SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,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 JuneSeptember 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,November 10,
2006: 27,064,832.27,089,832.
PART I - FINANCIAL INFORMATION
ITEMItem 1. FINANCIAL STATEMENTS.Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
Three Months Ended
--------------------------------------
JuneTHREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 June 30, 2005 ------------- -------------2006 2005
-------- -------- -------- --------
NET REVENUES $ 55,38999,588 $ 38,64777,576 $154,829 $116,223
COSTS AND EXPENSES:
Cost of sales 47,840 32,914COST OF SALES 86,678 68,108 134,518 101,022
Other operating costs and expenses 1,599 1,1991,426 1,641 3,025 2,840
Selling, general and administrative
expenses (exclusive of non-cash
compensation shown below) 5,334 3,8395,620 5,383 10,806 9,222
Acquisition costs -- -- 21 --
Non-CashNon-cash compensation 105 82(recovered) (50) 88 55 170
-------- -------- 54,899 38,034-------- --------
93,674 75,220 148,425 113,254
-------- -------- -------- --------
OPERATING INCOME 490 6135,914 2,356 6,404 2,969
Interest (income) expense, net (105) 407212 199 107 606
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 595 2065,702 2,157 6,297 2,363
Provision for income taxes 14 621,898 883 1,912 945
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 581 1443,804 1,274 4,385 1,418
-------- -------- -------- --------
Income from discontinued
operations, net of tax -- -- -- 272
Gain on sale of Sport Supply
Group, Inc., net of tax -- 12,646 -- 12,646
-------- -------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS -- 12,646 -- 12,918
-------- -------- -------- --------
NET INCOME $ 5813,804 $ 41613,920 $ 4,385 $ 14,336
======== ======== ======== ========
BASIC NET INCOME PER SHARE:
Continuing operations $ 0.020.14 $ 0.010.05 $ 0.16 $ 0.05
Discontinued operations -- 0.010.47 -- 0.48
-------- -------- -------- --------
$ 0.020.14 $ 0.020.52 $ 0.16 $ 0.53
======== ======== ======== ========
DILUTED NET INCOME PER SHARE:
Continuing operations $ 0.020.14 $ 0.010.05 $ 0.16 $ 0.05
Discontinued operations -- 0.010.46 -- 0.48
-------- -------- -------- --------
$ 0.020.14 $ 0.020.51 $ 0.16 $ 0.53
======== ======== ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 27,065 27,17227,077 27,048 27,071 27,109
Diluted 27,142 27,22627,106 27,177 27,123 27,201
The accompanying notes are an integral part of the interim consolidated
financial statements.
2
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)(In thousands)
JuneSEPTEMBER 30, 2006 MarchMARCH 31,
2006 2006
------------- -----------------------
ASSETS (Unaudited)(UNAUDITED)
Current Assets:assets:
Cash and cash equivalents $ 15,2694,842 $ 17,517
Restricted cash 3,000 3,000
Accounts receivable (less allowances of $5,219$5,084 and
$4,770, respectively) 29,32759,493 18,996
Other receivables 1,6041,757 1,427
Inventories 41,12851,135 33,003
Prepaid expenses and other current assets 3,1004,593 3,694
Short term deposits 28,767 --
Deferred tax assets 4,3503,730 4,350
--------- ---------
TOTAL CURRENT ASSETS 97,778Total current assets 157,317 81,987
Property, plant and equipment, net 2,5402,410 2,500
Trademarks and other intangible assets, net 403363 442
Deferred tax assets 6,8615,974 6,861
Other assets 59176 712
--------- ---------
TOTAL ASSETSTotal assets $ 108,173166,140 $ 92,502
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:liabilities:
Short-term borrowings $ 2,54327,391 $ 1,841
Current maturities of long-term borrowings 127126 85
Accounts payable and other current liabilities 32,09161,262 18,121
Accrued sales returns 1,7631,561 1,583
Income taxes payable 121509 142
--------- ---------
TOTAL CURRENT LIABILITIES 36,645Total current liabilities 90,849 21,772
Long-term borrowings 687655 575
Shareholders' Equity: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; 52,900,79752,925,797 and 52,900,297 shares issued,
27,064,83227,089,832 and 27,064,332 shares outstanding, respectively 529 529
Capital in excess of par value 117,190117,188 117,085
Accumulated other comprehensive losses (70)(77) (70)
Accumulated deficit (25,894)(22,090) (26,475)
Treasury stock, at cost, 25,835,965 shares (24,224) (24,224)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 71,141Total shareholders' equity 74,636 70,155
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITYTotal liabilities and shareholders' equity $ 108,173166,140 $ 92,502
========= =========
The accompanying notes are an integral part of the interim consolidated
financial statements. Certain reclassifications were made to conform the prior
year's financial statements to the current presentation.
3
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)(Unaudited)
(In thousands)
Three Months Ended
---------------------------
JuneSIX MONTHS ENDED
SEPTEMBER 30
June 30,---------------------
2006 2005
---- ------------ --------
Cash Flowsflows from Operating Activities:operating activities:
Income from continuing operations $ 5814,385 $ 1441,418
Adjustments to reconcile income from continuing operations
to net cash used by continuing operations:
Depreciation and amortization 266 209298 374
Non cash compensation 105 8255 170
Deferred tax expenses -- 991,507 700
Asset allowances, reserves and other 890 (184)1,298 1,207
Changes in assets and liabilities:
Restricted cash -- (2,120)250
Accounts receivable (11,065) (172)(41,776) (31,698)
Other receivables (177) (978)(330) (542)
Inventories (8,101) (7,105)(18,173) (4,616)
Prepaid expenses and other current assets 594 232(899) 392
Deposits (28,767) --
Other assets 100 (448)595 (375)
Accounts payable and other current liabilities 13,970 1,31843,139 23,510
Income taxes payable (21) (38)367 223
-------- --------
Operating cash flow used(used) by continuing operations (2,858) (8,961)
-------- --------(38,301) (8,987)
Operating cash flow used(used) by discontinued operations -- (53)
-------- --------
Net cash (used) by operating activities (2,858) (9,014)(38,301) (9,040)
-------- --------
Cash Flowsflows from Investing Activities:investing activities:
Additions to property and equipment (continuing operations) (67) (118)(88) (358)
Investing activities of discontinued operations -- (77)
Proceeds from sale of SSG, net of tax 30,980
-------- --------
Net cash (used) provided by investing activities (67) (195)(88) 30,545
-------- --------
Cash Flowsflows from Financing Activities:financing activities:
Short-term borrowings 4224,086 7,500
Repayments of short-term borrowings -- (7,500)
Net borrowings (repayments) under line of credit facility 702 10,8191,505 (8,151)
Purchase of treasury stock -- (392)
Exercise of stock options 50 --
Long-term borrowings -- 3,49616,782 173
Repayments of long-term borrowings (67) (3,800)(16,709) (5,000)
-------- --------
Financing activities of continuing operations 677 10,123
-------- --------25,714 (13,370)
Financing activities of discontinued operations -- (143)
-------- --------
Net cash provided (used) by financing activities 677 9,98025,714 (13,513)
-------- --------
Net (decrease) increase (decrease) in cash and cash equivalents (2,248) 771(12,675) 7,992
Cash and cash equivalents at beginning of period 17,517 2,954
-------- --------1,817
Cash and cash equivalents at end of period (including cash of discontinued
operations of $0 and $864,000, respectively) $ 15,2694,842 $ 3,7259,809
======== ========
Supplemental disclosures of non-cash investing and financing activities:
The Company has entered into certain capital lease agreements. For the threesix month
period ended JuneSeptember 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 threesix month period ended JuneSeptember 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)(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 "[EMERSONEMERSON(R) 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 JuneSeptember 30, 2006 and the results of operations for the three and six month
periods ended JuneSeptember 30, 2006 and JuneSeptember 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 and six month periodperiods ended JuneSeptember 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 a recovery
of non-cash compensation costs of approximately $105,000 and $82,000 in income from
continuing operations$50,000 for the three monthsmonth
period ended JuneSeptember 30, 2006 compared to non-cash compensation expenses of
$88,000 for the corresponding period of the previous fiscal year, and $55,000
and $170,000 in non-cash compensation costs for the six month period ended
September 30, 2006 and JuneSeptember 30, 2005, respectively.
NOTE 2 - COMPREHENSIVE INCOME
Comprehensive income for the three monthsand six month periods ended
JuneSeptember 30, 2006 and JuneSeptember 30, 2005 is as follows (in thousands):
Three Months Ended
---------------------------------
JuneTHREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 ---------------------------------SEPTEMBER 30
2006 2005 --------------- --------------
(Unaudited)2006 2005
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Income from continuing operations $ 5813,804 $ 1441,274 $ 4,385 $ 1,418
Recognition of realized losses in
net income -- -- 3 --
Change in unrealized (loss) gain on
securities, net (3)(7) -- (10) 15
------- ------- ------- -------
Comprehensive income $ 5813,797 $ 1591,274 $ 4,378 $ 1,433
======= ======= ======= =======
6
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
--------------------------
JuneTHREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 --------------------------SEPTEMBER 30
2006 2005 ------------ ----------
(Unaudited)2006 2005
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
NUMERATOR:
Numerator:
Net earnings from continuing
operations for basic and
diluted earnings per share $ 5813,804 $ 1441,274 $ 4,385 $ 1,418
======= ======= DENOMINATOR:======= =======
Denominator:
Denominator for basic earnings
per share - weighted average
shares 27,065 27,17227,077 27,048 27,071 27,109
Effect of dilutive securities:securities
on denominator:
Options and warrants 77 5429 129 52 92
------- ------- ------- -------
Denominator for diluted
earnings per share -
weighted average shares and
assumed conversions 27,142 27,22627,106 27,177 27,123 27,201
======= ======= ======= =======
Earnings from continuing operations
Basic and diluted earnings per
share $ 0.020.14 $ 0.010.05 $ 0.16 $ 0.05
======= ======= ======= =======
6
NOTE 4- SHAREHOLDERS' EQUITY
Outstanding capital stock at JuneSeptember 30, 2006 consists of common
stock and Series A convertible preferred stock. The Series A convertible
preferred stock from which the conversion feature expired
effectiveis non-voting, has no dividend preferences and has not been
convertible since March 31, 2002.2002; it retains a liquidation preference.
At JuneSeptember 30, 2006, Emerson hashad approximately 502,000 options
outstanding approximately 627,000 options with exercise prices ranging from $1.00 to $3.28.$3.26.
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 JuneSeptember
30, 2006, the Company has repurchased 1,267,623 shares under this program.
During the quarter and year-to-date periods ended JuneSeptember 30, 2006, there were
no shares repurchased under this program. No shares have been repurchased under
the program since June 14, 2005. Repurchases of the Company's shares are subject
to certain conditions under Emerson's banking facility.
7
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
JuneSeptember 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.fiscal 2005. As of JuneSeptember 30, 2006, these warrants
havehad 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 JuneSeptember 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 $ 41,128SEPTEMBER 30, MARCH 31,
2006 2006
-------------- -----------
(Unaudited)
Finished goods $ 52,589 $ 34,416
Less inventory allowances (1,454) (1,413)
-------- --------
Net inventory $ 51,135 $ 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.
8
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 itsdue to that predecessor's failure to pay
state taxes, interest and penalties for tax years from 1979 to 1989 in the
aggregate amountamounts 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, the 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. Since
the initial purchase of common stock, Grande has increased its holdings of
Emerson Radio Corp. common stock through open market purchases to approximately
50.9%, as of the date of this filing.
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 2007Under
these arrangements, Emerson incurred expenses with Grande of approximately
$105,000 and $235,000 for such fees
approximating $87,000 underthe three and six month periods ended September 30,
2006, respectively.
Emerson, Grande and Capetronic Displays Limited ("Capetronic"), a
subsidiary of Grande, have a prearranged sales agreement totaling 40,040 units
of 42" plasma televisions which will result in net revenues of $32.9 million and
approximately $1 million in net income from continuing operations during fiscal
2007. In September 2006, 25,340 of these arrangements. Sinceunits were shipped and $20.8 million
and $253,000 was recorded in net revenues and net income, respectively, for the
initial purchasesecond quarter of common stockfiscal 2007. Component parts valued at approximately $6.5
million were purchased by Emerson from Mr. Geoffrey P. Jurick, Grande hasCapetronic. Inventory purchases related
to this sales agreement were purchased from an unrelated party and were funded
with cash on hand and increased its holdingsborrowings. This sales agreement is part of Emerson Radio Corp. common stock to approximately 49.5%, asa
major holiday promotional sale with one of the date of this
filing.our major customers.
9
NOTE 8 - BORROWINGS
SHORT-TERM BORROWINGSShort-term Borrowings
Short-term borrowings consist of amounts outstanding under the
Company's foreign bank facilities held by its foreign subsidiaries.subsidiaries and current
amounts outstanding under our Revolving Credit Agreement with Wachovia Bank.
(See Note 8 - Borrowings, Long-term borrowings) Availability under this facilitythe foreign
bank facilities totals $22.3$17.5 and $23.3 million as of JuneSeptember 30, 2006 and
March 31, 2006, and is maintained by the pledge of bank deposits of
approximately $3.0 millionmilion 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 BORROWINGSThe current revolver balance of $24.0 million pertains to
parts and inventory purchases primarily for promotional item sales recorded near
the end of the second quarter of fiscal 2007. As of Junethe date of this filing, the
outstanding revolver balance has subsequently been returning to normal seasonal
business levels.
SEPTEMBER 30, MARCH 31,
2006 2006
----------- -----------
(IN THOUSANDS)
(UNAUDITED)
Revolving line of credit $24,045 $ ---
Foreign bank loans 3,346 1,841
----------- -----------
Short term borrowings $27,391 $1,841
Long-term Borrowings
As of September 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
===== =====
SEPTEMBER 30, MARCH 31,
2006 2006
------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Mortgage payable $ 604 $ 641
Capitalized lease obligations
and other 177 19
-------- --------
781 660
Less current maturities (126) (85)
-------- --------
Long term debt and notes payable $ 655 $ 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%(8.25% as of JuneSeptember 30, 2006) plus 0.00% to 0.50% or, at Emerson's
election, LIBOR
(1.25%the London Interbank Offered Rate ("LIBOR" which was 1.25% as of
JuneSeptember 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.
AsDuring the quarter ended September 30, 2006, Emerson amended
its Revolving Credit Agreement with Wachovia Bank, National Association to
finance its working capital requirements through October 31, 2006, primarily to
ensure funding of Junethe promotional item purchases totaling over $30.0 million.
Under this amendment, Emerson's line of credit was increased to $53 million from
$45 million for this period; and its revolver commitments, letters of credit and
inventory borrowing bases were increased. Emerson did not utilize the additional
available funds during the amendment period, and this amendment expired at
October 31, 2006.
10
At September 30, 2006, there were noapproximately $24.0 million
of borrowings outstanding under the facility and Emerson was in compliance with
the covenants contained in the loan agreement. Emerson has elected to pay
interest at the LIBOR rate plus a 1.25% margin, the effective interest rate on
such borrowings was 6.58% at September 30, 2006.
As of JuneSeptember 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 shareholdersstockholders 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 againstalleged, among other things, that Emerson and Mr. Jurick for breach ofbreached their
fiduciary duty to the minority shareholdersstockholders of Sport Supply by sellingwhen they sold
Emerson's controlling stake in Sport Supply to Collegiate atfor 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.premium. Emerson and Mr.
Jurick moved to dismiss the first cause of action,claims asserted against them, and oral argument on their motion was conducted on June 23, 2006. On July 5, 2006,
the court granted Emerson and Mr. Jurick'stheir motion and the first cause of action
was dismissed. Based on the expectation thatclaims against Emerson and Mr. Jurick
would
prevail in their defense, no loss was accrued in this matter aswere dismissed.
In March of June 30,
2006.
For more than two-and-a-half years, Emerson has been defending2004, a
consolidated putative class action captioned In Re Emerson Radio
Corp. Securities Litigation, 03cv4201 (JLL) (the "Consolidated Action")was filed in the United States
District Court for the District of New Jersey. The class action complaint
asserted various securities-related claims against Emerson and Messrs. Geoffrey Jurick,
Kenneth Corby, John Raab and Jerome Farnum (the "Individual Defendants") on behalf of
purchasersrelating to certain of Emerson's
publicly traded securities between January 29, 2003public disclosures. Emerson and August 12, 2003 (the "Class Period"). By athe other defendants moved to dismiss the
complaint, and on 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
prejudice. 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'sCourt's
December 19, 2005 dismissal order to the United States Court of Appeals for the
Third Circuit. On September 11, 2006, the remaining lead plaintiff voluntarily
dismissed the appeal. Accordingly, the putative class action litigation against
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 theother defendants will ultimately
prevail in their defense, no loss has been accrued in this matter as of June 30,
2006.favorably concluded.
11
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
=======
11THREE MONTHS SIX MONTHS
ENDED ENDED
DISCONTINUED OPERATIONS(SSG) SEPTEMBER 30, 2005
---------------------------------
Net revenues $ -- $23,218
Operating income -- 610
Gain on sale of SSG, net of tax 12,646 12,646
Net income $12,646 $12,918
12
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;
13
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 prospectusreport or
the date of the document incorporated by reference into this prospectus.report. 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.
COMPANY FILINGS
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.WWW.EMERSONRADIO.COM. The
information contained in this website is not incorporated by reference in this
report.
1314
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 and six month periodperiods ended JuneSeptember 30, 2006 (fiscal 2007) and
the three and six month periodperiods ended JuneSeptember 30, 2005 (fiscal 2006) (in
thousands):
Three Months Ended
--------------------------------
JuneTHREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 June 30,2005
--------------- ------------
(Unaudited)2005 2006 2005
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Net revenues $ 55,38999,588 $ 38,64777,576 $154,829 $116,223
Cost of sales 47,840 32,91486,678 68,108 134,518 101,022
Other operating costs 1,599 1,1991,426 1,641 3,025 2,840
Selling, general and
administrative costs 5,334 3,8395,620 5,383 10,806 9,222
Acquisition costs -- -- 21 --
Non-CashNon-cash compensation
105 82costs (recovered) (50) 88 55 170
-------- -------- -------- --------
Operating income 490 6135,914 2,356 6,404 2,969
Interest (income) expense, net (105) 407212 199 107 606
-------- -------- -------- --------
Income from continuing operations
before income taxes 595 2065,702 2,157 6,297 2,363
Provision for income taxes 14 621,898 883 1,912 945
-------- -------- Net income-------- --------
Income from continuing
operations $ 5813,804 $ 1441,274 $ 4,385 $ 1,418
======== ======== ======== ========
Net Revenues - Net revenues for the firstsecond quarter of fiscal 2007 increased
$16.8$22.0 million, or 43.3%28.4%, to $55.4$99.6 million as compared to $38.6$77.6 million for the
firstsecond quarter of fiscal 2006. For the six month period of fiscal 2007, net
revenues increased $38.6 million, or 33.2%, to $154.8 million from $116.2
million for the six month period of fiscal 2006. Net revenues are comprised of
Emerson(R) branded product sales, promotional item 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; promotional
item sales include various sales programs of specific models or products based
on customer specifications; 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 and six month periods were comprised of:
i) An increase in revenues from the sale of Emerson(R) branded product
of $17.3$13.6 million, or 50.4%26.7%, to $51.6$64.6 million from $34.3$51.0 million for
the firstsecond quarter of fiscal 2007 as compared to the same period in
fiscal 2006. Revenues for the six month period of fiscal 2007 of
Emerson(R) branded product increased $30.7 million, or 36.0%, to
$116.0 million from $85.3 million for the same period is fiscal
2006. The increase for the three and six month periodperiods was primarily
due to an increase in the number of units sold in the microwave
category of the Emerson(R) product group and an increase in addition, new sales from the recent introduction of
iPod(R) compatible products.
1415
ii) AnDuring the second quarter of fiscal 2007, Emerson had promotional
item sales totaling $20.8 million. This sales agreement represents a
major holiday promotion with one of our major customers and will
result in total net revenues of $32.9 million in fiscal 2007. In
addition to this increase in net revenues, this promotional sale
resulted in an increase in accounts payable and other current
liabilities and accounts receivable of $20.6 million and $20.8
million, respectively, as well as an increase in short term deposits
of $28.8 million due to parts and inventory purchases related to
this sale. In order to fund these purchases, short term borrowings
through our revolving line of credit increased by $24.0 milion for
the period ended September 30, 2006. As of the date of this filing,
the outstanding balances in accounts payable and other current
liabilities, accounts receivable, short term deposits and short term
borrowings have subsequently been returning to normal seasonal
business levels. There were no promotional item sales during fiscal
2006.
iii) A decrease in themed product sales of $434,000,$11.9 million, or 48.4%, to
$2.3$12.7 million in the firstsecond quarter of fiscal 2007 from $1.8$24.6
million for the firstsecond quarter of fiscal 2006. For the six month
period of fiscal 2007, themed product sales totaled $15.0 million
compared to $26.4 million for the same period in fiscal 2006, a
decrease of $11.4 million, or 43.2%. This revenue increasedecrease was the
result of increaseddecreased unit sales traction of the Nickelodeon(R) themed product
category.
iii)iv) Licensing revenues decreased by approximately $923,000,$530,000, or 36.9%26.5%,
to approximately $1.5 million for the firstsecond quarter of fiscal 2007
from $2.5$2.0 million in the firstsecond quarter of fiscal 2006. For the six
month period of fiscal 2007, licensing revenues decreased by
approximately $1.5 million, or 33.3%, to $3.0 million as compared to
$4.5 million for the six month period of fiscal 2006. The decreasedecreases
for the three and six month period wasperiods were primarily due to lower
sales volumes under our video licensing agreement.
Cost of Sales - Cost of sales, as a percentage of net revenues, increaseddecreased for
the firstsecond quarter of fiscal 2007 to 86.4%86.8% from 85.2%87.8% for the same period of
fiscal 2006, and to 86.7% from 86.9% for the six month period of fiscal 2007
compared to the same period of fiscal 2006. In relative terms, the increasedecrease in
cost of sales for the three and six month periodperiods was primarily due to decreased licensing revenues compared to the
same periodincreased
sales in the prior year.our higher margin iPod(R) compatible product category. In absolute
terms, costs of sales for the firstsecond quarter of fiscal 2007 increased $14.9$18.6
million, or 45.4%27.3%, to $47.8$86.7 million from $32.9$68.1 million for the same period in
fiscal 2006. For the six month period of fiscal 2007, cost of sales increased
$33.5 million, or 33.2%, to $134.5 million from $101.0 million for the same
period of fiscal 2006. The cost of sales as a percentage of sales revenuerevenues less
license revenues decreased to 88.8%88.1% and 88.4% for the first quarterthree and six month
periods of fiscal 2007, respectively, as compared to 91.0%90.1% and 90.4% for the
same period in the
prior year.three and six month periods of fiscal 2006.
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.
16
Other Operating Costs and Expenses - Other operating costs and expenses, as a
percentage of net revenues, decreased to 2.9%1.4% from 3.1%2.1% for the firstsecond quarter
of fiscal 2007 compared to the same period of fiscal 2006, and decreased to 2.0%
for the six month period of fiscal 2007 compared to 2.4% for the same period in
fiscal 2006. In absolute terms, other operating costs and expenses increased approximately $400,000decreased to
$1.4 million from $1.6 million ($215,000 or 13.4%) and increased to $3.0 million
from $1.2$2.8 million ($185,000 or 6.6%) for the three and six month periods of
fiscal 2007 and fiscal 2006, respectively. As a percentage of net revenues, the
decrease for the three and six month periodperiods 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,$237,000, or 39.5%4.4%, to $5.3$5.6 million (9.6%(5.6% of net revenues) from
$3.8$5.4 million (9.9%(6.9% of net revenues) for the firstsecond quarter of fiscal 2007 as
compared to the firstsecond quarter of fiscal 2006. For the six month period of
fiscal 2007, S,G&A expenses increased $1.6 million, or 17.4%, to $10.8 million
(7.0% of net revenues) from $9.2 million (7.9% of net revenues) in fiscal 2006.
For the second quarter of fiscal 2007, the increase in absolute terms compared
to fiscal 2006 was primarily due to an increase of approximately $212,000 for
sales commissions and freight out costs related to the increase in sales
volumes. In addition, advertising expenditures and bad debt expenses increased
by approximately $110,000 and $357,000, respectively. These increases were
partially offset by decreases in personnel expenditures of approximately
$310,000, as well as decreases in various other costs. The increase in absolute
terms for the threesix month period of fiscal 2007 compared to fiscal 2006 was
primarily due to an increase of approximately $400,000 for salesincreased commission and freight out
costs related to the increase in sales volume. In addition,inventory carrying expenditures of
$595,000, advertising expenditures, professional feesexpenses of $311,000, and bad debt expenses increased by approximately
$354,000, $185,000 and $385,000, respectively.of $742,000.
These increases were partially offset by decreases in personnel expenditurespayroll bonus costs of
approximately $168,000.
15
$505,000 and a gain on sale of real property of approximately
$198,000.
Acquisition Costs - AcquisitionThe Company recorded acquisition costs wereof approximately
$21,000 forin the first quarter of fiscal 2007, associated with contemplated
acquisition transactions that were not completed. There were no acquisition
costs in the first or second quarter of fiscal 2006.
Non-Cash Compensation Costs (Recovered) - Non-cash compensation costs relate to
stock option expense associated with the adoption of SFAS 123R "Share-Based
Payments." For the three month period ending September 30, 2006, adjustments to
non-cash compensation expenses incurred in prior periods were recorded resulting
in a recovery of such costs totaling $50,000, as compared to $88,000 in non-cash
compensation costs recorded for the same period of fiscal 2006. These
adjustments were the result of stock option forfeitures due to senior management
and board of director changes over the past year. For the six month periods,
non-cash compensation costs of approximately $55,000 and $170,000 were recorded
for fiscal 2007 and fiscal 2006, respectively. All non-cash compensation costs
in all periods were approximately $105,000 and $82,000, respectively.associated with stock options.
17
Interest (Income) Expense, net - In the firstsecond quarter of fiscal 2007, the Company
recorded interest income,expense, net, of $105,000,$212,000, an increase of $512,000,$13,000 over the
firstsecond quarter of fiscal 2006, in which we recorded approximately $407,000$199,000 in
interest expense, net. For the six month period of fiscal 2007, the Company
recorded interest expense, net of $107,000, a decrease of approximately $500,000
over the six month period of fiscal 2006, in which we recorded $606,000 in
interest expense, net. The decrease in interest expense, net 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$1.9 million
for the firstsecond quarter of fiscal 2007 as compared to $62,000$883,000 for the firstsecond
quarter of fiscal 2006. For the six month period of fiscal 2007, the provision
for income taxes increased by $967,000 to $1.9 million as compared to $945,000
for the same period in fiscal 2006. The decreaseincrease in the tax expense for the
three and six month periodperiods of fiscal 2007 was
primarily the result of lowerhigher 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%$3.8 million (3.8%
of net revenues) for the firstsecond quarter of fiscal 2007 as compared to $416,000
(1.1%$1.3
million (1.6% of net revenues) for the same period of fiscal 2006. For the six
month period of fiscal 2007, net income from continuing operations totaled
approximately $4.4 million (2.8% of net revenues) as compared to $1.4 million
(1.2% of net revenues) for the six month period of fiscal 2006.
LIQUIDITY AND CAPITAL RESOURCES
As of JuneSeptember 30, 2006, we had cash and cash equivalents of
approximately $15.3$4.8 million compared to approximately $17.5 million at March 31,
2006. Working capital increased to $61.1$66.5 million at JuneSeptember 30, 2006 as
compared to $60.2 million at March 31, 2006. The decrease in cash and cash
equivalents of approximately $2.2$12.7 million was primarily due to increases in
cash used by continuing operating activities of $38.3 million, offset by cash
provided from investing activities of $25.7 million, as described below.
18
Cash flows used by continuing operating activities were approximately
$2.9$38.3 million for fiscal 2007, primarily related to increases in accounts
receivable ($41.8 million), inventories ($18.2 million) and deposits ($28.8
million), offset by an increase in accounts payable and accrued liabilities
($43.1 million) and income from continuing operations ($4.4 million). Due to
foreign purchases of $14.0promotional items, accounts payable and accrued liabilities
and accounts receivable increased in part by approximately $20.6 million anand
$20.8 million, respectively, and deposits increased by $28.8 million. These
increases were a result of a major holiday promotion with one of our major
customers. (See Management's Discussion and Analysis of Results of Operations
and Financial Condition - Results of Operations). In addition, the increase in
asset
allowancesinventories 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 remaining 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 waswere due to the seasonal nature of the
business, as well aswith increased sales volumes over the continuing shift fromprior quarter and increased
domestic inventory purchases related to the direct import to domestic
business which creates a growing need for inventory at domestic locations.
16
upcoming holiday sale season.
Net cash used by investing activities was approximately $67,000$88,000 in
fiscal 2007, which consisted primarily of tools and equipment acquisitions.
Net cash provided by financing activities was approximately $677,000 in$25.7
million for fiscal 2007 due primarily due to the net increase in borrowings needed
to secure the purchase of promotional items as well as purchases related to
increased foreign borrowings.inventory levels for the upcoming holiday selling season.
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.
During the quarter ended September 30, 2006, Emerson amended its
Revolving Credit Agreement with Wachovia Bank, National Association to finance
its working capital requirements through October 31, 2006, primarily to ensure
funding of the promotional item purchases totaling over $30.0 million. Under
this amendment, Emerson's line of credit was increased to $53 million from $45
million for this period; and its revolver commitments, letters of credit and
inventory borrowing bases were increased. Emerson did not utilize the additional
available funds during the amendment period, and this amendment expired at
October 31, 2006.
19
As of JuneSeptember 30, 2006, there were noapproximately $24.0 million in
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,Due to the fact that the outstanding
revolver balance has been returning to normal seasonal business levels as of the
date of this filing, all amounts outstanding under this facility have been
presented as long-term.short-term in the accompanying financial statements.
Our foreign subsidiaries maintain various credit facilities,
aggregating $18.7$17.5 million, consisting of the following:
o Two letter of credit facilities totaling $11.2$10.0 million which are
used for inventory purchases; and
o Two back-to-back letter of credit facilities totaling $7.5 million.
At JuneSeptember 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$10.0 million of credit facilities. The compensating amount of $3.0
million of restricted cash is legally restricted from use for general business
purposes. At JuneSeptember 30, 2006, there were approximately $6.5$5.9 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 JuneSeptember 30, 2006 for the
periods shown (in thousands):
PAYMENT DUE BY PERIOD
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
LESS THAN 1 - 3 3 - 5 MORE THAN
TOTAL 1 YEAR 1 - 3 YEARS 3 -YEARS 5 YEARS
MORE THAN 5 YEARS
------------- ----------------- ------------------ ------------------ ----------------------------- ---------- ---------- ---------- ----------
Notes and
mortgagesMortgages payable $ 623604 $ 74 $ 148 $ 148 $ 253234
Capital lease
obligations 191 53 94 44177 52 93 32 --
Leases 6,208 1,596 2,900 1,7125,951 1,647 2,952 1,352 --
------ ------ ------ ------ ---------------- ---------- ---------- ---------- ----------
Total $7,022 $1,723 $3,142 $1,904 $ 253
====== ====== ====== ====== ======6,732 $ 1,773 $ 3,193 $ 1,532 $ 234
========== ========== ========== ========== ==========
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 JuneSeptember 30, 2006.
CRITICAL ACCOUNTING POLICIES
For the threesix month period ended JuneSeptember 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.
20
INFLATION, FOREIGN CURRENCY, AND INTEREST RATES
Neither inflation nor currency fluctuations had a significant
effect on our results of operations during the first quarterand second quarters 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 threesix 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 JuneSeptember 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.
21
(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 shareholdersstockholders 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 againstalleged, among other things, that Emerson and Mr. Jurick for breach ofbreached their
fiduciary duty to the minority shareholdersstockholders of Sport Supply by sellingwhen they sold
Emerson's controlling stake in Sport Supply to Collegiate atfor 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.premium. Emerson and Mr.
Jurick moved to dismiss the first cause of action,claims asserted against them, and oral argument on their motion was conducted on June 23, 2006. On July 5, 2006,
the court granted Emerson and Mr. Jurick'stheir motion and the first cause of action
was dismissed. Based on the expectation thatclaims against Emerson and Mr. Jurick
would
prevail in their defense, no loss was accrued in this matter aswere dismissed.
In March of June 30,
2006.
For more than two-and-a-half years, Emerson has been defending2004, a
consolidated putative class action captioned In Re Emerson Radio
Corp. Securities Litigation, 03cv4201 (JLL) (the "Consolidated Action")was filed in the United States
District Court for the District of New Jersey. The class action complaint
asserted various securities-related claims against Emerson and Messrs. Geoffrey Jurick,
Kenneth Corby, John Raab and Jerome Farnum (the "Individual Defendants") on behalf of
purchasersrelating to certain of Emerson's
publicly traded securities between January 29, 2003public disclosures. Emerson and August 12, 2003 (the "Class Period"). By athe other defendants moved to dismiss the
complaint, and on 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
prejudice. 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'sCourt's
December 19, 2005 dismissal order to the United States Court of Appeals for the
Third Circuit. On September 11, 2006, the remaining lead plaintiff voluntarily
dismissed the appeal. Accordingly, the putative class action litigation against
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 theother defendants will ultimately
prevail in their defense, no loss has been accrued in this matter as of June 30,
2006.favorably concluded.
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.
22
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 JuneSeptember 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 JuneSeptember 30, 2006 quarter, the Company repurchased 1,267,623 shares under
this program. As of JuneSeptember 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
No shares have been repurchased under the program since
June 14, 2005.
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.
NoneOn November 8, 2006, a subsidiary of Grande Holdings made a proposal to
Emerson to sell a 51% interest in Capetronic Group, Ltd., a consumer electronics
manufacturer, to an Emerson subsidiary for $108 million. Grande Holdings
beneficially owns 50.8% of Emerson's outstanding shares of common stock. Emerson
has formed a special committee of independent directors to evaluate the proposal
on behalf of the Company. There can be no assurance that Emerson will proceed
with and/or complete the transaction or as to what the terms with respect to any
such transaction would be, nor can Emerson provide a timeline as to when a
resolution, if any, may occur.
23
ITEM 6. EXHIBITS.
10.31 Letter re: Employment10.32 First Amendment to Loan and Security Agreement, betweendated as of
September 1, 2006, among Emerson Radio Corp., Emerson Macao
Commercial Offshore Limited, Majexco Imports, Inc., Emerson
Radio (Hong Kong) Limited and John D. Florian, effective as of May 10, 2006.Wachovia Bank, National
Association.*
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
2224
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,November 14, 2006
/s/ Adrian Ma
----------------------------------------------------------------
Adrian Ma
Chief Executive Officer
(Principal Executive Officer)
Date: August 21,November 14, 2006
/s/ John D. Florian
----------------------------------------------------------------
John D. Florian
Deputy Chief Financial Officer and
Controller
(Principal Financial and Accounting Officer)
2325