowings contemplated hereunder and that such resolutions have not been amended, modified, revoked or rescinded, (2) as to the incumbency and specimen signature of each director executing any Loan Documents on its behalf and (3) that attached thereto are true and complete copies of its organizational documents; and such certificate and the resolutions attached thereto shall be in form and substance reasonably satisfactory to the Agent.
(e) The Borrower shall have paid (i) all fees set forth in Sections 2.4(b) and 2.4(c) and 2.4(d) hereof on the dates specified and (ii) all fees of counsel to the Agent submitted on the date hereof as previously agreed to. This condition precedent does not derogate from the Borrower's continuing obligations under Section 10.5.
(f) The Agent shall have received a Waiver and Consent from landlords of collateral locations with respect to which a Waiver and Consent is not currently existing, in each case in form and substance satisfactory to the Agent.
(g) The Lenders shall have received such other materials, documents and papers regarding the Borrower or the Loans as the Lenders may reasonably require.
(h) The Agent shall have received (i) all UCC Financing Statements or other public filing documents required to perfect any security interests and other evidence of the Liens granted pursuant to the Security Documents and (ii) original stock certificates evidencing all Capital Stock pledged pursuant to the Stock Pledge Agreement together with original stock powers (or equivalent forms) executed in blank in form and substance satisfactory to the Agent.
(i) ERC US shall have delivered to the Agent the most recent draft of ERC US' financial statements for the fiscal year ended March 31, 2005 and such statements shall be acceptable to the Agent.
(j) The Agent shall have received an appraisal of the property pledged to the Agent for the benefit of the Lenders pursuant to the Intellectual Property Security Agreements, in form and substance satisfactory to the Agent.
(k) To the extent not listed above, the Agent shall have received, or shall have verified completion of, each item referenced on the closing checklist attached hereto as SCHEDULE 4.1(N), in form or in a manner reasonably satisfactory to the Agent.
(l) All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be reasonably satisfactory in form and substance to the Lenders, and the Agent and the Lenders shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as they may reasonably request.
Section 4.2 Conditions to Each Loan.
The obligation of the Lenders to make any Loan requested to be made on any date (including, without limitation, the initial Loan) is subject to the satisfaction of the following conditions precedent:
(a) Each of the representations and warranties made by each Person constituting the Borrower in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date except for representations and warranties which speak as of another date, in which case such representations and warranties shall have been true in all material respects as of such date (it being agreed that for purposes of this Section 4.2 (a) the date referred to in Section 3.2 shall refer to the date of the then most recent audited financial statements of ERC US and its consolidated Subsidiaries delivered to the Agent.
(b) No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loans requested to be made on such date.
(c) The Agent shall have received a Borrowing Base Certificate for the then most recently ended Calculation Period in accordance with Section 5.2(c).
(d) The Agent and the Lenders shall have received all fees due and owing pursuant to Sections 2.4.
(e) No notice of, or any other document or instrument creating, any federal tax Lien or Lien under Section 412 of the Code or Section 4068 of ERISA shall have been issued, recorded or filed in an amount in excess of $100,000 with respect to the assets of any Person constituting the Borrower and no Lender shall have informed the Agent or the Borrower that such Lender has processed any such Lien or has notice thereof.
(f) No restrictions shall have been imposed on the convertibility or transferability of any currency by any Governmental Authority where ER Hong Kong or ER BVI is domiciled which the Agent deems in its business judgment will have an adverse impact on the ability of any Person constituting the Borrower to pay or perform the Obligations hereunder or under the other Loan Documents or to continue to operate its business.
Each borrowing hereunder shall constitute a representation and warranty by the Borrower as of the date of such Loan that the conditions contained in this Section 4.2 have been satisfied.
ARTICLE 5.
AFFIRMATIVE COVENANTS
Each Person constituting the Borrower hereby agrees that, so long as the Commitments remain in effect, any Note remains outstanding and unpaid or any other amount is owing to the Agent or any Lender hereunder, each Person constituting the Borrower shall and shall cause their respective Subsidiaries, other than SSG and Inactive Subsidiaries, to:
Section 5.1 Financial Statements, Budgets and Forecasts.
Furnish to the Agent (with sufficient copies for each Lender):
(a) as soon as available but in any event within 120 days of the end of each fiscal year of ERC US, (1) a copy of the consolidated and consolidating balance sheet of ERC US and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income and retained earnings and of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, prepared internally by a Responsible Officer, (2) a copy of the consolidated balance sheet of ERC US and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for such fiscal year, certified by and reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by BDO Seidman, LLP or other independent certified public accountants of nationally recognized standing reasonably acceptable to the Agent; together with consolidating schedules which set forth columnar information for each of ERC US and its consolidated Subsidiaries (other than SSG) and SSG, an elimination column and the consolidated results for ERC US and its consolidated Subsidiaries, and in any event in substantially the same format as presented to the Agent by Ernst & Young, LLP for the fiscal year ended March 31, 2003, and (3) a compliance certificate by a Responsible Officer as to such financial statements being fairly stated in all material respects when considered in relation to the consolidated financial statements of ERC US and its consolidated Subsidiaries; and
(b) as soon as available, but in any event not later than 60 days after the end of each of the first three quarterly periods of each fiscal year of ERC US, the unaudited consolidated and consolidating balance sheet of ERC US and its consolidated Subsidiaries as at the end of such fiscal quarter and the related unaudited consolidated and consolidating statements of income and retained earnings and of cash flows of ERC US and its consolidated Subsidiaries for such fiscal quarter and the portion of the fiscal year through the end of such fiscal quarter, setting forth in each case in comparative form the figures for the previous year, together with a compliance certificate by a Responsible Officer as to their being fairly stated in all material respects when considered in relation to the consolidated financial statements of ERC US and its consolidated Subsidiaries (subject to normal year-end audit adjustments); and
(c) concurrently with the delivery of the financial statements referred to in Section 5.1(a) above, the annual budget and any forecasts or projections of ERC US and its consolidated Subsidiaries (except in the case of the delivery of the financial statements for the fiscal year ending March 31, 2005, in which case said annual budget shall be due on or before July 31, 2005.
all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein).
Section 5.2 Certificates; Other Information.
Furnish to the Agent (with sufficient copies for each Lender):
(a) concurrently with the delivery of the financial statements referred to in Sections 5.1(a) and 5.1(b), the following: (i) a certificate of a Responsible Officer of ERC US (A) stating that, to the best of such Officer's knowledge such Responsible Officer has obtained no knowledge of any Default or Event of Default, except as specified in such certificate and (B) showing the calculation of the financial covenants contained in Sections 6.11, 6.12 and 6.13 hereof and certifying the accuracy of such calculations; and (ii) an updated listing of all license agreements for intellectual property to which ERC US and/or any of its Subsidiaries is a party as licensor or licensee.
(b) within five Business Days after the same are sent, copies of all financial statements and reports which ERC US sends to its stockholders generally, and within five days after the same are filed, copies of all financial statements and reports which ERC US may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority;
(c) within seven Business Days after the end of each Calculation Period and, in the event the Calculation Period becomes a seven day period pursuant to the definition of such term, by the Wednesday next following the end of each Calculation Period, (i) a Borrowing Base Certificate as of the last day of such Calculation Period which certificate shall include, inter alia, an accounts receivable aging report for each Person constituting the Borrower as of the end of the Calculation Period covered by such certificate, and (ii) a report with respect to each back to back letter of credit facility and each other credit facility of ER Hong Kong and ER BVI, giving notice of any failure of any issuer of any letter of credit under any such facility to honor a draw thereunder for any reason and notice of disputes with respect to any such letters of credit;
(d) promptly upon their becoming available to the Borrower, management letters submitted to the Borrower by independent accountants in connection with any annual, interim or special audit;
(e) promptly after any Borrower determines that it intends to treat any of the Loans, Letters of Credit or related transactions as being a "reportable transaction" as provided in Section 3.23 (1) a written notice of such intention to the Agent, and (2) a duly completed copy of IRS Form 8886 or any successor form; and
(f) promptly, such additional financial and other information as the Agent from time to time reasonably may request.
Section 5.3 Payment of Obligations.
Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the relevant Person constituting the Borrower or its Subsidiaries, as the case may be or except for amounts not exceeding $500,000, in the aggregate, incurred in the ordinary course of business but subject to Section 6.2.
Section 5.4 Conduct of Business and Maintenance of Existence.
Continue to engage in businesses related to the businesses now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to Section 6.4; comply with all Contractual Obligations and Requirements of Law (excluding, for purposes of this subsection, Requirements of Law specifically addressed in other subsections of this Article 5) except, in the case of any Inactive Subsidiary, to the extent that failure to comply therewith would not, in the aggregate, have a Material Adverse Effect.
Section 5.5 Maintenance of Property; Insurance.
Keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted; maintain with financially sound and reputable insurance companies (rated A or better by A.M. Best & Co.) insurance on substantially all its property (including, without limitation, inventory) in at least such amounts and against at least such risks (but including in any event general liability, product liability and business interruption) as is required by Agent in its reasonable business judgment and available in the marketplace; cause Agent to be a loss payee on all such insurance policies and furnish to the Agent proof reasonably satisfactory to the Agent of the annual renewal thereof (within 30 days of such renewal) and, upon written request, such other information as to the insurance carried as Agent may reasonably request. Such insurance policies that cover goods shall provide that the insurance company shall give Agent at least thirty (30) days' written notice before any such policy of insurance is altered or canceled and that no act, whether willful or negligent, or default of Borrower shall affect the right of Agent to recover under such policy of insurance in case of loss or damage. Borrower irrevocably makes, constitutes and appoints Agent (and all officers, employees or agents designated by Agent) as Borrower's true and lawful attorney (and agent-in-fact) for the purpose, following an Event of Default, of making, settling and adjusting claims under such policies of insurance, endorsing the name of the relevant Persons constituting the Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and making all determinations and decisions with respect to such policies of insurance.
Section 5.6 Inspection of Property; Books and Records; Discussions.
Keep proper books of record and account in which full, true and correct entries in conformity with prudent business practices and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of the Agent and each Lender during normal business hours and upon reasonable notice (unless an Event of Default has occurred and is continuing, in which case no such notice from the Agent or any Lender shall be required) to visit and inspect any of its properties, examine and make abstracts from any of its books and records and conduct asset/system reviews and/or appraisals, including, without limitation, up to two (2) field exams every fiscal year of ERC US during the term hereof to be performed by a third party acceptable to the Required Lenders and an annual inventory appraisal to be performed by a third party acceptable to the Required Lenders (all such asset/system reviews and appraisals, field exams and inventory appraisals to be at the Borrower's sole cost and expense, the cost of which shall be paid by Borrower on demand from the Agent) at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of any Person constituting the Borrower and its Subsidiaries with officers and employees of such Person and its Subsidiaries and with its independent certified public accountants.
Section 5.7 Notices. Promptly give notice to the Agent of:
(a) the occurrence of any Default or Event of Default of which the Borrower has knowledge;
(b) any (i) default or event of default under any Contractual Obligation of any Person constituting the Borrower or any of its Subsidiaries, other than SSG and Inactive Subsidiaries, or (ii) litigation, investigation or proceeding which may exist at any time between any Person constituting the Borrower or any of its Subsidiaries, other than SSG and Inactive Subsidiaries, and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, would have a Material Adverse Effect;
(c) any litigation or proceeding affecting any Person constituting the Borrower or any of its Subsidiaries in which the amount involved is $500,000 or more and not covered by insurance or in which injunctive or similar relief is sought;
(d) the occurrence of any event having a Material Adverse Effect; and
(e) The failure of any Person which has issued one or more letters of credit in a face amount equal to or greater than $100,000 (or its equivalent in any currency), in the case of trade letters of credit, and $500,000, in the case of back to back letters of credit (or its equivalent in any currency), singly or in the aggregate to the Foreign Subsidiaries, as beneficiary, or for the account of any Foreign Subsidiary, to honor a draw under such letter of credit for any reason.
Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer of the relevant Person constituting the Borrower setting forth details of the occurrence referred to therein and stating what action such Person proposes to take with respect thereto.
Section 5.8 ERISA Compliance.
Comply with all the applicable provisions of ERISA now or hereafter in effect with respect to each of its Plans except where the failure to comply would not have a Material Adverse Effect. Notify the Lender of the following events, as soon as possible and in any event within thirty days after the Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan; (ii) the occurrence of a prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan, (iii) the institution of proceedings or the taking or expected taking of any other action by the PBGC or any Person constituting the Borrower or any ERISA Affiliate to terminate or withdraw or partially withdraw from any Plan and, with respect to a Multiemployer Plan, the Reorganization or Insolvency of such Plan (as such terms are defined in ERISA), (iv) the failure of any Person constituting the Borrower or any ERISA Affiliate to make a required installment under Section 412 (m) of the Code or any other payment required under Section 412 of the Code on or before the due date or (v) the adoption of an amendment with respect to a Plan so that any Person constituting the Borrower or any ERISA Affiliate is required to provide security to the Plan under Section 401(a)(29) of the Code, and in addition to such notice, promptly deliver to the Lender a certificate signed by a Responsible Officer setting forth the details relating thereto, and the action that such Person and the ERISA Affiliate propose to take with respect thereto and when known, any action taken or threatened by the Internal Revenue Service or the PBGC, together with a copy of any notice to the PBGC or the Internal Revenue Service or any notice delivered by the PBGC or the Internal Revenue Service.
Section 5.9 Taxes and Claims.
Pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any property belonging to it and which upon non-payment could become a Lien on any portion of its property, prior to the date on which penalties attach thereto; provided that, subject to any more restrictive provisions contained in the Loan Documents, Borrower shall not be required to pay or cause to be paid any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and for which adequate reserves are being maintained in accordance with GAAP; provided, however, Borrower shall immediately pay and discharge or cause to be paid and discharged any such contested taxes, assessments and governmental charges or levies in excess of $100,000 upon the commencement of any proceeding to foreclose, sell or otherwise execute on the Lien thereof.
Section 5.10 Environmental Matters.
(a) Borrower shall defend, indemnify and hold harmless the Agent and all Lenders from and against any and all Environmental Liabilities.
(b) Borrower shall not cause or permit (or allow any subtenant to cause or permit) (i) any real property owned or leased by it, or any part thereof, to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials in violation of the Environmental and Safety Laws.
(c) The provisions of this Section 5.10 shall be in addition to any other obligation and liability the Borrower may have to the Agent and the Lenders, and shall survive the transactions contemplated herein, the termination of this Credit Agreement and the repayment of all Obligations.
Section 5.11 Shipping Documents.
Upon reasonable request by Agent, (i) each of the Subsidiary Borrowers or any one or more of them as Agent shall direct from time to time, shall deliver the copies of all ocean or other bills of lading and other shipping documents (collectively, "Shipping Documents") for each shipment of goods made by or for any Subsidiary Borrower to ERC US, MI or any other Subsidiary or Person receiving goods (and acting on ERC US' behalf) to be sold by ERC US to be delivered to the Agent or any Person selected by Agent to act on its behalf (including without limitation any Lender) and/or (ii) upon the occurrence and during the continuance of an Event of Default, cause the Agent or any Person selected by Agent to act on its behalf (including without limitation any Lender) to be named on such Shipping Documents as a Person necessary to negotiate or effect a Transfer of such Shipping Documents or the goods covered thereby, and (iii) ERC US shall cause any other Person shipping goods to ERC US to take the actions described in clause (i) and (ii) of this Section 5.11.
Section 5.12 Significant Subsidiary.
Cause each Subsidiary which becomes a Significant Subsidiary after the Closing Date (if not already a Subsidiary Borrower) to become a party hereto by executing and delivering an Assumption Agreement to this Agreement. If any two (2) or more Inactive Subsidiaries (a "Significant Group") taken together would constitute a Significant Subsidiary, Borrower shall cause so many of such Inactive Subsidiaries to become a party hereto (by executing and delivering an Assumption Agreement to this Agreement) as is necessary to cause the remaining Person(s) in such group to cease to be a Significant Group.
Section 5.13 Waivers and Consents.
Borrower shall use reasonable efforts to obtain Waivers and Consents substantially in the form of Exhibit L hereto from each warehousemen/lessor of each location in the United States of America at which any Person constituting the Borrower maintains any Collateral (as defined in the Security Agreements) and which has not been obtained prior to the Effective Date.
Section 5.14 Lockbox Account.
ERC US shall maintain those lockbox and other deposit accounts and full cash dominion with PNC Bank, National Association (in that capacity, the "Depository") to which their customers will be directed to make payment on accounts and into which proceeds of collateral shall be promptly deposited, and shall maintain control agreements with the Depository and the Agent with respect to such deposit accounts providing for a first security therein in favor of the Agent for the benefit of the Lenders, all in form and substance satisfactory to the Required Lenders.
ARTICLE 6.
NEGATIVE COVENANTS
Each Person constituting the Borrower hereby agrees that, so long as the Commitments remain in effect, any Note remains outstanding and unpaid or any other amount is owing to the Agent or any Lender hereunder, it shall not, and shall not permit any of their respective Subsidiaries, other than SSG, to, directly or indirectly:
Section 6.1 Limitation on Indebtedness.
Create, incur, assume or suffer to exist any Indebtedness, except:
(a) Indebtedness (i) in respect of the Loans, the Notes and other obligations of such Person constituting the Borrower under this Agreement and (ii) arising with respect to Hedging Agreements;
(b) Indebtedness of all Foreign Subsidiaries shall not exceed $95,000,000 in the aggregate, and any collateral pledged to secure such Indebtedness shall not exceed an amount in excess of 35% of the of such Indebtedness.
(c) ERC US may guarantee up to $5,000,000 (or its equivalent in other currencies) of the aggregate liability of any Foreign Subsidiary or other trade letter of credit facilities permitted by 6.1(b).
(d) ERC Intercompany Payable in the aggregate principal amount of $44,000,000 during the fiscal year ending March 31, 2006 plus an additional $3,000,000 for each fiscal year thereafter. ERC US shall not (i) at any time reduce the outstanding principal amount of the ERC Intercompany Payable to an amount that is less than $44,000,000 during the fiscal year ended March 31, 2006 plus an additional $3,000,000 for each fiscal year thereafter, and (ii) make any payment with respect thereto at any time during which an Event of Default has occurred and is continuing. None of ER Hong Kong, ER BVI or ER Macao shall effect a Transfer of the ERC Intercompany Payable.
(e) Unsecured Indebtedness not exceeding $500,000 and which has no negative pledge covenant of a Person which becomes a Subsidiary after the date hereof, provided that such Indebtedness existed at the time such Person became a Subsidiary and was not created in anticipation thereof;
(f) Capital Lease Obligations plus purchase money indebtedness existing on the Effective Date plus additional Capital Lease Obligations and purchase money indebtedness provided the aggregate amount of such additional Capital Lease Obligations and purchase money indebtedness does not increase in any fiscal year during the term of this Agreement by more than $500,000 over the amount thereof in the prior fiscal year; and
(g) Contingent Obligations in accordance with Section 6.3 of this Agreement.
Section 6.2 Limitation on Liens.
Create, incur, assume or suffer to exist any Lien upon any of its property, assets (including, without limitation, any Capital Stock of ER Hong Kong, ER BVI, MI, SSG, Emerson Global Limited or ER Macao) or revenues, whether now owned or hereafter acquired, except for:
(a) Liens securing the Obligations.
(b) Liens securing Indebtedness permitted by Section 6.1(f); provided, that, in the case of Liens securing Indebtedness permitted by Section 6.1(f) such Liens shall not encumber any property not financed by such Indebtedness, and in the case of any Liens permitted by Section 6.1(e), such Liens shall not encumber any property owned by any Person other than the new Subsidiary or any property not encumbered by such Lien at the time it was created, such Liens existed at the time such Person became a Subsidiary and were not created in anticipation of the acquisition, and any such Lien does not by its terms secure any Indebtedness other than Indebtedness existing immediately prior to the time such Person becomes a Subsidiary;
(c) Subject to Section 5.9, Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the relevant Person constituting the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP;
(d) carriers', warehousemen's, mechanics', materialmen's, repairmen's, landlords' or other like Liens on inventory and equipment arising in the ordinary course of business which secure amounts not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings provided, the Borrower shall give immediate written notice to the Agent of any action taken by the holder of any such Lien to foreclose or enforce such Lien and shall immediately pay and discharge the same upon notice from the Agent that in the Agent's business judgment such Lien impairs or may impair the Agent's security interest in, or the value of, any Collateral (as defined in any of the Loan Documents);
(e) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements;
(f) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; and
(g) Liens listed on Schedule VII, provided that no such Lien is amended after the date of this Agreement to cover any additional property or to secure additional Indebtedness.
Notwithstanding the termination pursuant to the terms of any Intellectual Property Security Agreement of any Lien on any Intellectual Property of any Person constituting the Borrower, except upon payment in full of the Obligations and termination of the Commitments, no Person constituting the Borrower shall create, incur, assume or suffer to exist any Lien on any Intellectual Property owned by it except in favor of the Agent and the Lenders.
Section 6.3 Limitation on Contingent Obligations.
Create, incur, assume or suffer to exist any Contingent
Obligation, except as permitted by this Agreement, including without limitation,
Section 6.1(b) and 6.1(c), provided, in any case those obligations are not
otherwise prohibited under this Agreement.
Section 6.4 Limitations on Fundamental Changes.
Enter into any merger, consolidation or amalgamation, or (except in the case of Inactive Subsidiaries) liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), reincorporate itself in any other jurisdiction, or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, make, in the case of any Subsidiary Borrower, any amendments to its organizational documents, or make any material change in its present method of conducting business, except:
(a) any Subsidiary of ERC US, other than ER Hong Kong or ER BVI, may be merged or consolidated with or into ERC US (provided that ERC US shall be the continuing or surviving corporation) or with or into any one or more wholly owned Subsidiaries of ERC US other than SSG or any Inactive Subsidiary (provided that the wholly owned Subsidiary or Subsidiaries or the Subsidiary Borrower, if it is a party to such merger or consolidation, shall be the continuing or surviving corporation) and after giving effect to any of such transactions, no Default or Event of Default shall exist; and
(b) any wholly owned Subsidiary of ERC US other than the Foreign Subsidiaries may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to ERC US or any wholly-owned Subsidiary of ERC US other than SSG or any Inactive Subsidiary; and
(c) sales of assets in accordance with Section 6.5 of this Agreement.
Section 6.5 Limitation on Sale of Assets.
Convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets, tangible or intangible, (including, without limitation, Capital Stock of any Person constituting the Borrower (other than Capital Stock of ERC US or SSG, provided the provisions of Section 2.9(f) are complied with), receivables and leasehold interests), whether now owned or hereafter acquired, except:
(a) obsolete or worn out property and property no longer used or useful in such Persons' business disposed of in the ordinary course of business;
(b) the sale of inventory in the ordinary course of business;
(c) the sale or discount without recourse of accounts receivable only in connection with the compromise thereof or the assignment of past-due accounts receivable for collection; and
(d) as otherwise contemplated by Section 6.4 of this Agreement.
Section 6.6 Limitation on Investments, Loans and Advances.
Purchase, hold or acquire beneficially any Capital Stock, other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make or permit to exist any investment or acquire any interest whatsoever in, any other Person, except:
(a) extensions of trade credit to customers in the ordinary course of business provided payment of such trade credit is made on normal business terms.
(b) So long as no Event of Default shall have occurred and be continuing, ERC US may (i) acquire Capital Stock in SSG (provided such Capital Stock of SSG is acquired only with Capital Stock of ERC US and provided giving effect to any such acquisition shall not cause any Person who holds less than 10% (or such greater percentage as the Required Lenders may agree to in writing) of any class of Capital Stock of ERC US on the date hereof to hold more than 10% (or such greater percentage as the Required Lenders may agree to in writing) of any such class of Capital Stock of ERC US; (ii) prior to the Transfer of all of Borrower's Capital Stock of SSG, acquire (A) from Geoffrey Jurick Capital Stock of ERC US having a fair market value of not greater than $8,500,000 and (B) from any other Person that is not an Affiliate of ERC US Capital Stock of ERC US having a fair market value of not greater than $2,500,000, provided that the aggregate cash consideration paid by ERC US for the ERC US Capital Stock acquired pursuant to clauses 6.6(b)(ii)(A) and 6.6(b)(ii)(B) above shall not exceed $7,500,000; and (iii) after the Transfer of all of Borrower's Capital Stock of SSG, acquire (A) from Geoffrey Jurick Capital Stock of ERC US having a fair market value of not greater than $17,800,000 (inclusive of acquisitions from Geoffrey Jurick pursuant to clause 6.6(b)(ii)(A) above) and (B) from any other Person that is not an Affiliate of ERC US Capital Stock of ERC US having a fair market value of not greater than $2,500,000; provided that the aggregate cash consideration paid by ERC US for the ERC US Capital Stock acquired pursuant to clauses 6.6(b)(iii)(A) and 6.6(b)(iii)(B) above shall not exceed $18,500,000); provided, however, that the acquisitions described in clauses 6.6(b)(ii) and 6.6(b)(iii) above shall not be permitted unless the Borrower shall have (A) demonstrated to the Agent, on a pro forma basis, compliance after such acquisitions with the financial covenants set forth in Sections 6.11, 6.12 and 6.13 hereof and (B) in connection with Transfers from Geoffrey Jurick, delivered to Agent the minutes and authorizing resolution of independent directors of ERC US related thereto, together with any reports, pro forma financial statements or other information provided to said independent directors in connection with their consideration of the approval of such Transfers from Geoffrey Jurick, and such other information as the Agent may reasonably require.
(c) Permitted Investments, provided if the Person making the Permitted Investment is organized under the laws of any state of the United States of America, the District of Columbia, Puerto Rico, or any other territory or possession of the United States of America the Agent shall have been granted a first priority perfected security interest therein;
(d) capital contributions, loans and advances by ER Hong Kong, Emerson Global, Ltd., ER Macao and/or ER BVI to ERC US;
(e) loans and advances in the form of cash by any Person constituting the Borrower in an aggregate amount for all Persons constituting Borrower not to exceed $1,000,000 in outstanding principal amount at any time; and
(f) loans and advances between ER Hong Kong, Emerson Global, Ltd., ER Macao and ER BVI in the ordinary course of business.
(g) prior to the occurrence of an Event of Default, advances by any Person constituting the Borrower to Inactive Subsidiaries to pay charges imposed by Governmental Authorities related to the maintenance of such Inactive Subsidiary's corporate existence, such as annual filing and franchise fees and other minimal expenses necessary to maintain such Inactive Subsidiary in good standing.
Section 6.7 Limitation on Optional Payments and Modifications of Debt Instruments.
Make any optional payment or prepayment on or redemption, defeasance or purchase of any Subordinated Debt, or amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms relating to the payment or prepayment or principal of or interest on, any such Indebtedness, other than any amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon.
Section 6.8 Transactions with Affiliates.
Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) not otherwise prohibited under this Agreement, and (b) upon fair and reasonable terms no less favorable to the relevant Person constituting the Borrower, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. Transactions entered into pursuant to the agreements listed on Schedule X are permitted, provided in the case of the management agreements or other transactions with SSG, the net amount owed by SSG at any time shall not exceed $100,000.
Section 6.9 Fiscal Year.
Permit the fiscal year of the Borrower to end on a day other than March 31st of each year.
Section 6.10 Limitation on Conduct of Business.
Enter into any business either directly or through any Subsidiary except for businesses in which ERC US and its Subsidiaries are engaged on the date of this Agreement and business related to such existing businesses.
Section 6.11 Net Worth.
(a) Prior to the Transfer of Borrower's Capital Stock of SSG, permit Consolidated Net Worth at the end of any fiscal quarter of ERC US to be less than the sum of (a) $53,380,000, minus an amount equal to the actual consideration paid in respect of Permitted Additional Share Repurchases, not to exceed $7,500,000 plus (b) 50% of the aggregate, cumulative Consolidated Net Income (but excluding net losses for purposes of this calculation), if any, for each quarter occurring after the Closing Date.
(b) Subsequent to the Transfer of Borrower's Capital Stock of SSG, permit Consolidated Net Worth at the end of any fiscal quarter of ERC US to be less than the sum of (a) an amount equal to (i) 85% of (ii) an amount equal to the Consolidated Net Worth as shown in the financial statements (including, but not limited to, a balance sheet and income statement giving effect to said Transfer) accompanying the ERC US filing with the Securities and Exchange Commission (or analogous Governmental Authority) under "Form 8-K" (or comparable successor form), minus an amount equal the actual consideration paid in respect of Permitted Additional Share Repurchases, not to exceed $9,000,000 (inclusive of consideration paid prior to the Transfer of Borrower's Capital Stock of SSG) plus (b) 50% of the aggregate, cumulative Consolidated Net Income (but excluding net losses for purposes of this calculation), if any, for each quarter occurring after said Transfer; provided however that in no event shall the Consolidated Net Worth requirement as calculated pursuant to this Section 6.11(b) for the fiscal quarter ended immediately subsequent to said Transfer be less than the Consolidated Net Worth requirement as calculated pursuant to Section 6.11(a) hereof for the fiscal quarter ended immediately prior to said Transfer.
Section 6.12 Fixed Charge Coverage Ratio.
Permit the Fixed Charge Coverage Ratio for the period of four consecutive fiscal quarters preceding any date of determination to be less than 1.25 to 1.
Section 6.13 Senior Funded Debt to EBITDA.
(a) Permit the ratio of Senior Funded Debt of ERC US and its
consolidated Subsidiaries to Consolidated EBITDA to be greater than the
following thresholds: (i) 4.00 to 1.00 for the four consecutive fiscal quarters
preceding June 30, 2005; (ii) 4.75 to 1.00 for the four consecutive fiscal
quarters preceding September 30, 2005; (iii) 3.25 to 1.00 for the four
consecutive fiscal quarters preceding December 31, 2005; (iv) 1.75 to 1.00 for
the four consecutive fiscal quarters preceding March 31, 2006; (v) 2.60 to 1.00
for the four consecutive fiscal quarters preceding June 30, 2006; (vi) 3.85 to
1.00 for the four consecutive fiscal quarters preceding September 30, 2006;
(vii) 1.90 to 1.00 for the four consecutive fiscal quarters preceding December
31, 2006; (viii) 1.20 to 1.00 for the four consecutive fiscal quarters preceding
March 31, 2007; (ix) 2.00 to 1.00 for the four consecutive fiscal quarters
preceding June 30, 2007; (x) 3.00 to 1.00 for the four consecutive fiscal
quarters preceding September 30, 2007; (xi) 1.50 to 1.00 for the four
consecutive fiscal quarters preceding December 31, 2007; and (xii) 1.20 to 1.00
for the four consecutive fiscal quarters preceding March 31, 2008.
(b) The foregoing notwithstanding, upon the Transfer of the
Capital Stock of SSG by Borrower, the Borrowers shall not permit the ratio of
Senior Funded Debt of ERC US and its consolidated Subsidiaries to Consolidated
EBITDA to be greater than the following thresholds: (i) 3.50 to 1.00 for the
four consecutive fiscal quarters preceding June 30, 2005; (ii) 3.50 to 1.00 for
the four consecutive fiscal quarters preceding September 30, 2005; (iii) 2.50 to
1.00 for the four consecutive fiscal quarters preceding December 31, 2005; (iv)
1.75 to 1.00 for the four consecutive fiscal quarters preceding March 31, 2006;
(v) 2.10 to 1.00 for the four consecutive fiscal quarters preceding June 30,
2006; (vi) 3.50 to 1.00 for the four consecutive fiscal quarters preceding
September 30, 2006; (vii) 1.60 to 1.00 for the four consecutive fiscal quarters
preceding December 31, 2006; (viii) 1.20 to 1.00 for the four consecutive fiscal
quarters preceding March 31, 2007; (ix) 1.75 to 1.00 for the four consecutive
fiscal quarters preceding June 30, 2007; (x) 2.95 to 1.00 for the four
consecutive fiscal quarters preceding September 30, 2007; (xi) 1.60 to 1.00 for
the four consecutive fiscal quarters preceding December 31, 2007; and (xii) 1.20
to 1.00 for the four consecutive fiscal quarters preceding March 31, 2008.
Section 6.14 Intentionally omitted.
Section 6.15 ERISA Obligations.
Be or become obligated to the PBGC, in any material respect, other than in respect of annual premium payments.
Section 6.16 Restricted Payments.
Make any purchase, redemption or other acquisition of any Capital Stock of ERC US other than as permitted pursuant to Section 6.6(b) hereof. Make any other distribution to holders of the Capital Stock of ERC US, in their capacity as such, except for the issuance of Capital Stock of ERC US in transactions described in the parenthetical contained in Section 2.9(f)(ii) and pursuant to transactions contemplated by Section 6.6(b)(i).
Section 6.17. Anti-Terrorism Laws.
Each Borrower and their respective Affiliates and agents shall not (i) conduct any business or engage in any transaction or dealing with any Blocked Person, including the making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, (ii) deal in, or otherwise engage in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order No. 13224; or (iii) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in the Executive Order No. 13224, the USA Patriot Act or any other Anti-Terrorism Law. The Borrower shall deliver to the Lenders any certification or other evidence requested from time to time by any Lender in its sole discretion, confirming Borrower's compliance with this Section 6.17.
ARTICLE 7.
EVENTS OF DEFAULT
Section 7.1 Events of Default.
If any of the following events (each, an "Event of Default") shall occur and be continuing:
(a) (i) The Borrower shall fail to pay any principal of any Note or the Loans when due in accordance with the terms thereof or hereof; or (ii) the Borrower shall fail to pay any interest on any Note or the Loans, or any other amount payable hereunder, or any Person constituting the Borrower shall fail to pay any net amount due by it under any Lender Hedge Agreement, in each case within two (2) Business Days' after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or
(b) Any representation or warranty made or deemed made by any Person constituting the Borrower or any other party to a Loan Document herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or
(c) Any Person constituting the Borrower shall default in the
observance or performance of any agreement contained in Article 6,
Section 5.1, 5.2, 5.6, 5.7 or 5.11 or in any covenant or agreement in
any Security Document, or in any covenant or agreement in any other
Loan Document which has a grace period expressed with respect thereto;
or
(d) Any Person constituting the Borrower or any other Party to a Loan Document shall default in the observance or performance of any other agreement contained in this Agreement (other than as provided in Sections 7.1(a), (b) or (c)) or any other Loan Document, and such default shall continue unremedied for a period of 30 days, provided, if such Event of Default is not a monetary Event of Default and is capable of cure and the relevant Person is diligently proceeding to cure such Event of Default, such Person shall have an additional thirty (30) days to effect such cure; or
(e) ERC US or any of its Subsidiaries, other than SSG, shall:
(1) default in any payment of principal of or interest on any Indebtedness (other than the Notes) or in the payment of any Contingent Obligation in either case in excess of $500,000, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Contingent Obligation was created; or
(2) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Contingent Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Contingent Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Contingent Obligation to become payable; or
(f) (1) ERC US or any of its Subsidiaries, other than SSG, shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or ERC US or any of its Subsidiaries, other than SSG, shall make a general assignment for the benefit of its creditors; or (2) there shall be commenced against ERC US or any of its Subsidiaries, other than SSG, any case, proceeding or other action of a nature referred to in clause (1) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (3) there shall be commenced against ERC US or any of its Subsidiaries, other than SSG, any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (4) ERC US or any of its Subsidiaries, other than SSG, shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (1), (2) or (3) above; or (5) ERC US or any of its Subsidiaries, other than SSG, shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or
(g) One or more judgments or decrees shall be entered against ERC US or any of its Subsidiaries, other than SSG, involving in the aggregate a liability (not paid or fully covered by insurance) of $900,000 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or
(h) (i) Any Reportable Event, which the Required Lenders determine in good faith (which determination shall be final and conclusive) constitutes grounds for the termination of any Plan or Plans by PBGC or for the appointment by the appropriate United States District Court of a trustee to administer or liquidate any Plan or Plans, shall have occurred and be continuing thirty (30) days after written or telegraphic or telephonic notice to such effect shall have been given to the Borrower by the Agent; or (ii) a decision shall have been made by the Board of Directors (or any committee thereof), any authorized officer or other employee of any Person constituting the Borrower, or any trustee or trustees of any Plan or Plans to terminate any Plan or Plans or to file a termination notice with respect to any Plan or Plans; or (iii) a trustee shall be appointed by the appropriate United States District Court to administer any Plan or Plans, or any Plan or Plans shall be terminated; or (iv) PBGC shall institute proceedings to terminate any Plan or Plans or to appoint a trustee to administer any Plan or Plans; or (v) any Person constituting the Borrower or any ERISA Affiliate shall fail with respect to any Plan or Plans to meet the minimum funding standards established in the Code, or shall obtain a waiver of such minimum funding standards; or (vi) any Person constituting the Borrower or any ERISA Affiliate shall completely or partially withdraw from a Plan; or (vii) any Person constituting the Borrower or any ERISA Affiliate shall make a decision to cease operations at a facility or facilities where such cessation would result in a separation from employment of more than 20% of the total number of employees who are participants under a Plan; where in the case of any one or more of the events described in the preceding clauses (i) through (vii) the aggregate outstanding amount of unfunded vested liabilities under such Plan if a single employer plan (including unfunded vested liabilities which arise or might arise as a result of the termination of or withdrawal from such Plan) or the allocable portion of such outstanding unfunded vested liabilities under a Multiemployer Plan shall exceed (either singly or in the aggregate in the case of any such liability arising out of one or more of the events described in the preceding clauses (i) through (vii) under more than one such Plan) 2% of the Consolidated Tangible Net Worth of ERC US and shall in good faith be determined by the Required Lenders (which determination shall be final and conclusive) to have a Material Adverse Effect; or
(i) A Change in Control shall occur; or
(j) Any Subsidiary of any Person constituting the Borrower shall take any action set forth in Article 6 which the Borrower has undertaken not to permit; or
(k) Any Subsidiary of any Person constituting the Borrower shall fail to take any action set forth in Article 5 which the Borrower has undertaken to cause and such failure shall not be remedied for a period of 30 days; or
(l) An Event of Default under (and as defined in) any other Loan Document shall occur; or
(m) ERC US shall cease to own all of the issued and outstanding Capital Stock of ER Hong Kong (other than the Director Share) or MI, or Paul Gullett, an individual with an office at Suite 3105, Hampton Court, The Gateway, 25-27 Canton Road, Kowloon, Hong Kong 1, or other nominee of ERC US reasonably acceptable to Agent, shall cease to own the Director Share as nominee for ERC US; or
(n) ER Hong Kong shall cease to own all the issued and outstanding Capital Stock of ER BVI; or
(o) any Person shall become a member of the Board of Directors of ER Hong Kong unless simultaneously with becoming a member of said Board of Directors such Person has delivered an ER Hong Kong Director Resignation to the Agent;
(p) Geoffrey P. Jurick shall cease to be the Chairman of the Board and Chief Executive Officer of ERC US or shall own less than 20% of its issued and outstanding common Capital Stock of ERC US; or
then, and in any such event, (A) if such event is an Event of Default specified in clause (1) or (2) of Section 7.1(f) above with respect to any Person constituting the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes shall immediately become due and payable, and (B) if such event is any other Event of Default, any one or more of the following actions may be taken: (i) the Agent may (with the consent of the Required Lenders) and shall (upon the request of the Required Lenders), by written notice to the Borrower, declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; (ii) the Agent may (with the consent of the Required Lenders) and shall (upon the request of the Required Lenders), by written notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable and (iii) the Agent may (with the consent of the Required Lenders) and shall (upon the request of the Required Lenders but subject to the provisions of Article 8), proceed to enforce the rights and remedies of the Secured Party under the Security Documents. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived.
ARTICLE 8.
THE AGENT
Section 8.1 Actions.
Each Lender authorizes the Agent to act on behalf of such Lender under this Agreement, the other Loan Documents and any other related instruments and, in the absence of other written instructions from the Lenders received from time to time by the Agent (with respect to which the Agent agrees that it will, subject to the last two sentences of this Section 8.1, comply in good faith except as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender agrees (which agreement shall survive any termination of this Agreement) to indemnify the Agent, pro rata according to such Lender's Percentage (as defined in Schedule I), from and against any and all liabilities, obligations, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement, the Notes, any of the other Loan Documents and any other related instruments, including, without limitation, the reimbursement of the Agent for all reasonable out-of-pocket expenses (including, without limitation, syndication costs and attorneys' fees) incurred by the Agent hereunder or in connection herewith or in enforcing the obligations of the Borrower or any Lender under this Agreement, under any of the other Loan Documents or any other related instruments, in all cases as to which the Agent is not reimbursed by the Borrower; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, damages, penalties, actions, judgments, suits, costs, expenses or disbursements determined by a court of proper jurisdiction in a final proceeding to have resulted from the Agent's gross negligence or willful misconduct. The Agent shall not be required to take any action hereunder or under any other related instruments, or to prosecute or defend any suit in respect of this Agreement or any such instrument, unless indemnified to its satisfaction by the Lenders against costs, liability, and expense. If any indemnity in favor of the Agent shall become impaired, it may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. The Agent may delegate its duties hereunder to affiliates, agents or attorneys-in-fact selected in good faith by the Agent. Each Lender's obligation to indemnify the Agent as set forth above shall be unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which such Lender may have or have had against the Agent, any other Lender, the Borrower, any Subsidiary or any other Person.
Section 8.2 Exculpation.
The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement. Neither the Agent nor any of its directors, officers, employees, or agents (collectively, the "Related Parties") shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement, the other Loan Documents or any other related instrument, or in connection herewith or therewith, except for its own willful misconduct or gross negligence, nor shall the Agent or any Related Parties be responsible for any recitals or representations or warranties herein or therein, or for the effectiveness, enforceability, validity or due execution of this Agreement, the other Loan Documents or any other related instruments, nor shall the Agent or any Related Parties be obligated to make any inquiry respecting the performance by the Borrower of its obligations hereunder or thereunder. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which it believes to be genuine and to have been presented by a proper Person. The Agent may at any time request instructions from the Lenders with respect to any actions or approvals which, by the terms of this Agreement, the Agent is permitted or required to take or grant, and the Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from taking any action or withholding any approval under this Agreement or any of the other Loan Documents until it has received instructions from the Required Lenders. No Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any of the other Loan Documents in accordance with instructions from the (i) Required Lenders, or (ii) all of the Lenders to the extent required hereunder.
Section 8.3 Successor.
The Agent may resign as such at any time upon at least ten
(10) Business Days' prior notice to the Borrower and all Lenders, and the Agent
may be removed at any time by written notice from the Required Lenders. If the
Agent at any time shall resign or be removed, the Required Lenders may appoint
another Lender as a successor Agent. If the Required Lenders do not make such
appointment within thirty days, the resigning or removed Agent shall appoint a
new Agent from among the Lenders or, if no Lender accepts such appointment, from
among commercial banking institutions or trust institutions generally; provided
such successor agent shall be a domestic commercial bank having a combined
capital and surplus in excess of $500,000,000 and, if not a Lender, shall be
reasonably acceptable to ERC US (ERC US' approval not to be unreasonably
withheld or delayed). Upon the acceptance of any appointment as Agent by a
successor Agent, such successor Agent shall thereupon become the Agent hereunder
and shall be entitled to receive from the prior Agent such documents of transfer
and assignment as such successor Agent may reasonably request, and the resigning
or removed Agent shall (i) be discharged from its duties and obligations under
this Agreement and the other related instruments and (ii) entitled to the
continued benefit of this Article 8 with respect to all actions taken by it
prior to its removal or resignation.
Section 8.4 Credit Decisions.
Each Lender represents and acknowledges to the Agent that it has, independently of the Agent and each other Lender, and based on the financial information referred to in this Agreement and the other Loan Documents and such other documents, information and investigations as it has deemed appropriate, made its own credit decision to enter into this Agreement. Each Lender also acknowledges that it will, independently of the Agent and each Lender, and based on such documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement, the Loan Documents or any other related instruments.
Section 8.5 Notices, etc. from Agent.
The Agent shall give prompt notice to each Lender of each notice or request given to the Agent by the Borrower or by the Agent to the Borrower pursuant to the terms of this Agreement. The Agent will promptly distribute to each Lender each instrument received for its account and copies of all other communications received by the Agent from the Borrower for distribution to the Lenders by the Agent in accordance with the terms of this Agreement.
Section 8.6 Security Documents.
Each Lender hereby authorizes the Agent to enter into the Security Documents and to take all action contemplated thereby. Each Lender hereby confirms its agreement to be bound by the terms and conditions of the Security Documents. Each Lender agrees that no Lender shall have any right individually to seek to realize upon the collateral granted for the benefit of the Lenders pursuant to any of the Security Documents, it being understood and agreed that such rights and remedies may be exercised by the Agent for the benefit of the Agent and the Lenders upon the terms of the Security Documents.
Section 8.7 No Reliance on Agent's Customer Identification Program.
Each Lender acknowledges and agrees that neither such Lender, nor any of its Affiliates, participants or assignees, may rely on the Agent to carry out such Lender's, Affiliate's, participant's or assignee's customer identification program, or other obligations required or imposed under or pursuant to the USA Patriot Act or the regulations thereunder, including the regulations contained in 31 CFR 103.121 (as hereafter amended or replaced, the "CIP Regulations"), or any other Anti-Terrorism Law, including any programs involving any of the following items relating to or in connection with any Borrower, their Affiliates or their agents, the Loan Documents or the transactions hereunder or contemplated hereby: (1) any identity verification procedures, (2) any recordkeeping, (3) comparisons with government lists, (4) customer notices or (5) other procedures required under the CIP Regulations or such other Laws.
ARTICLE 9.
PURCHASING LENDER
Section 9.1 Purchasing Lender.
(a) Each Lender, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time may sell, assign and delegate to any Affiliate of such Lender and/or, with the consent of the Agent and ERC US (which in each case shall not be unreasonably withheld or delayed and shall not be required of ERC US after the occurrence during the continuance of an Event of Default), to one or more additional banks or financial institutions (each, a "Purchasing Lender") all or any part (but not less than $5,000,000 in aggregate of such Lender's rights and obligations under this Agreement, the Notes and the other Loan Documents (provided, that any such sale, assignment and delegation shall be made with respect to each Loan and the Commitment and Term Loan Commitment of such Lender hereunder) pursuant to an agreement ("Assignment and Acceptance") executed by the Purchasing Lender and such Lender. Such Assignment and Acceptance shall specify an effective date which is not less than five Business Days after the date of execution thereof.
Upon such execution, delivery, and acceptance, from and after the effective date determined pursuant to such Assignment and Acceptance and payment by the assigning Lender of a $3,000 administrative fee to the Agent for its own account with respect to each Purchasing Lender party to such Assignment and Acceptance, (A) the Purchasing Lender thereunder shall be a party hereto and, to the extent of the Commitments assigned and Loans sold pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (B) the assigning Lender thereunder shall, to the extent of the Commitments assigned pursuant to such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Such Assignment and Acceptance shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender as a Lender and the resulting adjustment of Commitments arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such assigning Lender under this Agreement and the Notes. On or prior to the effective date determined pursuant to such Assignment and Acceptance, the Borrower, at its own expense, shall execute and deliver to the assigning Lender and Purchasing Lender in exchange for the surrendered Notes, new Notes to the order of such Purchasing Lender in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment hereunder, new Notes to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Notes shall be dated the Closing Date and otherwise shall be in the form of the Notes replaced thereby. The Notes surrendered by the assigning Lender shall be returned to the Borrower marked "replaced." The assigning Lender shall provide the Agent with a copy of each Assignment and Acceptance.
(b) If, pursuant to this Agreement, any interest in this Agreement or any other Loan Documents is assigned to any transferee, or a participation in any interest in this Agreement is given to a transferee, in either case which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such transferee, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Lender (for the benefit of the transferor Lender, the Agent and the Borrower) that under applicable law and treaties no taxes will be required to be withheld by the Agent, the Borrower or the transferor Lender with respect to any payments to be made to such transferee in respect of the Loans, (ii) to furnish to the transferor Lender, the Agent and the Borrower Form W-8ECI or W-8BEN (Ownership Exemption or Reduced Rate Certificate) (wherein such transferee claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder) and (iii) to agree (for the benefit of the transferor Lender, the Agent and the Borrower) to provide the transferor Lender, the Agent and the Borrower a new Form W-8ECI or W-8BEN upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with applicable U.S. laws and regulations and amendments duly executed and completed by such transferee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption.
Section 9.2 Disclosure of Information.
Each Person constituting the Borrower authorizes the Lenders to disclose to any Purchasing Lender and any prospective Purchasing Lender any and all information relating to each Person constituting the Borrower and its Affiliates which has been furnished to the Agent and the Lenders by or on behalf of each Person constituting the Borrower; provided that any such Purchasing Lender agrees to keep any information relating to any Person constituting the Borrower received hereunder confidential except as may be required by any Requirement of Law.
Section 9.3 Pledges to Federal Reserve Bank.
Nothing herein shall prohibit any Lender from pledging or assigning any Note to any Federal Reserve Bank in accordance with applicable law.
ARTICLE 10.
MISCELLANEOUS
Section 10.1 Amendments and Waivers.
(a) No amendment or waiver of any provision of this Agreement, or any of the other Loan Documents, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent, unless in writing and signed by all the Lenders, shall do any of the following: (A) waive any of the conditions specified in Section 4.1 (though the Agent alone may defer the fulfillment of such conditions until the date of the applicable borrowing), (B) increase the amount or extend the term of the Commitments of the Lenders or subject the Lenders to any additional obligations, (C) reduce the principal of, or interest on, the Loans, the Reimbursement Obligations or any of the Notes, or reduce any fees payable hereunder, (D) postpone any date fixed for any payment in respect of principal of, or interest on, the Loans, the Reimbursement Obligations or any of the Notes, as the case may be, or fees payable hereunder, (E) change any of the components which shall be required for the Lenders or any Lender to take any action hereunder, (i.e., the Percentage of the Commitments, or the aggregate unpaid principal amount of the Loans, or the number of Lenders), (F) release all or any substantial portion of the collateral subject to any Security Document except as contemplated by the Intellectual Property Security Agreements and, with respect to intellectual property, the Security Agreements executed and delivered by ERC US and Scott or (G) amend this Section 10.1; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders hereinabove required to take such action, affect the rights or duties of the Agent under this Agreement. Without derogating from the foregoing, no amendment to this Agreement shall be effective unless signed by each Person constituting the Borrower.
(b) The liability of each Person constituting the Borrower hereunder shall be absolute and unconditional irrespective of:
(1) any change in the time, manner, or place of payment or in any other term of, or any other amendment or waiver of, or any consent to departure from any of the Loan Agreement, any of the Loan Documents or any Obligations;
(2) any change in the name, Capital Stock, Certificate of Incorporation or by-laws, as the case may be, of any Person constituting the Borrower;
(3) the insolvency of, or the voluntary or involuntary bankruptcy, assignment for the benefit of creditors, reorganization or other similar proceedings affecting any Person constituting the Borrower or any of their respective assets; or
(4) any other circumstance or claim which might otherwise constitute a defense available to, or a discharge of, any Person constituting the Borrower in respect of the Obligations.
(c) No payment made by any Person constituting the Borrower, or received or collected by the Agent or any of the Lenders, from any Person constituting the Borrower by virtue of any action or proceeding or set-off or application at any time in reduction of or in payment of the Obligations shall be deemed to modify, release or otherwise affect the liability of any Person constituting the Borrower under the Loan Documents. Notwithstanding any such payments received or collected by the Agent or any of the Lenders in connection with the Obligations, each Person constituting the Borrower shall remain liable for the Obligations until all Obligations are paid in full. The joint and several obligation of each Person constituting the Borrower shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Agent or the Lenders upon the insolvency, bankruptcy or reorganization of any Person constituting the Borrower or otherwise, all as though such payment had not been made.
(d) The obligations and liabilities of each Person constituting the Borrower hereunder shall not be released, discharged, limited or in any way affected by anything done, suffered or permitted by the Agent or Lenders in connection with any monies or credit advanced by the Agent or Lenders to any Person constituting the Borrower or any security therefor, including, without limitation, any loss of, or in respect of, any security received by the Agent or any of the Lenders from any Person constituting the Borrower. It is agreed that the Lenders and/or the Agent, without releasing, discharging, limiting or otherwise affecting in whole or in part the obligations and liabilities of any Person constituting the Borrower hereunder, may, without limiting the generality of the foregoing:
(1) grant time, renewals, extensions, indulgences, releases and discharges to any Person constituting the Borrower;
(2) take or abstain from taking security or collateral for the Obligations or from perfecting security or collateral for the Obligations;
(3) release, discharge, compromise or otherwise deal with (with or without consideration) any and all collateral, mortgages, indemnities, guaranties or other security given by any Person constituting the Borrower with respect to the Obligations;
(4) accept compromises from any Person constituting the Borrower;
(5) after an Event of Default, apply all monies at any time received from any Person constituting the Borrower or from any guaranties, indemnities or any collateral upon such part of the Obligations as the Lenders and/or Agent may see fit or change any such application in whole or in part from time to time as the Agent or such Lenders may see fit; or
(6) otherwise deal with each Person constituting the Borrower and all other Persons and collateral as the Lenders and/or Agent may see fit;
(e) neither the Agent nor any of the Lenders shall be bound or obligated to exhaust recourse against any Person constituting the Borrower or other Persons or any security, guarantee, indemnity, mortgage or collateral it may hold or take any other action before being entitled to payment from each Person constituting the Borrower hereunder and each Person constituting the Borrower hereby waives any requirement that would otherwise compel the Agent or the Lenders to do any of the foregoing.
Section 10.2 Notices.
Any notice, request, demand, direction or other communication (for purposes of this Section 10.2 only, a "Notice") to be given to or made upon any party hereto under any provision of this Agreement shall be given or made by telephone or in writing (which includes by means of electronic transmission (i.e., "e-mail") or facsimile transmission). Any such Notice must be delivered to the applicable parties hereto at the addresses and numbers set forth under their respective names on Schedule XI hereof or in accordance with any subsequent unrevoked Notice from any such party that is given in accordance with this Section 10.2. Any notice shall be effective:
(a) In the case of hand-delivery, when delivered;
(b) If given by mail, four days after such Notice is deposited with the United States Postal Service, with first-class postage prepaid, return receipt requested;
(c) In the case of a telephonic Notice, when a party is contacted by telephone, if delivery of such telephonic Notice is confirmed no later than the next Business Day by hand delivery, a facsimile or electronic transmission, or an overnight courier delivery of a confirmatory Notice (received at or before noon on such next Business Day);
(d) In the case of a facsimile transmission, when sent to the applicable party's facsimile machine's telephone number, if the party sending such Notice receives confirmation of the delivery thereof from its own facsimile machine;
(e) In the case of electronic transmission, when actually received.
Any Lender giving a Notice to a Person constituting the Borrower shall concurrently send a copy thereof to the Agent, and the Agent shall promptly notify the other Lenders of its receipt of such Notice, provided that any notice, request or demand to or upon the Agent pursuant to Section 2.3, Section 2.5, Section 2.8, Section 2.9(a) or Section 2.10 shall not be effective until received. Any party may change its address for notices by notice to the other parties hereto in the manner provided in this subsection. Any notice to the Borrower or given by the Borrower shall be binding upon, and deemed received or given by, all Persons constituting the Borrower if given by any Person constituting the Borrower (in the case of notices from the Borrower) or delivered to any Person constituting the Borrower at the address set forth on Schedule XI (or such other address noticed to the Lender as provided herein) and no separate notice to or by any other Person constituting the Borrower shall be necessary for the binding effect or deemed receipt of a notice to or by the Borrower.
Section 10.3 No Waiver; Cumulative Remedies.
(a) No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof.
(b) No single or partial exercise of any right, remedy, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
(c) The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
Section 10.4 Survival of Representations and Warranties.
All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes.
Section 10.5 Payment of Expenses and Taxes. The Borrower shall:
(a) pay or reimburse the Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation and execution of, and any proposed or effective amendment, supplement or modification to, this Agreement and the Notes and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent;
(b) pay or reimburse the Agent and each Lender for all reasonable out-of-pocket costs and expenses incurred by each of them in connection with the enforcement or preservation of any rights under this Agreement, the Notes, the other Loan Documents and any such other documents, including, without limitation, reasonable fees and disbursements of counsel to the Agent and each Lender;
(c) pay, indemnify, and hold the Agent and each Lender harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Notes, the other Loan Documents and any such other documents; and
(d) pay, indemnify, and hold the Agent and each Lender harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions (whether sounding in contract, in tort or on any other ground), judgments, suits, reasonable out-of-pocket costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of, or in any other way arising out of or relating to, (i) this Agreement, the Notes, the other Loan Documents or any other documents contemplated by or referred to herein or therein, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan (including without limitation, any disbursement from the Escrow Fund with respect to the purchase or payment of any Convertible Debentures), (iii) any investigation, litigation or proceeding relating to any acquisition or proposed acquisition by ERC US or any of its Subsidiaries of all or a portion of the Capital Stock or all or substantially all of the assets of any Person, regardless of whether any Lender is a party thereto or (iv)any action taken or omitted to be taken by the Agent or any Lender with respect to any of the foregoing;
(all the foregoing, collectively, the "Indemnified Liabilities"), and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law; provided, that the Borrower shall have no obligation hereunder to the Agent or any Lender with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of the Agent or such Lender. The agreements in this subsection shall survive repayment of the Notes and all other amounts payable hereunder.
Section 10.6 Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent, the Lenders, all future holders of the Notes and their respective successors and assigns, except that no Person constituting the Borrower may assign, transfer or delegate any of their rights or obligations under this Agreement without the prior written consent of the Lenders other than pursuant to the operation of law by reason of a transaction permitted by Section 6.4.
Section 10.7 Setoff/Sharing.
(a) In addition to any rights and remedies of the Agent and Lenders provided by law, each Lender shall have the right, without prior notice to any Person constituting the Borrower, any such notice being expressly waived by each Person constituting the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by any Person constituting the Borrower hereunder or under the Notes or the other Loan Documents (whether at the stated maturity, by acceleration or otherwise) to setoff and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency of such Lender to or for the credit or the account of any Person constituting the Borrower. Each Lender agrees promptly to notify the Borrower and Agent after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application.
(b) Each of the Lenders agree among themselves that with respect to all amounts received by them which are applicable to the payment or satisfaction of all or part of the Loans or Reimbursement Obligations, interest thereon, any fees or any other amount payable hereunder or under the other Loan Documents, equitable adjustment will be made so that, in effect, all such amounts will be shared among the Lenders in proportion to their respective Percentages, whether received by voluntary payment, by the exercise of the right of setoff or banker's lien, by counterclaim or by the enforcement of their rights hereunder or under the other Loan Documents.
(c) If any Lender shall, through the exercise of any right of counterclaim, setoff, banker's lien or otherwise, receive payment or reduction of a proportion of the aggregate amount of the Loans or interest thereon due to such Lender, or any other amount payable hereunder, as the case may be, which is greater than the proportion received by any other Lender or Lenders in respect to the aggregate amount of any Loan or Reimbursement Obligation and interest thereon due such Lender, or with respect to any other amount payable hereunder, that Lender receiving such proportionately greater payment shall notify the other Lenders and the Agent of such receipt and purchase participations (which it shall be deemed to have done simultaneously upon the receipt of such excess payment) in the Loans and Reimbursement Obligations held by the other Lender or Lenders so that all such recoveries of principal and interest with respect to the Loans shall be proportionate to each Lender's respective Percentage; provided that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to the purchasing Lender to the extent of such recovery, together with a pro rata portion (based on the amount of each participation) of the interest thereon (or other amounts), if any, recovered from the purchasing Lender.
(d) The Borrower expressly consents to the arrangement described in this Section 10.7.
Section 10.8 Foreign Subsidiaries.
Notwithstanding anything to the contrary contained herein, the joint and several liability of the Foreign Subsidiaries and the Significant Subsidiaries which are formed in a jurisdiction outside the United States hereunder shall be limited to $5,000,000 of the Obligations outstanding on the Maturity Date or such earlier date (an "Accelerated Maturity Date") to which the maturity of the Obligations is accelerated pursuant to Section 7.1 (and whether denominated as principal, interest, Revolving Credit Loans, Term Loans, or otherwise). It is agreed that no payment of interest on, or principal of, the Revolving Credit Loans or Term Loans by any Person (whether or not a Foreign Subsidiary) prior to the Maturity Date or any Accelerated Maturity Date shall be counted towards, satisfy or discharge such $5,000,000 limit on liability provided, that, on the date the Term Loans, and all accrued and unpaid interest thereon, are paid in full, the Foreign Subsidiaries shall have no further liability for the Obligations. Nothing in this Section 10.8 shall (i) release or impair the validity of the Obligations, (ii) in any way affect or impair any Lien granted pursuant to any Security Document or any other Loan Document, (iii) in any way affect or impair the right of the Agent and the Lenders to foreclose the Security Documents or enforce any other Loan Documents pursuant to the terms thereof or (iv) impair or reduce the liability of ERC US or MI for the whole of the Obligations which liability is unlimited. The establishment of multiple accounts by Persons constituting the Borrower shall not derogate from their joint and several liability for the Obligations as limited by this Section 10.8.
Section 10.9 Judgment Currency/Withholding Tax.
(a) If for the purposes of obtaining a judgment in any court
with respect to any obligation of any Person constituting the Borrower under
this Agreement, the Notes or any other instrument or agreement executed and
delivered by any Person constituting the Borrower in connection therewith it
becomes necessary to convert into any other currency any amount in Dollars due
thereunder, then such conversion shall be made at the buying spot rate of
exchange for freely transferable Dollars at the close of business on the day
before the day on which the judgment is given at the place where such court is
located. If there is a change in such rate of exchange prevailing between the
day before the day on which the judgment is given and the date of the payment
thereof, the Borrower agrees to pay such additional amounts (if any) as may be
necessary to insure that the amount paid on such date is the amount in such
other currency which, when converted at such rate of exchange in effect on the
date of payment, is the amount then due in Dollars. Any amount due under this
Section 10.9 will be due in Dollars. Any amount due under this Section 10.9 will
be due as a separate debt and shall not be affected by or merged into any
judgment being obtained for any other sums due under or in respect of this
Agreement, the Notes or any other instrument or agreement executed and delivered
by any Person constituting the Borrower in connection therewith. In no event,
however, shall the Borrower be required to pay more Dollars at such rate of
exchange when payment is made than the amount of Dollars stated to be due.
(b) If any payment of the Obligations by any Subsidiary Borrower which is organized or located in a jurisdiction outside the United States of America is subject in such jurisdiction to any withholding or other tax, levy, impost, charge, fee, duty or deduction of any kind whatsoever (each, a "Foreign Tax"), the Borrower shall pay to the Agent or Lender, as the case may be, such additional amounts as will result in a net payment to the Agent or such Lender equal to the amount such payee would have received had no such Foreign Tax been imposed.
Section 10.10 Counterparts.
This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
Section 10.11 Severability.
Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
Section 10.12 Integration.
This Agreement represents the agreement of the Borrower, the Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents.
Section 10.13 Governing Law.
This Agreement and the Notes and the rights and obligations of the parties under this Agreement and the Notes shall be governed by, and construed and interpreted in accordance with, the law of the State of New Jersey.
Section 10.14 Submission To Jurisdiction; Waivers.
Each Person constituting the Borrower hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or proceeding relating to or arising out of this Agreement and the other Loan Documents to which it is a party, or the conduct of any party with respect thereto, or for recognition and enforcement of any judgment in respect thereof, to the nonexclusive general jurisdiction of the Courts of the State of New Jersey, the courts of the United States of America for the District of New Jersey, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in such courts and waives to the fullest extent permitted by law any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at the address set forth in Section 10.2 or at such other address of which the Lender shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent permitted by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages.
Section 10.15 Acknowledgments.
Each Person constituting the Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the Notes and the other Loan Documents;
(b) it has not been advised by the Agent or any Lender or their respective counsel as to any tax or other financial implications or consequences of the transactions contemplated by the Loan Documents and each Person constituting the Borrower has made an independent analysis of, and decision with respect to, such matters, relying on its own legal counsel and other professionals. It is further acknowledged that the Agent, the Lenders and their respective counsel had and have no obligation to advise any Person constituting the Borrower with respect to any such matters.
(c) neither the Agent nor any Lender has any fiduciary relationship to any Person constituting the Borrower, and the relationship between the Agent and the Lenders, on one hand, and each Person constituting the Borrower, on the other hand, is solely that of debtor and creditor; and
(d) no joint venture exists among any Person constituting the Borrower, the Agent or any Lender.
Section 10.16 Waivers of Jury Trial.
EACH PERSON CONSTITUTING THE BORROWER, THE AGENT AND EACH LENDER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE NOTES OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
Section 10.17 SSG.
Notwithstanding anything to the contrary contained herein, SSG is not a party hereto and is not obligated in anyway hereunder.
Section 10.18 Affirmation of Obligations
Upon the effectiveness of this Agreement, from and after the Effective Date: (a) the terms and conditions of the Original Credit Agreement shall be amended as set forth herein and, as so amended, shall be restated in their entirety, but only with respect to the rights, duties and obligations among Borrowers, the Lenders and the Agent accruing from and after the Closing Date; (b) this Agreement shall not in any way release or impair the rights, duties, Obligations or Liens created pursuant to the Original Credit Agreement or any other Loan Document (as defined therein) or affect the relative priorities thereof, in each case to the extent in force and effect thereunder as of the Effective Date and except as modified hereby or by documents, instruments and agreements executed and delivered in connection herewith, and all of such rights, duties, Obligations and Liens are assumed, ratified and affirmed by each of the Borrowers and parties to the Loan Documents; (c) all indemnification obligations of the Borrowers and parties to the Loan Documents under the Original Credit Agreement and any other Loan Documents (as defined therein) shall survive the execution and delivery of this Agreement and shall continue in full force and effect for the benefit of the Lenders, the Agent, and any other
Person indemnified under the Original Credit Agreement or any other Loan Document (as defined therein) at any time prior to the Effective Date, (d) the Obligations incurred under the Original Credit Agreement shall, to the extent outstanding on the Effective Date, continue outstanding under this Agreement and shall not be deemed to be paid, released, discharged or otherwise satisfied by the execution of this Agreement, and this Agreement shall not constitute a refinancing, substitution or novation of such Obligations or any of the other rights, duties and obligations of the parties hereunder, and the terms "Obligations" as such term is used in the Loan Documents shall include the Obligations as increased, amended and restated under this Agreement; (e) the execution, delivery and effectiveness of this Agreement shall not operate as a waiver of any right, power or remedy of the Lenders or the Agent (as defined therein) under the Original Credit Agreement, nor constitute a waiver of any covenant, agreement or obligation under the Original Credit Agreement, except to the extent that any such covenant, agreement or obligation is no longer set forth herein or is modified hereby; (f) any and all references to the Original Credit Agreement in any Security Document or other Loan Document shall, without further action of the parties, be deemed a reference to the Original Credit Agreement, as amended and restated by this Agreement, and as this Agreement shall be further amended, restated, supplemented or otherwise modified from time to time, and any and all references to the Security Documents or Loan Documents in any such Security Documents or any other Loan Documents shall be deemed a reference to the Security Documents or Loan Documents under the Original Credit Agreement, as amended and restated by this Agreement, and as this Agreement shall be further amended, restated, supplemented or otherwise modified from time to time; and (g) the Liens granted pursuant to the Security Documents shall continue without any diminution thereof and shall remain in full force and effect on and after the Effective Date.
Section 10.19 USA Patriot Act.
Each Lender or assignee or participant of a Lender that is not incorporated under the laws of the United States of America or a state thereof (and is not excepted from the certification requirement contained in Section 313 of the USA Patriot Act and the applicable regulations because it is both (i) an affiliate of a depository institution or foreign bank that maintains a physical presence in the United states or foreign county, and (ii) subject to supervision by a banking authority regulating such affiliated depository institution or foreign bank) shall deliver to the Agent the certification, or, if applicable, recertification, certifying that such Lender is not a "shell" and certifying to other matters as required by Section 313 of the USA Patriot Act and the applicable regulations: (1) within 10 days after the Effective Date, and (2) as such other times as are required under the USA Patriot Act.
Section 10.20 Joinder to HK Subordination Agreement.
ER Macao, by its signature below, becomes a "Subordinated Creditor" under the HK Subordination Agreement with the same force and effect as if originally named therein as a Subordinated Creditor, and ER Macao hereby agrees to all the terms and provisions of the HK Subordination Agreement applicable to it as a Subordinated Creditor thereunder. Each reference to a "Subordinated Creditor" in the HK Subordination Agreement shall be deemed to include each ER Macao.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.
BORROWERS:
EMERSON RADIO CORP
By: /s/ Guy A. Paglinco
---------------------------------
Name: Guy A. Paglinco
Title: VP-CFO
|
MAJEXCO IMPORTS, INC.
By: /s/ John J. Raab
---------------------------------
Name: John J. Raab
Title: SVP-Int'l
|
EMERSON RADIO (HONG KONG) LIMITED
By: /s/ John J. Raab
---------------------------------
Name: John J. Raab
Title: Director
|
EMERSON RADIO INTERNATIONAL LTD.
By: /s/ John J. Raab
---------------------------------
Name: John J. Raab
Title: Director
|
EMERSON RADIO MACAO
COMMERCIAL OFFSHORE LIMITED
By: /s/ John J. Raab
---------------------------------
Name: John J. Raab
Title: Director
|
LENDERS:
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Jeffrey A. Blakemore
---------------------------------
Jeffrey A. Blakemore
Senior Vice President
|
SOVEREIGN BANK
By: /s/ Chris D. Wolfslayer
--------------------------------
Name: Chris D. Wolfslayer
Title: Vice President
|
AGENT:
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Jeffrey A. Blakemore
--------------------------------
Jeffrey A. Blakemore
Senior Vice President
|
PRICING SCHEDULE
"Applicable Margin", in the case of Revolving Credit Loans, Term Loans, Swing Loans and the Applicable Fee Rate means for any date, the rates set forth below in the row opposite such term and in the column corresponding to the "Pricing Level" that applies at such date:
------------------- ----------------- ----------------- ----------------- -----------------
Level I Level II Level III Level IV
------------------- ----------------- ----------------- ----------------- -----------------
Applicable Plus 1.50% Plus 2.00% Plus 2.50% Plus 3.00%
Eurodollar Margin
------------------- ----------------- ----------------- ----------------- -----------------
Applicable Base 0.0% .50% 1.00% 1.50%
Rate Margin
------------------- ----------------- ----------------- ----------------- -----------------
Applicable Fee .25% .25% .30% .30%
Rate
------------------- ----------------- ----------------- ----------------- -----------------
|
For purposes of this Pricing Schedule, the following terms have the following meanings:
"Level I Pricing" applies at any date if the ratio of Senior Funded Debt to EBITDA on such date is less than 2.00:1.
"Level II Pricing" applies at any date if (i) the ratio of Senior Funded Debt to EBITDA in effect on such date is less than 2.50:1 and (ii) Level I Pricing does not apply.
"Level III Pricing: applies at any date if (i) the ratio of Senior Funded Debt to EBITDA in effect on such date is less than 3.00:1 and (ii) neither Level I Pricing nor Level II Pricing applies.
"Level IV Pricing" applies at any date if, on such date, the ratio of Senior Funded Debt to EBITDA is equal to or greater than 3.00:1.00.
EXHIBIT 21.1
EMERSON RADIO CORP. AND SUBSIDIARIES
EXHIBIT TO FORM 10-K
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF PERCENTAGE OF
NAME OF SUBSIDIARY INCORPORATION OWNERSHIP
------------------ ------------- ---------
Emerson Radio (Hong Kong) Limited. Hong Kong 100.0%*
Emerson Radio International Ltd. British Virgin Islands 100.0%
Sport Supply Group, Inc. Delaware 53.2%
Emerson Global Limited British Virgin Islands 100.0%
|
* One share is owned by a resident director, pursuant to local law.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Emerson Radio Corp. and Subsidiaries
Parsippany, New Jersey
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.33-63515) of Emerson Radio Corp. and Subsidiaries of our report dated May 20, 2005, except Note 6, as to which the date is June 27, 2005, relating to the consolidated financial statements and financial statement schedule of Emerson Radio Corp. and Subsidiaries, which appear in this Form 10-K.
/s/ BDO Seidman, LLP
--------------------
New York, New York
June 29, 2005
|
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No.333-63515) pertaining to the Stock Compensation Program and 1994 Non-Employee Director Stock Option Plan of Emerson Radio Corp. and Subsidiaries of our report dated May 19, 2003, with respect to the consolidated financial statements and schedules of Emerson Radio Corp. and Subsidiaries included in the Annual Report (Form 10-K) for the year ended March 31, 2003.
/s/ Ernst & Young LLP
---------------------
New York, New York
June 27, 2005
|
Exhibit 31.1
CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
I, Geoffrey P. Jurick, certify that:
1. I have reviewed this annual report on Form 10-K of Emerson Radio Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and
c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information: and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: June 29, 2005 /s/ Geoffrey P. Jurick
----------------------
Chairman of the Board,
Chief Executive Officer and President
|
A signed original of this written statement required by Section 302 has been provided to Emerson Radio Corp. and will be retained by Emerson Radio Corp. and furnished to the Securities and Exchange Commission or its staff upon request. Exibit 31.2
EXHIBIT 31.2
CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
I, Guy A. Paglinco, certify that:
1. I have reviewed this annual report on Form 10-K of Emerson Radio Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and
c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: June 29, 2005 /s/ Guy A. Paglinco
-------------------
Vice President and
Chief Financial Officer
|
A signed original of this written statement required by Section 302 has been provided to Emerson Radio Corp. and will be retained by Emerson Radio Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Emerson Radio Corp., (the "Company") on Form 10-K for the period ended March 31, 2005, filed with the Securities and Exchange Commission (the "Report"), Geoffrey P. Jurick, Chief Executive Officer, and Guy A. Paglinco, Chief Financial Officer, of the Company each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.
Dated: June 29, 2005
By: /s/ Geoffrey P. Jurick
----------------------
Geoffrey P. Jurick
Chief Executive Officer
By: /s/ Guy A. Paglinco
-------------------
Vice President and
Chief Financial Officer
|
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Emerson Radio Corp. and will be retained by Emerson Radio Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
EMERSON RADIO CORP. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------------------------------- ------------ -------------- -------------- ------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END OF
DESCRIPTION OF YEAR EXPENSES YEAR (B)
---------------------------------------------------------- ------------ -------------- -------------- ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS/CHARGEBACKS:
Year ended:
March 31, 2005 $ 1,284 $ 257 $ 666 $ 875
March 31, 2004 1,645 849 1,210(A) 1,284(C)
March 31, 2003 2,960 2,546 3,861(A) 1,645
---------------------------------------------------------
SALES RETURN RESERVES:
Year ended:
March 31, 2005 $ 5,030 $ 16,672 $ 16,294 $ 5,408
March 31, 2004 6,061 14,619 15,650 5,030
March 31, 2003 6,072 16,470 16,481 6,061
|
(A) Accounts written off, net of recoveries.
(B) Sales return reserves amounts include related accrued sales returns of $2,136,000, $2,521,000 and $3,768,000, for fiscal 2005, 2004 and 2003, respectively, which are not presented as part of the accounts receivable disclosed as "allowances" on the Consolidated Balance Sheets.
(C) At March 31, 2004, $140,000 relates to SSG discontinued operations which is not included in the allowance for doubtful accounts / chargebacks.