SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM 10-Q
(Mark
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedJune 30, 2006
-------------------------------------------------
2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
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Commission file number001-07731
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EMERSON RADIO CORP.
- --------------------------------------------------------------------------------
(Exact
(Exact name of registrant as specified in its charter)
DELAWARE 22-3285224
- --------------------------------------------------------------------------------
(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)
| | |
DELAWARE | | 22-3285224 |
|
(State or other jurisdiction of | | (I.R.S. Employer
|
incorporation or organization) | | Identification No.) |
|
9 Entin Road Parsippany, New Jersey | | 07054 |
|
(Address of principal executive offices) | | (Zip code) |
(973) 884-5800
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(Registrant's
(Registrant’s telephone number, including area code)
- --------------------------------------------------------------------------------
(Former
(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]þ Yes [ ]o 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“accelerated filer and large accelerated filer"filer” in Rule 12b-2 of the Exchange Act.
[ ]
o Large accelerated filer [ ]o Accelerated filer [X]þ Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ]o Yes [X]þ No
Indicate the number of shares outstanding of common stock as of August
11, 2006: 27,064,832.
14, 2007: 27,129,832.
TABLE OF CONTENTS
PART I -– FINANCIAL INFORMATION
ITEM
Item 1. FINANCIAL STATEMENTS.
Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
(Unaudited)
(In thousands, except earnings per share data)
| | | | | | | | |
| | Three Months Ended |
| | June 30 |
| | 2007 | | 2006 |
| | |
Net revenues | | | | | | | | |
Net revenues | | $ | 52,603 | | | $ | 55,241 | |
Net revenues-related party | | | 85 | | | | — | |
| | |
| | | 52,688 | | | | 55,241 | |
| | |
| | | | | | | | |
Costs and expenses: | | | | | | | | |
Cost of sales | | | 45,248 | | | | 47,840 | |
Other operating costs and expenses | | | 1,796 | | | | 1,599 | |
Selling, general and administrative expenses (exclusive of non-cash compensation shown below) | | | 4,977 | | | | 5,207 | |
Non-cash compensation | | | 79 | | | | 105 | |
| | |
| | | 52,100 | | | | 54,751 | |
| | |
| | | | | | | | |
Operating income | | | 588 | | | | 490 | |
| | | | | | | | |
Interest income, net | | | 70 | | | | 105 | |
Interest income-related party | | | 163 | | | | — | |
| | |
Income before income taxes | | | 821 | | | | 595 | |
| | | | | | | | |
Provision for income taxes | | | 379 | | | | 14 | |
| | |
Net income | | $ | 442 | | | $ | 581 | |
| | |
| | | | | | | | |
Net income per share: | | | | | | | | |
Basic | | $ | 0.02 | | | $ | 0.02 | |
Diluted | | $ | 0.02 | | | $ | 0.02 | |
Weighted average shares outstanding: | | | | | | | | |
Basic | | | 27,130 | | | | 27,065 | |
Diluted | | | 27,156 | | | | 27,140 | |
The accompanying notes are an integral part of the interim
consolidated financial statements.
2
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
| | | | | | | | |
| | June 30, 2007 | | | March 31, 2007(A) | |
| | (Unaudited) | | | | | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 23,165 | | | $ | 1,851 | |
Restricted cash | | | 3,000 | | | | 3,000 | |
Accounts receivable (less allowances of $3,160 and $3,573, respectively) | | | 27,785 | | | | 19,375 | |
Other receivables | | | 1,635 | | | | 1,536 | |
Due from affiliates | | | 239 | | | | 24,690 | |
Inventories | | | 45,102 | | | | 32,463 | |
Prepaid expenses and other current assets | | | 3,624 | | | | 3,376 | |
Deferred tax assets | | | 4,916 | | | | 5,737 | |
| | | | | | |
Total current assets | | | 109,466 | | | | 92,028 | |
| | | | | | | | |
Property, plant and equipment, net | | | 2,490 | | | | 2,492 | |
Trademarks and other intangible assets, net | | | 297 | | | | 311 | |
Deferred tax assets | | | 4,744 | | | | 4,067 | |
Other assets | | | 402 | | | | 510 | |
| | | | | | |
Total assets | | $ | 117,399 | | | $ | 99,408 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Short-term borrowings | | $ | 616 | | | $ | 3,111 | |
Current maturities of long-term borrowings | | | 150 | | | | 146 | |
Accounts payable and other current liabilities | | | 40,144 | | | | 20,044 | |
Accrued sales returns | | | 906 | | | | 1,191 | |
Income taxes payable | | | 518 | | | | 306 | |
Deferred tax liabilities | | | 46 | | | | 47 | |
| | | | | | |
Total current liabilities | | | 42,380 | | | | 24,845 | |
| | | | | | | | |
Long-term borrowings | | | 647 | | | | 651 | |
Deferred tax liabilities | | | 34 | | | | 25 | |
| | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Preferred shares – 10,000,000 shares authorized; 3,677 shares issued and outstanding; liquidation preference of $3,677 | | | 3,310 | | | | 3,310 | |
Common shares — $.01 par value, 75,000,000 shares authorized; 52,965,797 and 52,945,797 shares issued, 27,129,832 and 27,109,832 shares outstanding, respectively | | | 529 | | | | 529 | |
Capital in excess of par value | | | 117,501 | | | | 117,371 | |
Accumulated other comprehensive losses | | | (82 | ) | | | (82 | ) |
Accumulated deficit | | | (22,696 | ) | | | (23,017 | ) |
Treasury stock, at cost, 25,835,965 shares | | | (24,224 | ) | | | (24,224 | ) |
| | | | | | |
Total shareholders’ equity | | | 74,338 | | | | 73,887 | |
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 117,399 | | | $ | 99,408 | |
| | | | | | |
Three Months Ended
-------------------------------------- | | |
(A) | | Reference is made to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007 filed with the Securities and Exchange Commission in June 30, 2006 June 30, 2005
------------- -------------
NET REVENUES $ 55,389 $ 38,647
COSTS AND EXPENSES:
Cost of sales 47,840 32,914
Other operating costs2007 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
amended in July 2007. |
The accompanying notes are an integral part of the interim consolidated financial statements.
2
3
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
-------- --------
Financing activities of discontinued operations -- (143)
-------- --------
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
======== ========
(Unaudited)
(In thousands) | | | | | | | | |
| | Three Months Ended | |
| | June 30 | |
| | 2007 | | | 2006 | |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 442 | | | $ | 581 | |
Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | | | | | | |
Depreciation and amortization | | | 202 | | | | 266 | |
Non cash compensation | | | 79 | | | | 105 | |
Deferred tax expenses | | | 152 | | | | — | |
Asset allowances, reserves and other | | | (2,088 | ) | | | 890 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | (7,961 | ) | | | (11,065 | ) |
Other receivables | | | (99 | ) | | | (177 | ) |
Due from affiliates | | | 24,451 | | | | — | |
Inventories | | | (11,285 | ) | | | (8,101 | ) |
Prepaid expenses and other current assets | | | (248 | ) | | | 594 | |
Other assets | | | 87 | | | | 100 | |
Accounts payable and other current liabilities | | | 20,100 | | | | 13,970 | |
Income taxes payable | | | 91 | | | | (21 | ) |
| | | | | | |
Net cash provided(used) by operating activities | | | 23,923 | | | | (2,858 | ) |
| | | | | | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Additions to property and equipment | | | (126 | ) | | | (67 | ) |
| | | | | | |
Net cash used by investing activities | | | (126 | ) | | | (67 | ) |
| | | | | | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Short-term borrowings | | | 4 | | | | 42 | |
Net borrowings (repayments) under foreign bank facilities | | | (2,495 | ) | | | 702 | |
Exercise of stock options | | | 51 | | | | — | |
Long-term borrowings | | | 51,158 | | | | — | |
Repayments of long-term borrowings | | | (51,201 | ) | | | (67 | ) |
| | | | | | |
Net cash (used) provided by financing activities | | | (2,483 | ) | | | 677 | |
| | | | | | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 21,314 | | | | (2,248 | ) |
| | | | | | | | |
Cash and cash equivalents at beginning of period | | | 1,851 | | | | 17,517 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 23,165 | | | $ | 15,269 | |
| | | | | | |
Supplemental disclosures of non-cash investing and financing activities:
The Company has entered into certain capital lease agreements. For the three month periodperiods ended June 30, 2007 and June 30, 2006, the Company entered into agreements related to approximately $179,00039 and 179 of equipment, respectively, which isare excluded from the statement of cash flowflows as the transaction wastransactions were 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)
(Unaudited)
NOTE 1 -– BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Emerson Radio Corp.
("Emerson"(“Emerson”, consolidated
-– the
"Company"“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“” and H.H. Scott® trademarks 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, 20062007 and the results of operations for the three month periods ended June 30, 20062007 and June 30, 2005.2006. 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 ("2007 (“fiscal 2006"2007”), included in our annual report on Form 10-K, as amended, for fiscal 2006.2007.
Due to the seasonal nature of Emerson'sEmerson’s business, the results of operations for the three month period ended June 30, 20062007 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 ("2008 (“fiscal 2007"2008”).
Certain reclassifications were made to conform the prior year'syear’s financial statements to the current presentation.
5
Stock- Based Compensation
During the fourth quarter of fiscal 2005, the Company elected to early-adopt SFASStatement of Financial Accounting Standard (“FAS”) No. 123R, "Share-Based Payment" ("SFAS 123R"“Share-Based Payment” (“FAS 123R”) under the modified retrospective approach applied only to prior interim periods in fiscal
2005.that year. As a result, the Company has applied SFASFAS 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.previously issued accounting standards. As a result of applying the early
adoption, under the provisionprovisions of SFASFAS 123R, the Company has recorded compensation costs of approximately$79,000 and $105,000 and $82,000 in income from
continuing operations for the three months ended June 30, 20062007 and June 30, 2005,2006, respectively.
NOTE 2 -– COMPREHENSIVE INCOME
Comprehensive income for the three
monthsmonth periods ended June 30,
20062007 and June 30,
20052006 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
======= =======
| | | | | | | | |
| | Three Months Ended |
| | June 30 |
| | 2007 | | 2006 |
| | (Unaudited) |
Income from continuing operations | | $ | 442 | | | $ | 581 | |
Recognition of realized losses in net income | | | — | | | | 3 | |
Change in unrealized loss on securities, net | | | — | | | | (3 | ) |
| | |
Comprehensive income | | $ | 442 | | | $ | 581 | |
| | |
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
--------------------------
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
| | | | | | | | |
| | Three Months Ended |
| | June 30 |
| | 2007 | | 2006 |
| | (Unaudited) |
Numerator: | | | | | | | | |
Net income for basic and diluted earnings per share | | $ | 442 | | | $ | 581 | |
| | |
| | | | | | | | |
Denominator: | | | | | | | | |
Denominator for basic earnings per share – weighted average shares | | | 27,130 | | | | 27,065 | |
Effect of dilutive securities on denominator: | | | | | | | | |
Options and warrants | | | 26 | | | | 75 | |
| | |
Denominator for diluted earnings per share – weighted average shares and assumed conversions | | | 27,156 | | | | 27,140 | |
| | |
| | | | | | | | |
Basic and diluted earnings per share | | $ | 0.02 | | | $ | 0.02 | |
| | |
NOTE 4- SHAREHOLDERS'SHAREHOLDERS’ EQUITY
Outstanding capital stock at June 30, 2006 consists2007 consisted 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; however, it retains a liquidation preference.
At June 30, 2006,2007, Emerson hashad approximately 612,000 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'sEmerson’s outstanding common stock. As of June 30, 2006,2007, the Company has repurchased 1,267,623 shares under this program. During
the quarter ended June 30, 2006, there were noNo shares have been repurchased under this
program.the program since June 14, 2005. Repurchases of the Company'sCompany’s shares are subject to certain conditions under Emerson'sEmerson’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
7
earnings during fiscal 2004. As of June 30, 2006,2007, these warrants hadhave 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 June 30, 2006,2007, 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 June 30,
20062007 and March 31,
2006,2007, 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
======== ========
| | | | | | | | |
| | June 30, 2007 | | | March 31, 2007 | |
| | (Unaudited) | | | | | |
Finished goods | | $ | 48,124 | | | $ | 36,839 | |
Less inventory allowances | | | (3,022 | ) | | | (4,376 | ) |
| | | | | | |
Net inventory | | $ | 45,102 | | | $ | 32,463 | |
| | | | | | |
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 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 has accrued an amount based upon management’s best estimate as to the ultimate amount payable. Accruals made in relation to this matter have been recorded as a component of income tax expense.
8
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”. FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold which a tax position is not able at this timerequired to attain before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption of FIN 48, as of April 1, 2007, we recorded a net increase to accumulated deficit of $121,000, including approximately $68,000 related to accrued interest and penalties related to state income tax matters.
As of April 1, 2007, the Company had $121,000 of unrecognized tax benefits related to state taxes. All of the unrecognized tax benefits could impact our effective tax rate if recognized.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of income tax expense in the Consolidated Statement of Operations and totaled $4,000. Accrued interest and penalties were $68,000 as of June 30, 2007 and are recognized in the Statement of Financial Position.
The effective tax rate for the respective three months ended June 30, 2007 and June 30, 2006 differs from the federal statutory rate primarily as a result of state income taxes.
In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 Definition of a Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the amount (if any)purpose of such claim whichrecognizing previously unrecognized tax benefits. FSP FIN 48-1 is properly due and payable.
effective retroactively to April 1, 2007. The implementation of this standard did not have a material impact on our consolidated balance sheets or statements of operations.
NOTE 7 -– RELATED PARTY TRANSACTIONS
On December 5, 2005, The Grande Holdings Limited ("Grande"(“Grande”) purchased approximately 37% (10,000,000 shares) of the Company'sCompany’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 50.8% of our outstanding common shares, as of the date of June 30, 2007.
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. ForUnder these arrangements, Emerson incurred expenses with
9
Grande of approximately $134,000 and $87,000 for the firstthree months ended June 30, 2007 and June 30, 2006, respectively.
In October 2006, Emerson entered into an agreement with a consumer electronics distributor , APH (the “Licensee”)’ pursuant to which, among other things, Emerson agreed to grant the Licensee a license to distribute and sell LCD televisions (“LCD sets”) in North America under Emerson’s “H.H. Scott” brand name. The licensee has a distributor relationship with Grande, a related party to Emerson. In the fiscal quarter ended December 31, 2006, the Licensee began selling 32” and 37” LCD sets to a major United States based retailer. Pursuant to the terms of the agreement with the licensee, Emerson was paid a royalty of $110,000 as a result of such sales through June 30, 2007.
During the third quarter of fiscal 2007, Emerson provided unsecured financial assistance to Capetronic Display Limited ( “Capetronic”), Nakamichi Corporation (“Nakamichi”), Akai Electric (China) Co. Ltd. (“Akai”), and Sansui Electric (China) Co. (“Sansui”), each of which is a wholly-owned subsidiary of Grande, the manufacturer of the LCD sets, in the form of letters of credit and loans which aggregated approximately $22.0 million at December 31, 2006. In reviewing the documentation for certain of the letters of credit referred to above, Emerson determined that some of the parts for which letters of credit were opened were to be used for the manufacture of 27” and 42” television sets to be sold to the Licensee by Akai. Emerson had no direct or indirect interest in such sales, and Capetronic paid Emerson $57,000 as a fee for facilitating such transaction.
As a result of the transactions described in the preceding paragraph, Emerson may have been deemed to be in breach of certain covenants contained in Emerson’s credit facility. The lender under the credit facility agreed to waive such breaches and Emerson and the lender negotiated an amendment to the credit facility. Emerson was required to pay $125,000 to the lender in connection with the amendment. Emerson has charged this amount back to Capetronic and $125,000 was paid to one of Emerson’s foreign subsidiaries on August 14, 2007 by Capetronic.
On February 21, 2007, Capetronic, Nakamichi, Akai, and Sansui (collectively, the “Borrowers”), each of which is a wholly-owned subsidiary of Grande, jointly and severally, issued a promissory note (the “Note”) in favor of the Company in the principal amount of $23,501,514. The principal amount of the Note represented the outstanding amount owed to the Company as of February 21, 2007, as a result of certain related party transactions entered into between the Company and the Borrowers described above, including interest that had accrued from the date of such related party transactions until the date of the Note. Simultaneously with the execution of the Note, Grande executed a guaranty (the “Guaranty”) in favor of the Company pursuant to which Grande guaranteed payment of all of the obligations of the Borrowers under the Note in accordance with the terms thereof.
10
Interest on the unpaid principal balance of the Note accrued at a rate of 8.25% per annum, commencing on February 21, 2007, until all obligations under the Note were paid in full, subject to an automatic increase of 2% per annum in the event of default under the Note in accordance with the terms thereof. Payments of principal and interest under the Note were to be made in nine installments from April 1, 2007 through June 3, 2007 in such amounts and on such dates as set forth in the Note, with all amounts of interest due under the Note scheduled to be paid with the final installment.
As of June 3, 2007, all amounts due under the note have been repaid.
Since August 2006, Emerson has been providing to Sansui Sales PTE Ltd (“Sansui Sales”) and Akai Sales PTE Ltd (“Akai Sales”), both of which are subsidiaries of Grande, assistance with acquiring their product. Emerson issues purchase orders to third-party suppliers who manufacture this product, and Emerson issues sales invoices to Sansui Sales’ and Akai Sales’ at gross amounts for this product. Financing for this product is provided by Sansui Sales’ and Akai Sales’ customers in the form of transfer letters of credit to the suppliers, and goods are shipped directly from the suppliers to Sansui Sales’ and Akai Sales’ customers. Emerson recorded income totaling $85,000 for providing this service in the three months ended June 30, 2007. Akai Sales’ and Sansui Sales’ collectively owe Emerson $113,849 at June 30, 2007 as a result of these transactions.
Effective January 1, 2006, we entered into a lease for office space in Hong Kong with Grande and an agreement for services in connection with this office space rental from Grande, which was extended through December 31, 2008, and which will expire unless terminated earlier by either party upon three months prior written notice of termination by either party. For the fiscal year ended March 31, 2007, we incurred expenses withto Grande for such fees
approximating $87,000of approximately $429,000 under these arrangements. Since
In May 2007 Emerson paid a $10,000 commission to Vigers Hong Kong Ltd (“Vigers”), a property agent and a subsidiary of Grande, related to the initial purchasesale of common stocka building owned by Emerson to a non-affiliated buyer. The sale is under contract and a deposit has been received from Mr. Geoffrey P. Jurick, Grande has increased its holdingsthe buyer. The balance of $10,000 will be payable to Vigers by Emerson Radio Corp. common stock to approximately 49.5%, asupon closing of the datesale of the property in September 2007.
In June 2007 Emerson paid a one-time sales commission in the amount of $14,000 to an Executive Director of Grande Holdings, who is also Emerson’s President-International Sales and also a Director of Emerson. The commission was 50% of the net margin on a sale by Emerson to a non-affiliated customer.
Subsequent event:
In May 2007, we entered into an agreement with Goldmen Electronic Co. Ltd. (“Goldmen”), with a manufacturing facility in Guangdong, China, pursuant to which we agreed to pay Goldmen $1,682,220 in exchange for Goldmen’s manufacture and delivery to us of musical
11
instruments in order for us to meet our delivery requirements of these instruments in the first week of September 2007. In July 2007, we learned that Goldmen had filed for bankruptcy and was unable to manufacture the musical instruments we had ordered. Promptly after we learned of Goldmen’s bankruptcy, Capetronic agreed to manufacture the musical instruments on substantially the same terms and conditions, including the price, as Goldmen had agreed to manufacture them. Accordingly, on July 12, 2007, we purchased from Goldmen the molds and equipment necessary for Capetronic to manufacture the musical instruments for approximately $124,000, and on or about July 16, 2007, we made an upfront payment of $1,682,220 to Capetronic. On July 20, 2007, Capetronic advised us that it was unable to manufacture the musical instruments for us because it did not have the requisite governmental licenses to do so. Capetronic’s prior inability to manufacture the goods has since been rectified by a third party who holds the requisite governmental licenses. In accordance with a Board resolution in February 2007 requiring review of related party transactions in excess of $500,000, the management Related Party Transaction Committee reviewed and approved this filing.
transaction. The transaction was also approved by the Audit Committee in July 2007.
NOTE 8 -– BORROWINGS
SHORT-TERM BORROWINGS
Short-term Borrowings
At June 30, 2007 and 2006, short-term borrowings
consistconsisted of amounts outstanding under
the
Company's foreign bank facilities held by
itsthe Company’s foreign subsidiaries. Availability under
this facility totals $22.3 and $23.3 millionthe foreign bank facilities totaled $13.5 as of June 30,
2006 and March
31, 2006,2007 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 | | | | | | | | |
| | June 30, 2007 | | | March 31, 2007 | |
| | (In thousands) | |
| | (Unaudited) | | | | | |
Foreign bank loans | | $ | 616 | | | $ | 3,111 | |
| | | | | | |
| | | | | | | | |
Short term borrowings | | $ | 616 | | | $ | 3,111 | |
| | | | | | |
Long-term Borrowings
As of June 30,
20062007 and March 31,
2006,2007, 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 | | | | | | | | |
| | June 30, 2007 | | | March 31, 2007 | |
| | (In thousands) | |
| | (Unaudited) | | | | | |
Mortgage payable | | $ | 548 | | | $ | 567 | |
Capitalized lease obligations and other | | | 249 | | | | 230 | |
| | | | | | |
| | | 797 | | | | 797 | |
Less current maturities | | | (150 | ) | | | (146 | ) |
| | | | | | |
Long term debt and notes payable | | $ | 647 | | | $ | 651 | |
| | | | | | |
12
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$45.0 million or a "Borrowing Base"“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 June 30, 2006)2007) plus 0.00% to 0.50% or, at Emerson'sEmerson’s election, LIBOR
(1.25%the London Interbank Offered Rate (“LIBOR” which was 5.32% as of June 30, 2006)2007) 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'slender’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'sEmerson’s tangible assets.
As
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.
At June 30, 2006,2007, there were no borrowings outstanding under the facility and Emersonfacility. The effective interest rate on such borrowings was in compliance with the covenants contained in the loan
agreement.8.25% at June 30, 2007.
As of June 30,
2006,2007, 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 As a result of the Law Officesrelated party transactions entered into between Emerson and affiliates of Jeffrey S. Abraham Money Purchase Plan dated December 31, 1999 F/B/O Jeffrey
S. Abraham ("Plaintiff"), on behalfGrande described in Note 7, Emerson may have been deemed to be in breach of himselfcertain covenants contained in Emerson’s credit facility, including a covenant restricting Emerson from lending money and all common shareholdersfrom entering into related party transactions without the consent of Sport Supply Group, Inc. ("Sport Supply"), filedits lender. The lender under the credit facility agreed to waive such breaches and Emerson and the lender negotiated an amendment to the credit facility. Under the amendment, (i) Emerson granted the lender 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 Supplysecurity interest in the Court of Chancery$23 million Note and the Guaranty referred to in Note 7, (ii) a failure (following a 15 day cure period) by the borrowers to make payments to Emerson as required by the terms of the StateNote
13
would be deemed a default under the credit facility, (iii) the number of
Delaware, Civil Action No. 1845-N.
The complaint assertedfield audits by the lender was increased from two
causes of action: The first cause of actionto three each year and (iv) Emerson was
a purported class claim against Emerson and Mr. Jurick for breach of
fiduciary dutyrequired to pay $125,000 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 thatlender 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 throughamendment. All amounts due under 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$23 million Note were repaid in
their defense, no loss was accrued in this matterfull 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 in3, 2007. As of August 14, 2007 the
United States District Court for the Districtamendment fee 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$125,000 was repaid by Capetronic 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 MattersEmerson. NOTE 9 — LEGAL PROCEEDINGS
The Company is not a party to, variousand none of its property is the subject of, any pending legal proceedings other than routine litigation matters, in most
cases involving ordinary and routine claimsthat is incidental to ourits business. We
cannot estimate with certainty our ultimate legal
Item 2. Management’s Discussion and financial liability with
respect to such pending litigation matters. However, we believe, based on our
examinationAnalysis of such matters, that our ultimate liability will not have a
material adverse effect on our financial position, resultsResults 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 realizedOperations 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 CONDITIONFinancial 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
Forward-Looking Information
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'sEmerson’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'sEmerson’s control, and which may cause Emerson'sEmerson’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'sEmerson’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,"“may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,”
14
“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" | • | | the loss of any of our key customers or reduction in the purchase of our products by any such customers; |
|
| • | | Our inability to maintain effective internal controls or the failure by our personnel to comply with such internal controls; |
|
| • | | the failure to maintain our relationships with our licensees and distributors or the failure to obtain new licensees or distribution relationships on favorable terms; |
|
| • | | our inability to anticipate market trends, enhance existing products or achieve market acceptance of new products; |
|
| • | | our dependence on a limited number of suppliers for our components and raw materials; |
|
| • | | our dependence on third party manufacturers to manufacture and deliver our products; |
|
| • | | the seasonality of our business, as well as changes in consumer spending and economic conditions; |
|
| • | | the failure of third party sales representatives to adequately promote, market and sell our products; |
|
| • | | our inability to protect our intellectual property; |
|
| • | | the effects of competition; |
|
| • | | changes in foreign laws and regulations and changes in the political and economic conditions in the foreign countries in which we operate; |
|
| • | | conflicts of interest that exist based on our relationship with Grande; |
|
| • | | the outcome of the Audit Committee’s review of our related party transactions and internal controls; |
|
| • | | changes in accounting policies, rules and practices; and |
|
| • | | the other factors listed under “Risk Factors” in our Form 10-K, as amended, for the fiscal year ended March 31, 2007 and other filings with the Securities and Exchange Commission (the “SEC”). |
15
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. The information contained in this website is not incorporated by reference in this report.
13
RESULTS OF OPERATIONS
As a resultResults 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 nowOperations
We operate in one segment, the consumer electronics segment.
Accordingly, only the consumer electronics segment, isas presented in the following Management'sManagement’s Discussion and Analysis.
The following table summarizes certain financial information for the three month period ended June 30,
20062007 (fiscal
2007)2008) and the three month
periodperiods ended June 30,
20052006 (fiscal
2006)2007) (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
======== ========
| | | | | | | | |
| | Three Months Ended |
| | June 30 |
| | 2007 | | 2006 |
| | (Unaudited) |
Net revenues | | $ | 52,688 | | | $ | 55,241 | |
| | | | | | | | |
Cost of sales | | | 45,248 | | | | 47,840 | |
Other operating costs | | | 1,796 | | | | 1,599 | |
Selling, general and administrative costs | | | 4,977 | | | | 5,207 | |
Non-cash compensation costs | | | 79 | | | | 105 | |
| | |
Operating income | | | 588 | | | | 490 | |
| | | | | | | | |
Interest income, net | | | 233 | | | | 105 | |
| | |
Income before income taxes taxes | | | 821 | | | | 595 | |
Provision for income taxes | | | 379 | | | | 14 | |
| | |
Net Income | | $ | 442 | | | $ | 581 | |
| | |
16
Net Revenues - — Net revenues for the first quarter of fiscal 2007 increased $16.8
million, or 43.3%, to $55.42008 were $52.7 million as compared to $38.6$55.2 million for the first quarter of fiscal 2006.2007, a decrease of $2.5 million or 4.5%. Net revenues are comprised of Emerson(R)Emerson® branded product sales, themed product sales and licensing revenues. Emerson(R)Emerson® branded product sales are earned from the sale of products bearing the Emerson(R)Emerson® or HH Scott(R)Scott® brand name; themed product sales represent products sold bearing a certain theme or character; and licensing revenues are derived from licensing the Emerson(R)Emerson® and HH Scott(R)Scott® brand names to licensees for a fee. The variationsdecrease in net revenue for the three month periods wererevenues was comprised of:
i) An increase in revenues from the sale
| i) | | Emerson® branded products sales of $48.7 million in the first quarter of fiscal 2008 compared to $51.4 million in the first quarter of fiscal 2007, a decrease of $2.7 million, or 5.3%, primarily resulting from decreased sales volumes in audio product lines and Ipod® compatible product category, partially offset by an increase in the microwave ovens category; |
|
| ii) | | Themed product sales of $2.2 million in the first quarter of fiscal 2008 compared to $2.3 million in the first quarter of fiscal 2007, a decrease of $119,000, or 5.2%, primarily due to the discontinuance of Nickelodeon® themed products, partially offset by start-up sales of Mattel® themed products; |
|
| iii) | | Licensing revenues of $1.7 million in the first quarter of fiscal 2008 compared to $1.5 million in the first quarter of fiscal 2007, an increase of $176,000, or 11.7% primarily due to the commencement of several new licensing agreements in the first quarter of fiscal 2008; and |
|
| iv) | | In fiscal 2007 Emerson charged agent fees of $85,000, or 0.2% of net revenue, to Sansui Sales PTE, Ltd and Akai Sales PTE, Ltd, both of which are related parties to Emerson, for assistance in procuring their product. See Note 7 “Related Party Transactions”. No related party revenue was recorded in the three months ending June 30, 2006. |
Cost of Emerson(R) branded
productSales — In absolute terms, cost of
$17.3sales decreased $2.6 million, or
50.4%5.4%, 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$45.2 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%,2008 as compared to approximately $1.5 million for the first quarter of fiscal
2007 from $2.5$47.8 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 -2007. Cost of sales, as a percentage of net revenues, increased forwas 85.9% in 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 revenues2008 as compared to the
same period86.6% in the prior year. In absolute terms, costs of sales for the first quarter of fiscal 2007 increased $14.9 million, or 45.4%,2007. Cost of sales as a percentage of sales revenues less license revenues decreased to $47.8 million88.8% in the first quarter of fiscal 2008 from $32.9 million for89.1% in the same periodfirst quarter of fiscal 2007. The decrease in fiscal 2006.cost of sales in absolute terms was primarily related to the decrease in sales volume. The decrease in cost of sales as a percentage of net revenues and in absolute terms resulted from a decrease in inventory reserves and royalty expense offset by an increase related to reserves for sales revenue less license revenues decreased to 88.8%returns. The decrease in inventory 17
reserves resulted from the reduction of inventory levels of a discontinued themed-product line, which were fully reserved in our previous quarter; however, there was also an offsetting impact on margins for the
first quarter of fiscal 2007this themed-product line as compared to 91.0% for the same period in the
prior year.
a consequence.
Gross profit margins continue to be subject to decreased licensing revenues and
competitive pressures arising from lower pricing ofstrategies associated with the productprice categories inof the consumer electronics market in which Emerson competes. Emerson's brandedwe compete. Our products are generally placed in the low-to-medium priced category of the market.
market, which has a tendency to be highly competitive.
Other Operating Costs and Expenses - Other — As a result of a shift away from direct import sales, other operating costs and expenses as a percentage of net revenues decreased to 2.9% from 3.1% forwere 3.4% in the first quarter of fiscal 2007 compared to2008 and 2.9% in the same periodfirst quarter of fiscal 2006.2007. In absolute terms, other operating costs and expenses increased approximately $400,000$197,000, or 12.3%, to $1.8 million for fiscal 2008 as compared to $1.6 million from $1.2 million forin fiscal 2007. The increase in absolute terms was the three month periodsresult of fiscal 2007increased warehousing and fiscal 2006,
respectively. Asbrokerage costs.
Selling, General and Administrative Expenses (“S,G&A”) — S,G&A, 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 increasewere relatively unchanged at 9.4% 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
20072008 as compared to the first quarter of fiscal
2006. The increase2007. S,G&A, in absolute terms,
fordecreased $209,000, or 4.0%, to $5.0 million in the
three month periodfirst quarter of fiscal
20072008 as 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$5.2 million for the first quarter of fiscal 2007. The decrease in S,G&A in absolute terms between the first quarter of fiscal 2008 and 2007 associated with contemplated acquisition transactions that were not
completed. There were no acquisition costswas primarily due to severance pay in the first quarter of the prior fiscal 2006.
Non-Cashyear of $300,000, a gain on the sale of marketable securities of $205,000, a decrease in accounts receivable reserves of $233,000, and a decrease in variable selling expenses of $106,000 offset by an increase in salaries and bonuses of $460,000, professional fees of $139,000, and trade show expenses of $109,000. Non Cash Compensation - Non-cash – Non cash compensation costs relaterelates to stock optionoptions expense associated with the adoption of SFAS 123R "Share-Based“Share-Based Payments." For
the three month periods” Stock based costs decreased to $79,000 (0.1% of fiscal 2007 and fiscal 2006, non-cash compensation
costs were approximately $105,000 and $82,000, respectively.
Interest (Income) Expense, net - Inrevenues) in the first quarter of fiscal 2007, the
Company recorded interest income,2008 compared to $105,000 (0.2% of net of $105,000, an increase of $512,000, overrevenues) in 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 increased2007.
Interest Income, net — Interest income, net, included $163,000 interest income recordedon a note receivable from a related party. See Note 7 — “Related Party Transactions.” As a result, interest income, net, increased $128,000, or 121.9%, to $233,000 (0.4% of net revenues) 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 for2008 from $105,000 (0.2% of net revenues) in the first quarter of fiscal 2006.2007. The decreaseincrease was primarily attributable to the related party interest income as well as money market account interest.
Provision (benefit) for Income Taxes — Our provision for income taxes, which primarily represents the deferred tax charges associated with our profits in the tax expenseUnited States, resulted in a provision of $379,000 for the three month period was
primarily the resultmonths ended June 30, 2007, or 0.7% of lower pre-tax profit in our domestic subsidiarynet revenues, as compared to
18
a provision of $14,000 for the same period in fiscal 2006.
three months ended June 30, 2006, or less than 1% of net revenues.
NetIncome From Continuing Operations - As a result of the foregoing factors, net income from continuing operations amounted to approximately $581,000 (1.1%$442,000 (0.8% of net revenues) for the first quarter of fiscal 20072008 as compared to $416,000
(1.1%$581,000 (1.0% of net revenues) forin the same periodfirst quarter of fiscal 2006.
LIQUIDITY AND CAPITAL RESOURCES2007.
Liquidity and Capital Resources
As of June 30, 2006,2007, we had cash and cash equivalents of approximately $15.3$23.2 million, compared to approximately $17.5 million at March 31, 2006. Working
capital increased to $61.1$15.3 million at June 30, 2006 as compared to $60.22006. Working capital was $67.2 million at June 30, 2007 and March 31, 2006.2007. The decreaseincrease in cash and cash equivalents of approximately $2.2$7.9 million was primarily due to increases in cash usedprovided by operating activities, partially offset by cash provided from investingused by financing activities, as described below.
Cash flows usedin the following paragraphs.
Operating cash flow provided by continuing operating activities
werewas approximately
$2.9$23.9 million for
fiscalthe three months ended June 30, 2007,
primarily relatedresulting from the repayment to Emerson of financing provided to an
increaseaffiliate 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,the prior fiscal year (see Note 7 – “Related Party Transactions”), primarily offset by
an increasegrowth in
accounts receivable of $11.1 and inventories
of $8.1 million. Both the increases in accounts payable and accrued liabilitiesinventory and accounts receivable
are primarily due toin the
increased sales volumes over
the prior quarter. The increase in inventory was due to the seasonal naturefirst quarter of
the business,fiscal 2008 as well as
the continuing shift from the direct importtheir asset allowances. Current payables increased $20.1 million, which is related to
domestic
business which creates a growing need for inventory
at domestic locations.
16
growth. Net cash used by investing activities was approximately $67,000$126,000 for the three months ended June 30, 2007 and resulted primarily from purchases of tooling by a foreign subsidiary related to sourcing of product, computer equipment, and improvements in fiscal 2007, which consisted primarilyone of tools and equipment acquisitions.our warehouses.
Net cash providedused by financing activities was approximately $677,000$2.5 million for the three months ended June 30, 2007, resulting primarily from repayments of outstanding loans of a foreign subsidiary. While cash used for the financing of inventory purchases has been repaid in fiscal 2007, primarily due to the increasedcurrent quarter, cash was also utilized for payments on certain equipment leases which have been capitalized and the mortgage of a foreign borrowings.subsidiary.
On December 23, 2005, Emersonwe 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 ofBank. This credit facility provides for revolving loans subject to individual maximums which, in the aggregate, are not to exceed the lesser of $45$45.0 million or a "Borrowing Base"“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'sour election, LIBORthe London Interbank Offered Rate (“LIBOR”) plus 1.25% to 2.25% depending on excess availability. Pursuant to the loan agreement, Emerson iswe are restricted
19
from, among other things, paying certain cash dividends, and entering into certain transactions without the lender'slender’s prior consent and isare subject to certain leverage financial covenants. Amounts outstandingBorrowings under the loan agreement will beare secured by substantially all of Emerson'sour tangible assets.
As of
At June 30, 2006,2007, there were approximately $24.6 million of letters of credit outstanding under this facility. There were no borrowings outstanding at June 30, 2007 under the
facility and Emerson wasthis facility. At June 30, 2007, we were 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.on our credit facilities.
Our foreign subsidiaries maintain various credit facilities, aggregating $18.7$17.5 million, with foreign banks 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.
| • | | two letter of credit facilities totaling $10.0 million which are used for inventory purchases; and |
|
| • | | two back-to-back letter of credit facilities totaling $7.5 million. |
At June 30,
2006,2007, our foreign subsidiaries pledged approximately $3.0 million in certificates of deposit to
this bankthese banks to assure the availability of the
$11.2$17.5 million
of credit facilities. The compensating amount of $3.0 million
of restrictedin cash is legally restricted from use for general business purposes. At June 30,
2006,2007, there were approximately
$6.5$4.0 million of letters of credit outstanding under these credit facilities.
17
Short-Term Liquidity.Liquidity is impacted by our seasonality in that we generally record the majority of our annual sales in the quarters ending September and December. This requires us to maintain higher inventory levels during the quarters ending June and September, therefore increasing the working capital needs during these periods. Additionally, we receive the largest percentage of product returns in the quarter ending March. The higher level of returns during this period adversely impacts our collection activity, and therefore our liquidity. Management believes that continued sales margin improvement and the policies in place for returned products should continue to favorably impact our cash flow. In the three months ended June 30, 2007, products representing approximately 35% of net revenues were imported directly to our customers. This contributes significantly to Emerson’s liquidity in that this inventory does not need to be financed by us.
Our principal existing sources of cash are generated from operations and borrowings available under our revolving credit facilities. As of June 30, 2007, we had $36.6 million of borrowing capacity available under our $45.0 million revolving credit facilities, as there were $24.6 million of letters of credit outstanding, and no outstanding loans. In addition, at March 31, 2007, we had $17.5 million of letter of credit facilities, of which approximately $13.5 million was available. We believe that our presentexisting sources of cash, position, futureincluding cash flowflows generated from operations, and our existing institutional financing noted above will be sufficient to fund all ofsupport our cash requirements forexisting operations over the next twelve months.12
20
months; however, we may raise additional financing, which may include the issuance of equity securities, or the incurrence of additional debt, in connection with our operations or if we elect to grow our business through acquisitions.
The following summarizes our obligations at June 30,
20062007 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
====== ====== ====== ====== ======
| | | | | | | | | | | | | | | | | | | | |
| | Payment due by period |
| | | | | | Less than | | | | | | | | | | More than 5 |
| | Total | | 1 year | | 1 – 3 years | | 3 – 5 years | | years |
| | |
Notes and mortgages payable | | $ | 549 | | | $ | 74 | | | $ | 148 | | | $ | 148 | | | $ | 179 | |
Capital lease obligations | | | 248 | | | | 76 | | | | 144 | | | | 28 | | | | — | |
Lease-related party | | | 102 | | | | 102 | | | | — | | | | — | | | | | |
Leases- non-affiliate | | | 4,792 | | | | 1,436 | | | | 2,587 | | | | 769 | | | | — | |
| | |
Total | | $ | 5,691 | | | $ | 1,688 | | | $ | 2,879 | | | $ | 945 | | | $ | 179 | |
| | |
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 POLICIES2007.
Emerson has contracted to sell its office location in Macao to a non-affiliated buyer for approximately $2.0 million. Emerson has received a deposit of approximately $300,000 from the buyer and paid a commission to Vigers Hong Kong Ltd, a property agent and subsidiary of Grande. See Note 7 – “Related Party Transactions.” The date scheduled for closing the sale is September 27, 2007.
Critical Accounting Policies
For the three month period ended June, 30, 2006,2007, 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 RATES2007.
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 2007.2008. 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
21
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative 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
ITEM2007.Item 4. CONTROLS AND PROCEDURES
(a) Disclosure controlsControls and procedures.
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, 2007, our principal executive officer and principal financial officer have concluded that, for the reasons set forth below under “Changes In Internal Control Over Financial Reporting”; our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not 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 |
|
| | Emerson has operated for many years under a system of internal controls governing the purchase and sale of inventory and the use of its credit facilities to support its working capital needs. This system was designed in order to insure participation by and coordination among |
22
| | employees involved in each of the major functional areas of Emerson, namely sales, procurement and finance both in the United States and in its Asian offices. |
|
| | The process begins with a monthly sales meeting in the United States chaired by the President of Sales and attended by sales, treasury, sales planning and production scheduling personnel. At this meeting, sales projections, pipeline and forecasts for all customers and for all models are reviewed and the foundation for the Monthly Buy Package is established. Subsequent to the monthly sales meeting, a Monthly Buy Package is developed, including a schedule of production needs by month, model and quantity. This package is forwarded to the Director of Sales and the Director of the Corporate Treasury and, when approved, forwarded to the Macao office. |
|
| | Experienced personnel in Macao then review and combine all buy packages received and schedule letters of credit and on-account buys with manufacturers covering production for the month necessary to fill outstanding orders and the likely needs of customers on a timely basis. The report from Macao is then sent for final approval to the Director of the Corporate Treasury and the Treasurer. This system of internal controls provides that no letter of credit may be authorized for issuance and no open account production is permitted to begin until this final approval is received. |
|
| | Once approved by Treasury, the package is sent back to the Macao office for execution of the buy transactions. Orders are placed and letters of credit are issued as needed. The Macao office produces and forwards to the Treasury and Finance Departments a Daily Activity Report which includes, among other things, letter of credit number, dollar amount, model number, manufacturer and quantity produced. All information on the Daily Activity Report should be able to be traced back to and tie in with the original approved Buy Package. This information becomes the basis on which Emerson’s cash and credit line are managed on a daily basis. |
|
| | Emerson’s primary domestic bank is notified of each letter of credit presented for payment and, when paid, the applicable item is removed from the Daily Activity Report. In summary, this system, which was developed over many years, was intended to ensure that every major function within the firm participates at every stage of the purchase, sale and finance process and that there centralized and continuing monitoring of the Company’s liquidity position. |
|
| | In two transactions described in Note 7 (Related Party Transactions) our financial statements included in this report on Form 10-Q, Emerson’s internal control process was bypassed. In the transaction involving the 42” plasma televisions, purchase orders were issued, letters of credit were authorized and funds were advanced as a deposit with Capetronic, an affiliate of Grande, with only minimal involvement from the Treasury, Sales or Finance Departments under Emerson’s system of internal control. In addition, the distributor to |
23
| | which Emerson sold the television sets remitted approximately 25% of the monies due to Capetronic rather than to Emerson which then received the funds at a later time. Documentation of the entire transaction was also deficient. |
|
| | The same infirmities (other than the payment by the distributor to Capetronic rather than Emerson) are present in the transactions involving the H.H. Scott LCD sets. In addition, there is virtually no documentation available to Emerson setting forth its participation in the transactions beyond the detail information set forth in the issued Letters of Credit. However, the available information shows that some of the Company’s credit was utilized to fund transactions for the benefit of Grande affiliates and in which Emerson then had no financial interest whatsoever. |
|
| | As described under Note 7 to our financial statements, during the quarter ended December 31, 2006, we and affiliates of Grande entered into a number of related party transactions that resulted in loans and letters of credit under our credit facility being issued for the benefit of affiliates of Grande. These loans were (i) subject to a repayment schedule that commenced on April 1, 2007 and ended on June 3, 2007 as set forth in the Note and (ii) guaranteed by Grande. All obligations under the Note were satisfied by June 3, 2007. The Company’s Audit Committee conducted an initial review of these transactions and concluded that these financing transactions (i) were not made on substantially the same terms, including interest rates and collateral and return on investment, as those prevailing at the time for comparable transactions with unrelated persons, and (ii) involved more than the normal risk of collectibility. In addition, the review of the transactions revealed material weaknesses in the Company’s internal controls. The deficiencies that were uncovered related to (i) one or more senior managers failing to follow the Company’s existing internal controls over purchases and sales of inventory and utilization of the Company’s credit facilities and (ii) the lack of documentation related to such related party transactions. These events have also raised concerns about the Company’s overall control environment. Although such events may not result in any adjustment to the Company’s financial statements, such events reflect material weaknesses with respect to the Company internal controls. |
|
| | The Company’s Audit Committee is continuing its independent review into certain related party transactions entered into by the Company, including its subsidiaries, with affiliates of Grande from December 2005 to the present, and internal controls related to such transactions. |
|
| | As part of the Company’s remedial actions, on February 20, 2007, the Board of Directors appointed a committee of the Board of Directors comprised of Adrian Ma, the Company’s Chief Executive Officer, Greenfield Pitts, the Company’s Chief Financial Officer, Michael A.B. Binney, the Company’s President — International Operations, and Eduard Will, the Company’s President — North American Operations, to internally review and approve all related party transactions in an amount in excess |
24
| | of $500,000. Following review and approval by this newly formed committee, all such related party transactions are required to be reviewed and approved by the Company’s Audit Committee. |
Except 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 theset forth 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.
Therethere 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
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.Legal Proceedings
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 not a party referenceto, and none of its property is madethe subject of, any pending legal proceedings other than routine litigation that is incidental to Part 1 its business.Item 3 - Legal Proceedings in our most recent annual
report on Form 10-K.
ITEM 1.A RISK FACTORS.1A. Risk Factors
There were no changes in any risk factors previously disclosed in our Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 2006, as amended.
2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
SHARE REPURCHASES:Unregistered Sales of Equity Securities and Use of Proceeds.
Share Repurchases:
For the quarter ended June 30,
2006,2007, we did not repurchase any shares under Emerson Radio Corp.
's’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'sEmerson’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'sEmerson’s management within the guidelines set forth by Rule 10b-18 under the Securities Exchange Act. Prior to the June 30,
20062007 quarter, the Company repurchased 1,267,623 shares under this program. As of June 30,
2006,2007, the maximum number of shares that are available to be repurchased under Emerson Radio Corp.
's’s common share repurchase program was 732,377.
21
No shares have been repurchased under the program since June 14, 2005.25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.Defaults Upon Senior Securities.
(a) None
(b) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Submission of Matters to a Vote of Security Holders.
None
ITEM 5. OTHER INFORMATION.
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
Exhibits. | 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.* |
26
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)
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| EMERSON RADIO CORP. (Registrant) | |
| /s/ Adrian Ma | |
Date: August 14, 2007 | Adrian Ma Chief Executive Officer (Principal Executive Officer)
| |
| /s/ Greenfield Pitts | |
Date: August 14, 2007 | Greenfield Pitts Chief Financial Officer (Principal Financial and Accounting Officer)
| |
| | |
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| | |
27