From the 10-K:
During the fourth quarter of fiscal 1997, the Company's cash flow was negatively
impacted by the buildup of a backlog created by manufacturing/sourcing
difficulties for certain products, its inability to air one of its infomercials
due to then pending litigation and the unavailability of inventory, the increase
of product offerings with multi-pay arrangements, increasing domestic
cancellation and return rates and the decline in Asian net revenues.
The Company is currently pursuing a business strategy which concentrates on
targeted expansion and cost reduction and has taken the following steps to
rebuild its business including:
- Restructuring PRTV to focus more on effectively utilizing Mike
Levey's on-air talents. Operations have now been reduced and
refocused with a potential annualized saving in excess of $3.0
million.
- Curtailing long-term or unprofitable media contracts which will
result in a savings of at least $4.0 million on an annualized
basis.
- Pursuing internet and alternative delivery systems, as well as
continuity products, in order to further limit the cyclical nature
of the business.
- Reengineering the corporate structure and reducing the workforce.
- Considering outsourcing management of the Company's information
technology systems.
- Pursuing a strategy to reduce the cost and increase the efficiency
of order fulfillment.
On March 31, 1997, the Company had a total of $13.0 million in outstanding bank
debt and $1.1 million in outstanding letters of credit under its $20.0 million
revolving line of credit (the "Line"). The Line has an expiration date of
September 30, 1997. At June 27, 1997, the Line was being fully utilized.
Interest accrues on the Line at the bank's national commercial rate and is
payable monthly. On a quarterly basis, the Company must be in compliance with
various financial covenants including tangible net worth and working capital
minimums, various financial ratios and capital expenditure limits. At March 31,
1997, the Company was, and at present is, in technical default of various
financial covenants for which the bank has not granted a waiver. The Company
also has an outstanding term loan with the bank in an approximate amount of $3.2
million, net of an $768,000 discount. The term loan is payable in annual
installments of $1.0 million due December 1, 1997 and 1998 with the remaining
balance due September 30, 1999. The term loan also includes the covenants listed
above. As a result of the covenant defaults, the long-term portion of the term
loan has been classified as current at
-24-
<PAGE>
March 31, 1997. The Line and term loan are secured by a lien on substantially
all the assets of the Company and its subsidiaries. Such lien on certain non-
domestic assets of the Company is subordinate to a lien held by Barclays Bank
PLC. At present, the Company has an overdraft line of approximately $1.0 million
with Barclays of which approximately $550,000 is outstanding in early July 1997.
The Company's cash position continues to tighten as a result of the losses being
incurred in early fiscal 1998, the continued downturn in both Japanese and
domestic revenues, the inability of the Company to obtain additional borrowings
and payment of recently negotiated legal settlements. The Company expects to
report losses for the first quarter of fiscal 1998 and expects to incur losses
in the second quarter of fiscal 1998. The Company's inability to refinance its
existing debt or obtain additional debt or equity financing may have a further
material adverse effect on the Company's operating results and financial
condition.
The Company continues to negotiate with its principal lenders regarding an
extension of the Line, as well as exploring additional sources of financing with
other financial institutions; however, there can be no assurance that the Line
will be extended or a replacement lender located. In addition, the Company has
retained Lehman Brothers, as a financial advisor, to assist it in continuing
discussions regarding potential strategic partnerships and other matters with
several interested parties.
The Company faced significant difficulty during the latter half of its 1997
fiscal year and while these difficulties are expected to continue throughout the
first half of fiscal 1998, management of the Company believes that cash flow
from operations in fiscal 1998 will benefit from the aforementioned strategy.
Management will continue to identify and implement additional cost reduction
measures. The Company's ability to continue as a going concern is dependent on
its ability to implement the plans and actions described above, to return the
Company to profitability, and to improve its liquidity and/or obtain additional
capital through new debt financings or equity investments. No assurance can be
given that any of these actions will be successful. In addition, issuance of
additional equity would have a dilutive effect upon existing shareholders.
------------------
And the dreaded "4th paragraph" of the auditor's report reads:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
$45,691,000 and experienced negative cash flows from operations for the year
ended March 31, 1997 and is party to significant pending litigation. In
addition, the Company has not complied with certain covenants of its loan
agreements. These conditions have impaired the Company's liquidity and may cause
it to be unable to meet its obligations as they become due. These conditions
raise substantial doubt as to the Company's ability to continue as a going
concern. Management's plans regarding these conditions are discussed in Note 1.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the possible outcome of
these uncertainties. |
