SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-07731
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EMERSON RADIO CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-3285224
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Entin Road Parsippany, New Jersey 07054
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(Address of principal executive offices) (Zip code)
(973) 884-5800
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
[ ] Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of common stock as of
August 11, 2006: 27,064,832.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
Three Months Ended
--------------------------------------
June 30, 2006 June 30, 2005
------------- -------------
NET REVENUES $ 55,389 $ 38,647
COSTS AND EXPENSES:
Cost of sales 47,840 32,914
Other operating costs and expenses 1,599 1,199
Selling, general and administrative expenses
(exclusive of non-cash compensation shown below) 5,334 3,839
Acquisition costs 21 --
Non-Cash compensation 105 82
-------- --------
54,899 38,034
-------- --------
OPERATING INCOME 490 613
Interest (income) expense, net (105) 407
-------- --------
INCOME BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 595 206
Provision for income taxes 14 62
-------- --------
INCOME FROM CONTINUING OPERATIONS 581 144
-------- --------
Income from discontinued
operations, net of tax -- 272
-------- --------
NET INCOME $ 581 $ 416
======== ========
BASIC NET INCOME PER SHARE:
Continuing operations $ 0.02 $ 0.01
Discontinued operations -- 0.01
-------- --------
$ 0.02 $ 0.02
======== ========
DILUTED NET INCOME PER SHARE:
Continuing operations $ 0.02 $ 0.01
Discontinued operations -- 0.01
-------- --------
$ 0.02 $ 0.02
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 27,065 27,172
Diluted 27,142 27,226
The accompanying notes are an integral part of the interim consolidated
financial statements.
2
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, 2006 March 31, 2006
------------- --------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 15,269 $ 17,517
Restricted cash 3,000 3,000
Accounts receivable (less allowances of $5,219 and $4,770, respectively) 29,327 18,996
Other receivables 1,604 1,427
Inventories 41,128 33,003
Prepaid expenses and other current assets 3,100 3,694
Deferred tax assets 4,350 4,350
--------- ---------
TOTAL CURRENT ASSETS 97,778 81,987
Property, plant and equipment, net 2,540 2,500
Trademarks and other intangible assets, net 403 442
Deferred tax assets 6,861 6,861
Other assets 591 712
--------- ---------
TOTAL ASSETS $ 108,173 $ 92,502
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 2,543 $ 1,841
Current maturities of long-term borrowings 127 85
Accounts payable and other current liabilities 32,091 18,121
Accrued sales returns 1,763 1,583
Income taxes payable 121 142
--------- ---------
TOTAL CURRENT LIABILITIES 36,645 21,772
Long-term borrowings 687 575
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; 52,900,797 and 52,900,297 shares issued,
27,064,832 and 27,064,332 shares outstanding, respectively 529 529
Capital in excess of par value 117,190 117,085
Accumulated other comprehensive losses (70) (70)
Accumulated deficit (25,894) (26,475)
Treasury stock, at cost, 25,835,965 shares (24,224) (24,224)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 71,141 70,155
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 108,173 $ 92,502
========= =========
The accompanying notes are an integral part of the interim consolidated
financial statements.
3
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
---------------------------
June 30, June 30,
2006 2005
---- ----
Cash Flows from Operating Activities:
Income from continuing operations $ 581 $ 144
Adjustments to reconcile income from continuing operations to net cash used by
continuing operations:
Depreciation and amortization 266 209
Non cash compensation 105 82
Deferred tax expenses -- 99
Asset allowances, reserves and other 890 (184)
Changes in assets and liabilities:
Restricted cash -- (2,120)
Accounts receivable (11,065) (172)
Other receivables (177) (978)
Inventories (8,101) (7,105)
Prepaid expenses and other current assets 594 232
Other assets 100 (448)
Accounts payable and other current liabilities 13,970 1,318
Income taxes payable (21) (38)
-------- --------
Operating cash flow used by continuing operations (2,858) (8,961)
-------- --------
Operating cash flow used by discontinued operations -- (53)
-------- --------
Net cash (used) by operating activities (2,858) (9,014)
-------- --------
Cash Flows from Investing Activities:
Additions to property and equipment (continuing operations) (67) (118)
Investing activities of discontinued operations -- (77)
-------- --------
Net cash (used) by investing activities (67) (195)
-------- --------
Cash Flows from Financing Activities:
Short-term borrowings 42 --
Net borrowings under line of credit facility 702 10,819
Purchase of treasury stock -- (392)
Long-term borrowings -- 3,496
Repayments of long-term borrowings (67) (3,800)
-------- --------
Financing activities of continuing operations 677 10,123
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Financing activities of discontinued operations -- (143)
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Net cash provided by financing activities 677 9,980
-------- --------
Net increase (decrease) in cash and cash equivalents (2,248) 771
Cash and cash equivalents at beginning of period 17,517 2,954
-------- --------
Cash and cash equivalents at end of period (including cash of discontinued
operations of $0 and $864,000, respectively) $ 15,269 $ 3,725
======== ========
Supplemental disclosures of non-cash investing and financing activities:
The Company has entered into certain capital lease agreements. For the three
month period ended June 30, 2006 the Company entered into agreements related
to approximately $179,000 of equipment, which is excluded from the statement
of cash flow as the transaction was non-cash in nature. There were no such
transactions during the three month period ended June 30, 2005.
The accompanying notes are an integral part of the interim consolidated
financial statements.
4
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Emerson
Radio Corp. ("Emerson", consolidated - the "Company"), which operates in the
consumer electronics business. On July 1, 2005, Emerson sold its 53.2% ownership
in Sport Supply Group, Inc. ("SSG"), which was previously reported as the
Company's Sporting Goods Segment, to Collegiate Pacific Inc. ("Collegiate") for
net proceeds of $30.7 million, after disposition costs, which resulted in a net
gain of $12.6 million, or $0.47 per share, that was reported in the Company's
results for the quarter ended September 30, 2005. Such gain was net of total
estimated income taxes of $4.2 million. As a result of the sale, the financial
position and results of operations of SSG have been presented as discontinued
operations for all prior year periods shown in the accompanying financial
statements (see Note 10), and the Company now operates in one segment, the
consumer electronics segment. The consumer electronics business includes the
design, sourcing, importing and marketing of a variety of consumer electronic
products and the licensing of the "[EMERSON LOGO]" trademark
for a variety of products domestically and internationally to certain licensees.
The unaudited interim consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present a fair statement of our consolidated financial position as
of June 30, 2006 and the results of operations for the three month periods ended
June 30, 2006 and June 30, 2005. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of the
unaudited interim consolidated financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes; actual results could materially differ from
those estimates. The unaudited interim consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and accordingly do not include all of the disclosures
normally made in our annual consolidated financial statements. Accordingly,
these unaudited interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
fiscal year ended March 31, 2006 ("fiscal 2006"), included in our annual report
on Form 10-K, as amended, for fiscal 2006.
Due to the seasonal nature of Emerson's business, the results of
operations for the three month period ended June 30, 2006 are not necessarily
indicative of the results of operations that may be expected for any other
interim period or for the full year ending March 31, 2007 ("fiscal 2007").
Certain reclassifications were made to conform the prior year's
financial statements to the current presentation.
5
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 fiscal
2005. 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 approximately $105,000 and $82,000 in income from
continuing operations for the three months ended June 30, 2006 and June 30,
2005, respectively.
NOTE 2 - COMPREHENSIVE INCOME
Comprehensive income for the three months ended June 30, 2006 and June
30, 2005 is as follows (in thousands):
Three Months Ended
---------------------------------
June 30
---------------------------------
2006 2005
--------------- --------------
(Unaudited)
Income from continuing operations $ 581 $ 144
Recognition of realized losses in net income 3 --
Change in unrealized (loss) gain
on securities, net (3) 15
------- -------
Comprehensive income $ 581 $ 159
======= =======
NOTE 3 - NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three Months Ended
--------------------------
June 30
--------------------------
2006 2005
------------ ----------
(Unaudited)
NUMERATOR:
Net earnings from continuing
operations for basic and
diluted earnings per share $ 581 $ 144
======= =======
DENOMINATOR:
Denominator for basic earnings
per share - weighted average
shares 27,065 27,172
Effect of dilutive securities:
Options and warrants 77 54
------- -------
Denominator for diluted
earnings per share -
weighted average shares and
assumed conversions 27,142 27,226
======= =======
Earnings from continuing operations
Basic and diluted earnings per
share $ 0.02 $ 0.01
======= =======
6
NOTE 4- SHAREHOLDERS' EQUITY
Outstanding capital stock at June 30, 2006 consists of common stock and
Series A convertible preferred stock from which the conversion feature expired
effective March 31, 2002.
At June 30, 2006, Emerson has outstanding approximately 627,000 options
with exercise prices ranging from $1.00 to $3.28.
In September 2003, the Company publicly announced the Emerson Radio
Corp. common stock repurchase program. The program provides for share repurchase
of up to 2,000,000 shares of Emerson's outstanding common stock. As of June 30,
2006, the Company has repurchased 1,267,623 shares under this program. During
the quarter ended June 30, 2006, there were no shares repurchased under this
program. Repurchases of the Company's shares are subject to certain conditions
under Emerson's banking facility.
On October 7, 2003, in connection with a consulting arrangement, the
Company 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 June 30,
2006, these warrants had not been exercised.
On August 1, 2004, in connection with a consulting agreement, the
Company 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 quarter ended September 30, 2004. As of June 30,
2006, these warrants have not been exercised.
NOTE 5 - INVENTORY
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. As of June 30, 2006 and March
31, 2006, inventories consisted of the following (in thousands):
7
June 30, 2006 March 31, 2006
-------------- ------------------
(Unaudited)
Finished goods $ 42,517 $ 34,416
Less inventory allowances (1,389) (1,413)
-------- --------
Net Inventory $ 41,128 $ 33,003
======== ========
NOTE 6 - INCOME TAXES
The Company has tax net operating loss carry forwards included in net
deferred tax assets that are available to offset future taxable income and can
be carried forward for 15 to 20 years. Although realization is not assured,
management believes it is more likely than not that all of the net deferred tax
assets will be realized through tax planning strategies available in future
periods and through future profitable operating results. The amount of the
deferred tax asset considered realizable could be reduced or eliminated if
certain tax planning strategies are not successfully executed or estimates of
future taxable income during the carryforward period are reduced. If management
determines that the Company 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.
In August, 2006, the Company was notified by the Franchise Tax Board of
the State of California that it had suspended in California the rights, powers
and privileges of a predecessor company on account of its failure to pay state
taxes, interest and penalties for tax years from 1979 to 1989 in the aggregate
amount of approximately $5.1 million. The Company is not able at this time to
determine the amount (if any) of such claim which is properly due and payable.
NOTE 7 - RELATED PARTY TRANSACTIONS
On December 5, 2005, Grande Holdings Limited ("Grande") purchased
approximately 37% (10,000,000 shares) of the Company's outstanding common stock
from our former Chairman and Chief Executive Officer, Geoffrey P. Jurick. In
January 2006, Emerson commenced leasing office space and procuring services in
connection with this office space rental in Hong Kong from Grande on terms which
Emerson management believes reflect arms length transactions. For the first
quarter of fiscal 2007 Emerson incurred expenses with Grande for such fees
approximating $87,000 under these arrangements. Since the initial purchase of
common stock from Mr. Geoffrey P. Jurick, Grande has increased its holdings of
Emerson Radio Corp. common stock to approximately 49.5%, as of the date of this
filing.
NOTE 8 - BORROWINGS
SHORT-TERM BORROWINGS
Short-term borrowings consist of amounts outstanding under the
Company's foreign bank facilities held by its foreign subsidiaries. Availability
under this facility totals $22.3 and $23.3 million as of June 30, 2006 and March
31, 2006, and is maintained by the pledge of bank deposits of approximately $3.0
million for each period shown in the following table. These compensating amounts
are legally restricted from use for general business purposes and are classified
as restricted cash in the current asset section of the balance sheet.
8
June 30, 2006 March 31, 2006
------------- --------------
(In thousands)
(Unaudited)
Foreign bank loans $2,543 $1,841
====== ======
LONG-TERM BORROWINGS
As of June 30, 2006 and March 31, 2006, borrowings under long-term
facilities consisted of the following:
June 30, 2006 March 31, 2006
------------- --------------
(In thousands)
(Unaudited)
Mortgage payable $ 623 $ 641
Capitalized lease obligations and other 191 19
----- -----
814 660
Less current maturities (127) 85
----- -----
Long term debt and notes payable $ 687 $ 575
===== =====
Emerson Credit Facility - On December 23, 2005, Emerson entered into a
$45.0 million Revolving Credit Agreement with Wachovia Bank. The loan agreement
provides for a $45.0 million revolving line of credit for revolving loans
subject to individual maximums which, in the aggregate, are not to exceed the
lesser of $45 million or a "Borrowing Base" as defined in the loan agreement.
The Borrowing Base amount is established by specified percentages of eligible
accounts receivables and inventories and bears interest ranging from Prime
(0.00% as of June 30, 2006) plus 0.00% to 0.50% or, at Emerson's election, LIBOR
(1.25% as of June 30, 2006) plus 1.25% to 2.25% depending on excess
availability. Pursuant to the Revolving Credit 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 leverage financial covenants. Amounts outstanding under the loan
agreement will be secured by substantially all of Emerson's tangible assets.
As of June 30, 2006, there were no borrowings outstanding under the
facility and Emerson was in compliance with the covenants contained in the loan
agreement.
As of June 30, 2006, the carrying value of this credit facility
approximated fair value.
9
NOTE 9 - LEGAL PROCEEDINGS
Putative Class Actions
On December 15, 2005, Jeffrey S. Abraham, as Trustee of the Law Offices
of Jeffrey S. Abraham Money Purchase Plan dated December 31, 1999 F/B/O Jeffrey
S. Abraham ("Plaintiff"), on behalf of himself and all common shareholders of
Sport Supply Group, Inc. ("Sport Supply"), filed a putative class action and
derivative complaint against Emerson, Geoffrey P. Jurick, Arthur J. Coerver,
Harvey Rothenberg, Collegiate Pacific, Inc. and Michael J. Blumenfeld and
nominal defendant Sport Supply in the Court of Chancery of the State of
Delaware, Civil Action No. 1845-N.
The complaint asserted two causes of action: The first cause of action
was a purported class claim against Emerson and Mr. Jurick for breach of
fiduciary duty to the minority shareholders of Sport Supply by selling Emerson's
controlling stake in Sport Supply to Collegiate at a premium, allegedly knowing
that Collegiate intended to use for its own benefit the proprietary assets of
Sport Supply. The second cause of action asserts a purported derivative claim
against Collegiate and Messrs. Coerver and Rothenberg for alleged breaches of
fiduciary duty and unjust enrichment. Plaintiff alleges that in connection with
the purchase of Emerson's controlling block of Sport Supply's stock, Collegiate
and Messrs. Coerver and Rothenberg breached their fiduciary duties of loyalty
and good faith to Sport Supply's shareholders by transferring assets and
technology to Collegiate without compensation to Sport Supply's shareholders.
Plaintiff further alleges that Collegiate was unjustly enriched through the use
and transfer of Sport Supply's assets.
Emerson and Mr. Jurick moved to dismiss the first cause of action, and
oral argument on their motion was conducted on June 23, 2006. On July 5, 2006,
the court granted Emerson and Mr. Jurick's motion and the first cause of action
was dismissed. Based on the expectation that Emerson and Mr. Jurick would
prevail in their defense, no loss was accrued in this matter as of June 30,
2006.
For more than two-and-a-half years, Emerson has been defending a
consolidated putative class action captioned In Re Emerson Radio Corp.
Securities Litigation, 03cv4201 (JLL) (the "Consolidated Action") filed in the
United States District Court for the District of New Jersey. The class action
complaint asserted claims against Emerson and Messrs. Geoffrey Jurick, Kenneth
Corby, John Raab and Jerome Farnum (the "Individual Defendants") on behalf of
purchasers of Emerson's publicly traded securities between January 29, 2003 and
August 12, 2003 (the "Class Period"). By a December 19, 2005 Opinion and Order,
the Court granted the defendants' motion to dismiss the complaint without
prejudice and granted the plaintiffs leave to amend their pleading consistent
with the rulings in the Court's Opinion and Order.
10
On March 3, 2006, one of the lead plaintiffs, Clark Niss, moved to
withdraw as a lead plaintiff, which motion was granted on March 29, 2006. On
April 13, 2006, the court entered a Stipulation and Order dismissing all claims
asserted in the class action complaint with prejudice. On April 26, 2006, the
remaining lead plaintiff, Jeffrey Hoffman, filed a Notice of Appeal, taking an
appeal of the court's December 19, 2005 dismissal order to the United States
Court of Appeals for the Third Circuit. Emerson and the Individual Defendants
continue to deny all allegations and intend to defend the appeal vigorously.
Generally, the complaint had alleged 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 thereunder, 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. Based on the expectation that the defendants will ultimately
prevail in their defense, no loss has been accrued in this matter as of June 30,
2006.
Other Matters
The Company is 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 of operations or cash
flows.
NOTE 10 - DISCONTINUED OPERATIONS
On July 1, 2005, Emerson sold its 53.2% interest in SSG to Collegiate.
After disposition costs, Emerson realized and reported in the quarter ended
September 30, 2005, a gain of approximately $12.6 million, net of estimated
deferred taxes of $4.2 million. Proceeds from the sale were used to pay down
$18.5 million of indebtedness.
The following table represents the results of the discontinued
operations, net of minority interest, and net of income taxes for which there
was no provision or recovery in either period.
Three Months Ended
Discontinued Operations(SSG) June 30, 2005
Net revenues $23,218
=======
Operating income 610
=======
Net income $ 272
=======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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 Quarterly Report on Form 10-Q.
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. Accordingly, all amounts are approximations.
FORWARD-LOOKING INFORMATION
COMPANY FILINGS
This report contains 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.
Forward-looking statements include statements with respect to Emerson's
beliefs, plans, objectives, goals, expectations, anticipations, assumptions,
estimates, intentions, and future performance, and involve known and unknown
risks, uncertainties and other factors, which may be beyond Emerson's control,
and which may cause Emerson's actual results, performance or achievements to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements.
All statements other than statements of historical fact are statements
that could be forward-looking statements. You can identify these forward-looking
statements through Emerson's use of words such as "may," "will," "can,"
"anticipate," "assume," "should," "indicate," "would," "believe," "contemplate,"
"expect," "seek," "estimate," "continue," "plan," "project," "predict," "could,"
"intend," "target," "potential," and other similar words and expressions of the
future. These forward-looking statements may not be realized due to a variety of
factors, including, without limitation:
o the loss of any of our key customers or reduction in the purchase
of our products by any such customers;
o the failure to maintain our relationships with our licensees and
distributors or the failure to obtain new licensees or
distribution relationships on favorable terms;
12
o our inability to anticipate market trends, enhance existing
products or achieve market acceptance of new products;
o our dependence on a limited number of suppliers for our
components and raw materials;
o our dependence on third party manufacturers to manufacture and
deliver our products;
o the seasonality of our business, as well as changes in consumer
spending and economic conditions;
o the failure of third party sales representatives to adequately
promote, market and sell our products;
o our inability to protect our intellectual property;
o the effects of competition;
o changes in foreign laws and regulations and changes in the
political and economic conditions in the foreign countries in
which we operate;
o changes in accounting policies, rules and practices; and
o the other factors listed under "Risk Factors" in this Form 10-Q,
as well as our Form 10-K, as amended, for the fiscal year ended
March 31, 2006 and other filings with the Securities and Exchange
Commission (the "SEC").
All forward-looking statements are expressly qualified in their
entirety by this cautionary notice. You are cautioned not to place undue
reliance on any forward-looking statements, which speak only as of the date of
this prospectus or the date of the document incorporated by reference into this
prospectus. We have no obligation, and expressly disclaim any obligation, to
update, revise or correct any of the forward-looking statements, whether as a
result of new information, future events or otherwise. We have expressed our
expectations, beliefs and projections in good faith and we believe they have a
reasonable basis. However, we cannot assure you that our expectations, beliefs
or projections will result or be achieved or accomplished.
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 this website is not incorporated by reference in this report.
13
RESULTS OF OPERATIONS
As a result of the sale of SSG, the results of operations of SSG have
been presented as discontinued operations for all prior year periods presented,
and we now operate in one segment, the consumer electronics segment.
Accordingly, only the consumer electronics segment is presented in the following
Management's Discussion and Analysis.
The following table summarizes certain financial information for the
three month period ended June 30, 2006 (fiscal 2007) and the three month period
ended June 30, 2005 (fiscal 2006) (in thousands):
Three Months Ended
--------------------------------
June 30, 2006 June 30,2005
--------------- ------------
(Unaudited)
Net revenues $ 55,389 $ 38,647
Cost of sales 47,840 32,914
Other operating costs 1,599 1,199
Selling, general and
administrative costs 5,334 3,839
Acquisition costs 21 --
Non-Cash compensation 105 82
-------- --------
Operating income 490 613
Interest (income) expense, net (105) 407
-------- --------
Income before income taxes 595 206
Provision for income taxes 14 62
-------- --------
Net income from continuing operations $ 581 $ 144
======== ========
Net Revenues - Net revenues for the first quarter of fiscal 2007 increased $16.8
million, or 43.3%, to $55.4 million as compared to $38.6 million for the first
quarter of fiscal 2006. 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 variations in net
revenue for the three month periods were comprised of:
i) An increase in revenues from the sale of Emerson(R) branded
product of $17.3 million, or 50.4%, to $51.6 million from $34.3
million for the first quarter of fiscal 2007 as compared to the
same period in fiscal 2006. The increase for the three month
period was primarily due to an increase in the number of units
sold in the microwave category of the Emerson(R) product group
and in addition, new sales from the recent introduction of
iPod(R) compatible products.
14
ii) An increase in themed product sales of $434,000, to $2.3
million in the first quarter of fiscal 2007 from $1.8 million for
the first quarter of fiscal 2006. This revenue increase was the
result of increased sales traction of the Nickelodeon(R) themed
product category.
iii) Licensing revenues decreased by approximately $923,000, or 36.9%,
to approximately $1.5 million for the first quarter of fiscal
2007 from $2.5 million in the first quarter of fiscal 2006. The
decrease for the three month period was primarily due to lower
sales volumes under our video licensing agreement.
Cost of Sales - Cost of sales, as a percentage of net revenues, increased for
the first quarter of fiscal 2007 to 86.4% from 85.2% for the same period of
fiscal 2006. In relative terms, the increase in cost of sales for the three
month period was primarily due to decreased licensing revenues compared to the
same period in the prior year. In absolute terms, costs of sales for the first
quarter of fiscal 2007 increased $14.9 million, or 45.4%, to $47.8 million from
$32.9 million for the same period in fiscal 2006. The cost of sales, as a
percentage of sales revenue less license revenues decreased to 88.8% for the
first quarter of fiscal 2007 as compared to 91.0% for the same period in the
prior year.
Gross profit margins continue to be subject to decreased licensing revenues and
competitive pressures arising from lower pricing of the product categories in
the consumer electronics market in which Emerson competes. Emerson's branded
products are generally placed in the low-to-medium priced category of the
market.
Other Operating Costs and Expenses - Other operating costs and expenses, as a
percentage of net revenues, decreased to 2.9% from 3.1% for the first quarter of
fiscal 2007 compared to the same period of fiscal 2006. In absolute terms, other
operating costs and expenses increased approximately $400,000 to $1.6 million
from $1.2 million for the three month periods of fiscal 2007 and fiscal 2006,
respectively. As a percentage of net revenues, the decrease for the three month
period was primarily due to lower service fees related to inventory and returned
product handling as compared to the increase in sales volumes.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A increased
approximately $1.5 million, or 39.5%, to $5.3 million (9.6% of net revenues)
from $3.8 million (9.9% of net revenues) for the first quarter of fiscal 2007 as
compared to the first quarter of fiscal 2006. The increase in absolute terms for
the three month period of fiscal 2007 compared to fiscal 2006 was primarily due
to an increase of approximately $400,000 for sales commission and freight out
costs related to the increase in sales volume. In addition, advertising
expenditures, professional fees and bad debt expenses increased by approximately
$354,000, $185,000 and $385,000, respectively. These increases were partially
offset by decreases in personnel expenditures of approximately $168,000.
15
Acquisition Costs - Acquisition costs were $21,000 for the first quarter of
fiscal 2007, associated with contemplated acquisition transactions that were not
completed. There were no acquisition costs in the first quarter of fiscal 2006.
Non-Cash Compensation - Non-cash compensation costs relate to stock option
expense associated with the adoption of SFAS 123R "Share-Based Payments." For
the three month periods of fiscal 2007 and fiscal 2006, non-cash compensation
costs were approximately $105,000 and $82,000, respectively.
Interest (Income) Expense, net - In the first quarter of fiscal 2007, the
Company recorded interest income, net of $105,000, an increase of $512,000, over
the first quarter of fiscal 2006, in which we recorded approximately $407,000 in
interest expense, net. The decrease in interest expense was primarily the result
of lower financing activities, as well as increased interest income recorded in
the foreign subsidiaries. The Company utilized cash received from the sale of
SSG for repayments of long-term borrowings during the previous fiscal year.
Provision for Income Taxes - Income tax expenses were approximately $14,000 for
the first quarter of fiscal 2007 as compared to $62,000 for the first quarter of
fiscal 2006. The decrease in the tax expense for the three month period was
primarily the result of lower pre-tax profit in our domestic subsidiary as
compared to the same period in fiscal 2006.
Income From Continuing Operations - As a result of the foregoing factors, net
income from continuing operations amounted to approximately $581,000 (1.1%
of net revenues) for the first quarter of fiscal 2007 as compared to $416,000
(1.1% of net revenues) for the same period of fiscal 2006.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, we had cash and cash equivalents of approximately
$15.3 million compared to approximately $17.5 million at March 31, 2006. Working
capital increased to $61.1 million at June 30, 2006 as compared to $60.2 million
at March 31, 2006. The decrease in cash and cash equivalents of approximately
$2.2 million was primarily due to increases in cash used by operating
activities, offset by cash provided from investing activities, as described
below.
Cash flows used by continuing operating activities were approximately
$2.9 million for fiscal 2007, primarily related to an increase in accounts
payable and accrued liabilities of $14.0 million, an increase in asset
allowances and other reserves of $0.9 million and operating income of $0.6
million, offset by an increase in accounts receivable of $11.1 and inventories
of $8.1 million. Both the increases in accounts payable and accrued liabilities
and accounts receivable are primarily due to the increased sales volumes over
the prior quarter. The increase in inventory was due to the seasonal nature of
the business, as well as the continuing shift from the direct import to domestic
business which creates a growing need for inventory at domestic locations.
16
Net cash used by investing activities was approximately $67,000 in
fiscal 2007, which consisted primarily of tools and equipment acquisitions.
Net cash provided by financing activities was approximately $677,000 in
fiscal 2007, primarily due to the increased foreign borrowings.
On December 23, 2005, Emerson entered into a $45.0 million Revolving
Credit Agreement with Wachovia Bank, National Association. The loan agreement
provides for a $45 million revolving line of credit. The $45.0 million revolving
line of credit replaced Emerson's prior $35.0 million credit facility which
contained substantially the same terms and conditions as the Revolving Credit
Agreement. The $45.0 million revolving line of credit facility provides for
revolving loans subject to individual maximums which, in the aggregate, are not
to exceed the lesser of $45 million or a "Borrowing Base" as defined in the loan
agreement. The Borrowing Base amount is established by specified percentages of
eligible accounts receivables and inventories and bears interest ranging from
Prime plus 0.00% to 0.50% or, at Emerson's election, LIBOR plus 1.25% to 2.25%
depending on excess availability. Pursuant to the 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 leverage financial covenants. Amounts outstanding under the loan
agreement will be secured by substantially all of Emerson's tangible assets.
As of June 30, 2006, there were no borrowings outstanding under the
facility and Emerson was in compliance with the covenants contained in the loan
agreement. The loan agreement expires in December 2010, and accordingly, all
amounts outstanding under this facility have been presented as long-term.
Our foreign subsidiaries maintain various credit facilities,
aggregating $18.7 million, consisting of the following:
o Two letter of credit facilities totaling $11.2 million which are
used for inventory purchases; and
o Two back-to-back letter of credit facilities totaling $7.5
million.
At June 30, 2006, our foreign subsidiaries pledged approximately $3.0
million in certificates of deposit to this bank to assure the availability of
the $11.2 million of credit facilities. The compensating amount of $3.0 million
of restricted cash is legally restricted from use for general business purposes.
At June 30, 2006, there were approximately $6.5 million of letters of credit
outstanding under these credit facilities.
17
We believe that our present cash position, future cash flow from
operations and our existing institutional financing noted above will be
sufficient to fund all of our cash requirements for the next twelve months.
The following summarizes our obligations at June 30, 2006 for the
periods shown (in thousands):
PAYMENT DUE BY PERIOD
-----------------------------------------------------------------------------------------
LESS THAN
TOTAL 1 YEAR 1 - 3 YEARS 3 - 5 YEARS MORE THAN 5 YEARS
------------- ----------------- ------------------ ------------------ -------------------
Notes and
mortgages payable $ 623 $ 74 $ 148 $ 148 $ 253
Capital lease
obligations 191 53 94 44 --
Leases 6,208 1,596 2,900 1,712 --
------ ------ ------ ------ ------
Total $7,022 $1,723 $3,142 $1,904 $ 253
====== ====== ====== ====== ======
There were no material capital expenditure commitments and no
substantial commitments for purchase orders outside the normal purchase orders
used to secure product as of June 30, 2006.
CRITICAL ACCOUNTING POLICIES
For the three month period ended June 30, 2006, there were no
significant changes to our accounting policies from those reported in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2006.
INFLATION, FOREIGN CURRENCY, AND INTEREST RATES
Neither inflation nor currency fluctuations had a significant effect on
our results of operations during the first quarter of fiscal 2007. Our exposure
to currency fluctuations has been minimized by the use of U.S. dollar
denominated purchase orders. We purchase virtually all of our products from
manufacturers located in China.
The interest on any borrowings under our credit facilities would be
based on the prime and LIBOR rate. We believe that given the present economic
climate, interest rates, while expected to rise, are not expected to increase
significantly during the coming year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes from items disclosed in Form
10-K for the fiscal year ended March 31, 2006.
18
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures.
During the three month period of fiscal 2007, our management, including
the principal executive officer and principal financial officer, evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) related to the recording, processing,
summarization and reporting of information in our reports that we file with the
SEC. These disclosure controls and procedures have been designed to ensure that
material information relating to us, including our subsidiaries, is made known
to our management, including these officers, by other of our employees, and that
this information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the SEC's rules and forms. Due
to the inherent limitations of control systems, not all misstatements may be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Our controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been met.
Based on their evaluation as of June 30, 2006, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) are effective to reasonably ensure that the
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC 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 Quarterly
Report on Form 10-Q relates that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Putative Class Actions
On December 15, 2005, Jeffrey S. Abraham, as Trustee of the Law Offices
of Jeffrey S. Abraham Money Purchase Plan dated December 31, 1999 F/B/O Jeffrey
S. Abraham ("Plaintiff"), on behalf of himself and all common shareholders of
Sport Supply Group, Inc. ("Sport Supply"), filed a putative class action and
derivative complaint against Emerson, Geoffrey P. Jurick, Arthur J. Coerver,
Harvey Rothenberg, Collegiate Pacific, Inc. and Michael J. Blumenfeld and
nominal defendant Sport Supply in the Court of Chancery of the State of
Delaware, Civil Action No. 1845-N.
The complaint asserted two causes of action: The first cause of action
was a purported class claim against Emerson and Mr. Jurick for breach of
fiduciary duty to the minority shareholders of Sport Supply by selling Emerson's
controlling stake in Sport Supply to Collegiate at a premium, allegedly knowing
that Collegiate intended to use for its own benefit the proprietary assets of
Sport Supply. The second cause of action asserts a purported derivative claim
against Collegiate and Messrs. Coerver and Rothenberg for alleged breaches of
fiduciary duty and unjust enrichment. Plaintiff alleges that in connection with
the purchase of Emerson's controlling block of Sport Supply's stock, Collegiate
and Messrs. Coerver and Rothenberg breached their fiduciary duties of loyalty
and good faith to Sport Supply's shareholders by transferring assets and
technology to Collegiate without compensation to Sport Supply's shareholders.
Plaintiff further alleges that Collegiate was unjustly enriched through the use
and transfer of Sport Supply's assets.
Emerson and Mr. Jurick moved to dismiss the first cause of action, and
oral argument on their motion was conducted on June 23, 2006. On July 5, 2006,
the court granted Emerson and Mr. Jurick's motion and the first cause of action
was dismissed. Based on the expectation that Emerson and Mr. Jurick would
prevail in their defense, no loss was accrued in this matter as of June 30,
2006.
For more than two-and-a-half years, Emerson has been defending a
consolidated putative class action captioned In Re Emerson Radio Corp.
Securities Litigation, 03cv4201 (JLL) (the "Consolidated Action") filed in the
United States District Court for the District of New Jersey. The class action
complaint asserted claims against Emerson and Messrs. Geoffrey Jurick, Kenneth
Corby, John Raab and Jerome Farnum (the "Individual Defendants") on behalf of
purchasers of Emerson's publicly traded securities between January 29, 2003 and
August 12, 2003 (the "Class Period"). By a December 19, 2005 Opinion and Order,
the Court granted the defendants' motion to dismiss the complaint without
prejudice and granted the plaintiffs leave to amend their pleading consistent
with the rulings in the Court's Opinion and Order.
20
On March 3, 2006, one of the lead plaintiffs, Clark Niss, moved to
withdraw as a lead plaintiff, which motion was granted on March 29, 2006. On
April 13, 2006, the court entered a Stipulation and Order dismissing all claims
asserted in the class action complaint with prejudice. On April 26, 2006, the
remaining lead plaintiff, Jeffrey Hoffman, filed a Notice of Appeal, taking an
appeal of the court's December 19, 2005 dismissal order to the United States
Court of Appeals for the Third Circuit. Emerson and the Individual Defendants
continue to deny all allegations and intend to defend the appeal vigorously.
Generally, the complaint had alleged 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 thereunder, 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. Based on the expectation that the defendants will ultimately
prevail in their defense, no loss has been accrued in this matter as of June 30,
2006.
For other information on litigation to which the Company is a party,
reference is made to Part 1 Item 3 - Legal Proceedings in our most recent annual
report on Form 10-K.
ITEM 1.A RISK FACTORS.
There were no changes in any risk factors previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2006, as amended.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
SHARE REPURCHASES:
For the quarter ended June 30, 2006, we did not repurchase any shares
under 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 June 30, 2006
quarter, the Company repurchased 1,267,623 shares under this program. As of June
30, 2006, the maximum number of shares that are available to be repurchased
under Emerson Radio Corp.'s common share repurchase program was 732,377.
21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) None
(b) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS.
10.31 Letter re: Employment Agreement between Emerson Radio Corp. and
John D. Florian, effective as of May 10, 2006.
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
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERSON RADIO CORP.
-------------------
(Registrant)
Date: August 21, 2006 /s/ Adrian Ma
-------------------
Adrian Ma
Chief Executive Officer
(Principal Executive Officer)
Date: August 21, 2006 /s/ John D. Florian
-------------------
John D. Florian
Deputy Chief Financial Officer and
Controller
(Principal Financial and Accounting Officer)
23