SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to____________________
Commission file number 0-25226
EMERSON RADIO CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-3285224
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
9 Entin Road Parsippany, New Jersey 07054
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(Address of principal executive offices) (Zip code)
(973) 884-5800
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated Filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of common stock as of August 9,
2005: 27,047,666.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
Three Months Ended
----------------------------------
June 30, 2005 June 30, 2004
------------- --------------
NET REVENUES $ 38,647 $ 47,826
COSTS AND EXPENSES:
Cost of sales 32,914 39,409
Other operating costs
and expenses 1,199 1,553
Selling, general and
administrative expenses 3,839 4,580
Acquisition costs recovered -- (71)
Stock based compensation 82 --
-------- --------
38,034 45,471
-------- --------
OPERATING INCOME 613 2,355
Interest expense, net (407) (235)
-------- --------
INCOME BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 206 2,120
Provision for income taxes 62 946
INCOME FROM CONTINUING OPERATIONS 144 1,174
Income from discontinued
operations, net of tax 271 630
-------- --------
NET INCOME $ 415 $ 1,804
======== ========
BASIC NET INCOME PER SHARE
CONTINUING OPERATIONS $ 0.01 $ 0.05
DISCONTINUED OPERATIONS 0.01 0.02
-------- --------
$ 0.02 $ 0.07
======== ========
DILUTED NET INCOME PER SHARE
CONTINUING OPERATIONS $ 0.01 $ 0.05
DISCONTINUED OPERATIONS 0.01 0.02
-------- --------
$ 0.02 $ 0.07
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 27,172 26,630
Diluted 27,225 27,261
The accompanying notes are an integral part of the interim
consolidated financial statements.
2
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, 2005 March 31, 2005
------------- --------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,861 $ 1,817
Cash securing bank loans 7,740 5,620
Accounts receivable (less allowances of $3,789 and
$3,783, respectively) 16,060 15,940
Other receivables 2,522 1,544
Inventories 45,291 38,156
Prepaid expenses and other current assets 3,068 3,300
Deferred tax assets 3,640 3,666
Current assets of discontinued operations 29,548 31,972
--------- ---------
TOTAL CURRENT ASSETS 110,730 102,015
Property and equipment - (net of accumulated depreciation
and amortization of $4,119 and $4,011, respectively) 2,302 2,292
Trademarks and other intangible assets (net of accumulated
amortization of $4,362 and $4,322, respectively) 561 600
Deferred tax assets 11,172 11,245
Other assets 863 477
Noncurrent assets of discontinued operations 13,449 14,539
--------- ---------
TOTAL ASSETS $ 139,077 $ 131,168
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term borrowings $ 85 $ 85
Short-term borrowings 16,363 13,044
Term loan 7,500 --
Accounts payable and other current liabilities 18,819 17,500
Accrued sales returns 1,713 1,919
Income taxes payable 205 243
Current liabilities of discontinued operations 9,174 13,108
--------- ---------
TOTAL CURRENT LIABILITIES 53,859 45,899
Long-term borrowings 11,639 11,960
Noncurrent liabilities of discontinued operations 2,867 3,010
Minority interest in discontinued operations 16,987 16,696
Shareholders' Equity:
Preferred shares - 10,000,000 shares authorized, 3,677
shares issued and outstanding 3,310 3,310
Common shares - $.01 par value, 75,000,000 shares
authorized; 52,883,131 shares issued, 27,047,166
and 27,203,164 shares outstanding, respectively 529 529
Capital in excess of par value 116,872 116,788
Accumulated other comprehensive losses (72) (87)
Accumulated deficit (42,690) (43,105)
Treasury stock, at cost, 25,835,965 and 25,679,967
shares, respectively (24,224) (23,832)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 53,725 53,603
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 139,077 $ 131,168
========= =========
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, 2005 June 30, 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 144 $ 1,174
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 291 209
Deferred tax expenses 99 758
Asset allowances, reserves and other (184) (38)
Changes in assets and liabilities:
Cash securing bank loans (2,120) 670
Accounts receivable (172) (4,922)
Other receivables (978) (1,185)
Inventories (7,105) (9,003)
Prepaid expenses and other current assets 232 (1,312)
Other assets (448) --
Accounts payable and other current liabilities 1,318 3,787
Income taxes payable (38) 162
-------- --------
Net cash used by continuing operations (8,961) (9,700)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (118) (43)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 10,819 (1,331)
Purchase of treasury stock (392) --
Long-term borrowings 3,496 9,500
Repayments of long-term borrowings (3,800) (3)
-------- --------
Net cash provided by financing activities 10,123 8,166
-------- --------
Net increase (decrease) in cash and cash equivalents 1,044 (1,577)
Cash and cash equivalents at beginning of year 1,817 5,213
-------- --------
Cash and cash equivalents at end of period $ 2,861 $ 3,636
======== ========
The accompanying notes are an integral part of the interim
consolidated financial statements.
4
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Emerson Radio Corp. ("Emerson", consolidated - the "Company") and its 53.2%
ownership in Sport Supply Group, Inc. ("SSG"), which was previously reported as
the Company's Sporting Goods Segment. On July 1, 2005, Emerson completed the
sale of its interest in SSG to Collegiate Pacific Inc. ("CP") for net proceeds
of approximately $30.1 million, after estimated disposition costs, which is
expected to result in a net gain of approximately $11.7 million ($0.43 per
share) being reported in the Company's quarter ended September 30, 2005. Such
gain is net of total estimated taxes of $4.4 million, which includes estimated
deferred taxes of $3.7 million. As a result of the sale, the financial position
and results of operations of SSG have been presented as discontinued operations
for all periods presented in the accompanying financial statements (see Note
10), and the Company now operates in one segment, the consumer electronics
segment. The consumer electronics business includes the design, sourcing,
importing and marketing of a variety of consumer electronic products and the
licensing of the "(Emerson LOGO)" trademark for a variety of products
domestically and internationally to certain licensees.
The unaudited interim consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present a fair statement of our consolidated financial position as
of June 30, 2005 and the results of operations for the three month periods ended
June 30, 2005 and 2004. 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, 2005 ("fiscal 2005"), included in our annual report on Form 10-K for
fiscal 2005.
Due to the seasonal nature of Emerson's business, the results of
operations for the three month period ended June 30, 2005 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, 2006 ("fiscal 2006").
Certain reclassifications were made to conform the prior
year's financial statements to the current presentation.
5
During the fourth quarter of fiscal 2005 the Company elected to
early-adopt SFAS No. 123R, "Share-Based Payment" ("SFAS 123R") under the
modified retrospective approach applied only to prior interim periods in fiscal
2005. As a result, the Company has applied SFAS 123R to new awards and to awards
modified, repurchased, or cancelled after April 1, 2004. Additionally,
compensation cost for the portion of awards for which the requisite service had
not been rendered that were outstanding as of April 1, 2004 are being recognized
as the requisite service is rendered on or after April 1, 2004 (generally over
the remaining option vesting period). The compensation cost for that portion of
awards has been based on the grant-date fair value of those awards as calculated
for pro forma disclosures under Statement 123. As a result of the early
adoption, under the provision of SFAS 123R, the Company has recorded
compensation costs of approximately $82,000 and $0 in income from continuing
operations for the three months ended June 30, 2005 and 2004, respectively.
NOTE 2 - COMPREHENSIVE INCOME
Our comprehensive income for the three months ended June 30, 2005
and 2004 is as follows (in thousands):
Three Months Ended
June 30, 2005 June 30, 2004
------------- -------------
(Unaudited)
Net Income $ 415 $ 1,804
Interest rate swap -- (4)
Unrealized gain on securities, net 15 --
------- -------
Comprehensive income $ 430 $ 1,800
======= =======
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, 2005 June 30, 2004
------------- -------------
NUMERATOR:
Earnings from continuing operations
- for basic and diluted earnings
per share $ 144 $ 1,174
======= =======
DENOMINATOR:
Denominator for basic earnings per
share - weighted average shares 27,172 26,630
Effect of dilutive securities:
options and warrants 53 631
------- -------
Denominator for diluted earnings
per share - weighted average shares
and assumed conversions 27,225 27,261
======= =======
Earnings from continuing operations
Basic and diluted earnings per share $ 0.01 $ 0.05
======= =======
6
NOTE 4- SHAREHOLDERS' EQUITY
Our outstanding capital stock at June 30, 2005 consisted of common
stock and Series A convertible preferred stock from which the conversion feature
expired effective March 31, 2002.
At June 30, 2005, Emerson had outstanding approximately 682,000 options
with exercise prices ranging from $1.00 to $3.26.
In September 2003, the Company publicly announced the Emerson Radio
Corp. common stock repurchase program. The program provides for share
repurchases of up to 2,000,000 shares of Emerson's outstanding common stock. As
of June 30, 2005, the Company had repurchased 1,267,623 shares under this
program. During the quarter ended June 30, 2005, the Company repurchased 155,998
shares under this program. Repurchase of the Company's shares are subject to
certain conditions under Emerson's banking facility.
On October 7, 2003, in connection with a consulting agreement, Emerson
granted 50,000 warrants with immediate vesting and an exercise price of $5.00
per share with an expiration date of October 2008. These warrants were valued
using the Black-Scholes valuation model. For the three months ended June 30,
2005 and 2004, no expense was charged to operations for these warrants. As of
June 30, 2005, these warrants had not been exercised.
On August 1, 2004, in connection with a consulting agreement, Emerson
granted 50,000 warrants with immediate vesting and an exercise price of $3.00
per share with an expiration date of August 2009. These warrants were valued
using the Black-Scholes valuation model. For the three months ended June 30,
2005 and 2004, no expense was charged to operations for these warrants. As of
June 30, 2005, these warrants had 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 for the consumer electronics
segment. As of June 30, 2005 and March 31, 2005, inventories consisted of the
following:
June 30, 2005 March 31, 2005
------------- --------------
(In thousands)
(Unaudited)
Finished goods $ 46,551 $ 39,446
Less inventory allowances (1,260) (1,290)
-------- --------
$ 45,291 $ 38,156
======== ========
7
NOTE 6 - INCOME TAXES
We have 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, we believe 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 assets considered
realizable, however, 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 we determine that we would not be
able to realize all or part of the net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made.
NOTE 7 - RELATED PARTY TRANSACTIONS
Effective March 1997, and as subsequently amended on July 1, 2005,
Emerson entered into a Management Services Agreement with SSG, under which each
company provides various managerial and administrative services to the other
company for fees at terms which management believes reflect arms length
transactions. These charges totaled a net credit of $16,000 and a net expense of
$65,000 in continuing operations for the three months ended June 30, 2005 and
2004, respectively, with a corresponding increase and reduction of costs
reflected in discontinued operations.
NOTE 8 - BORROWINGS
SHORT-TERM BORROWINGS
As of June 30, 2005 and March 31, 2005, short-term borrowings consisted
of amounts outstanding under the Company's foreign bank facilities held by its
foreign subsidiaries. Availability under this facility totals $20.0 million and
is maintained by the pledge of bank deposits of approximately $7.7 million and
$5.6 million as of June 30, 2005 and March 31, 2005, respectively.
June 30, 2005 March 31, 2005
------------- --------------
(In thousands)
(Unaudited)
Foreign bank loans $16,363 $13,044
======= =======
8
LONG-TERM BORROWINGS
As of June 30, 2005 and March 31, 2005, borrowings under long-term
facilities consisted of the following:
June 30, 2005 March 31, 2005
------------- --------------
(In thousands)
(Unaudited)
Emerson revolver $11,000 $11,300
Emerson term loan 7,500 --
Mortgage payable 696 715
Equipment notes and other 28 30
------- -------
19,224 12,045
Less Emerson term loan - current 7,500 --
Less current maturities 85 85
------- -------
Long term debt and notes payable $11,639 $11,960
======= =======
Emerson Credit Facility - On June 27, 2005, Emerson entered into a
$42.5 million Revolving Credit and Term Loan Agreement (the "Emerson Loan
Agreement") with several U.S. financial institutions. The Emerson Loan Agreement
provides for a $35 million revolving line of credit (the "Emerson Revolver").
The Emerson Loan Agreement also provides for a $7.5 million term loan which was
fully drawn upon on the date of entering the new agreement. The $35 million
revolving line of credit replaced Emerson's $25 million senior secured facility
and provides for revolving loans, subject to individual maximums which, in the
aggregate, are not to exceed the lesser of $35 million or a "Borrowing Base" as
defined in the Emerson Loan Agreement. The Borrowing Base amount is established
by specified percentages of eligible accounts receivables and inventories and
bears interest ranging from Prime plus 0.00% to 1.50% or, at Emerson's election,
LIBOR plus 1.50% to 3.00% depending on certain financial covenants. The interest
rate charged on the Term Loan ranges from prime plus 0.00% to 1.50% or, at
Emerson's election, LIBOR plus 1.50% to 3.00% depending on certain financial
covenants and amortized over a three-year period. Pursuant to the Emerson Loan
Agreement, Emerson is restricted from, among other things, paying certain cash
dividends, and entering into certain transactions without the lender's prior
consent and is subject to certain net worth and leverage financial covenants.
Amounts outstanding under the Emerson Loan Agreement are secured by
substantially all of Emerson's tangible assets.
As of June 30, 2005, there was approximately $11.0 million outstanding
under the Emerson Revolver and Emerson was in material compliance with the
covenants contained in the Emerson Loan Agreement. In July 2005, upon the
completion of the sale of Emerson's 53.2% interest in SSG, Emerson repaid the
$7.5 million Term loan as provided under the provisions of the loan agreement,
and in addition, repaid the outstanding $11.0 million under the revolver.
9
As of June 30, 2005, the carrying value of this credit facility
approximated fair value.
NOTE 9 - LEGAL PROCEEDINGS
Putative Class Actions
Between September 4, 2003 and October 30, 2003, several putative class
action lawsuits were filed in the United States District Court for the District
of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth Corby and
John Raab (the "Individual Defendants") on behalf of purchasers of Emerson's
publicly traded securities between January 29, 2003 and August 12, 2003 (the
"Class Period"). On December 17, 2003, the Court entered a Joint Stipulation and
Order consolidating these putative class actions under the caption In Re Emerson
Radio Corp. Securities Litigation, 03cv4201 (JLL) (the "Consolidated Action").
Further to that Stipulation and Order, lead plaintiff was appointed and co-lead
counsel and co-liaison counsel were approved by the Court in the Consolidated
Action. Consistent with the Stipulation and Order, the plaintiffs filed an
Amended Consolidated Complaint (the "Amended Complaint") that, among other
things, added Jerome Farnum, one of Emerson's directors, as an individual
defendant in the litigation.
Generally, the Amended Complaint alleges that Emerson and the
Individual Defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and Rule 10b-5 promulgated there under, by (i) issuing
certain positive statements during the Class Period regarding our ability to
replace lost revenues attributable to the Hello Kitty(R) license and (ii)
omitting to disclose that Emerson suffered allegedly soured relationships with
its largest retail customers. The Amended Complaint further alleges that these
statements were materially false and misleading when made because Emerson
allegedly misrepresented and omitted certain adverse facts which then existed
and disclosure of which was necessary to make the statements not false and
misleading. Emerson and the Individual Defendants deny all allegations and have
moved to dismiss the Complaint in its entirety for failure to state a claim. The
motion to dismiss was fully briefed and was submitted to the Court on October
15, 2004. The Court's decision on the motion is pending. Emerson and the
Individual Defendants intend to defend the lawsuit vigorously.
Other Matters
We are a party to various other litigation matters, in most cases
involving ordinary and routine claims incidental to its business. We cannot
estimate with certainty our ultimate legal and financial liability with respect
to such pending litigation matters. However, we believe, based on our
examination of such matters, that our ultimate liability will not have a
material adverse effect on our financial position, results of operations or cash
flows.
10
NOTE 10 - DISCONTINUED OPERATIONS
On July 1, 2005, Emerson completed the sale of its 53.2% ownership in
SSG to CP for net proceeds of approximately $30.1 million, after disposition
costs, which is expected to result in a net gain of approximately $11.7 million
being reported in the Company's quarter ending September 30, 2005. Such gain is
net of total estimated taxes of $4.4 million, which includes estimated deferred
taxes of $3.7 million. The proceeds received from the sale were used to pay down
$18.5 million of outstanding debt.
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
June 30, 2005 June 30, 2004
------------- -------------
Net revenues - SSG $23,218 $25,104
======= =======
Income from operations -
SSG 609 1,295
======= =======
Income from discontinued
operations, net $ 271 $ 630
======= =======
Net assets related to discontinued operations of $14.0 million and
$13.7 million are reported on the accompanying balance sheets for the periods
shown, and consist of:
Three Months Ended
June 30, 2005 March 31, 2005
------------- --------------
Cash and cash equivalents $ 864 $ 1,137
Accounts receivable 10,778 13,770
Inventories, net 16,299 15,361
Deferred tax assets 3,387 3,387
Property, plant and
equipment, net 5,722 5,983
Intangible assets, net 4,407 4,478
Other assets 1,540 2,395
------- -------
Total assets $42,997 $46,511
======= =======
Account payable and other
accrued liabilities $ 9,149 $13,083
Borrowings 2,892 3,035
Minority interest 16,987 16,696
======= =======
Total liabilities and
minority interest $29,028 $32,814
======= =======
Net assets $13,969 $13,697
======= =======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion of our operations and financial condition
should be read in conjunction 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. As a result, all amounts are approximations.
FORWARD-LOOKING INFORMATION
This report contains various forward-looking statements made pursuant
to the safe harbor provisions under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act") and information that is based on management's beliefs
as well as assumptions made by and information currently available to
management. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. When used in this report, the words
"anticipate", "believe", "estimate", "expect", "predict", "project", and similar
expressions are intended to identify forward-looking statements. Readers are
cautioned not to place undue reliance on forward-looking statements which speak
only as of the date hereof, and should be aware that our actual results could
differ materially from those contained in the forward-looking statements due to
a number of factors, including the statements under "Risk Factors" set forth in
our Form 10-K for the fiscal year ended March 31, 2005 and other filings with
the Securities and Exchange Commission (the "SEC"). We undertake no obligation
to publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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.
12
As a result of the sale of SSG, the results of operations of SSG have
been presented as discontinued operations for all periods presented, and the
Company now operates in one segment, the consumer electronics segment.
Accordingly, only the consumer electronics segment is presented in the following
Management's Discussion and Analysis.
The following table summarizes certain financial information for the
three month period ended June 30, 2005 (fiscal 2006) and the three month period
ended June 30, 2004 (fiscal 2005) (in thousands):
Three Months Ended
June 30
-------------------------
2005 2004
-------- --------
(Unaudited)
Net revenues $ 38,647 $ 47,826
Cost of sales 32,914 39,409
Other operating costs 1,199 1,553
Selling, general and
administrative costs 3,839 4,580
Acquisition costs recovered -- (71)
Stock based costs 82 --
-------- --------
Operating income 613 2,355
Interest expense, net 407 235
-------- --------
Income before
income taxes 206 2,120
Provision for
income taxes 62 946
-------- --------
Net income $ 144 $ 1,174
======== ========
Net Revenues - Net revenues for fiscal 2006 decreased $9.2 million, or 19.2%, to
$38.6 million from $47.8 million for fiscal 2005. Net revenues are comprised of
Emerson(R) branded product sales, themed product sales and licensing revenues.
Emerson(R) branded product sales are earned from the sale of products bearing
the Emerson(R) or HH Scott(R) brand name; themed product sales represent
products sold bearing a certain theme or character; and licensing revenues are
derived from licensing the Emerson(R) and HH Scott(R) brand names to licensees
for a fee. The decrease in net revenues for the three month period was comprised
of:
i) A decrease in revenues from the sale of Emerson(R) branded
product of $8.9 million, or 20.6%, from $43.2 million in fiscal
2005 to $34.3 million in fiscal 2006. We believe that this
revenue decrease was partially due to a shift in sales volume
from our major customer from the June quarter to the September
quarter.
ii) An increase in themed product sales of $1.2 million from $590,000
in fiscal 2005 to $1.8 million in fiscal 2006. This increase was
primarily due to the continued increase in sales of
Nickelodeon(R) themed products.
13
iii) A decrease in licensing revenues of $1.5 million, or 38.0% to
approximately $2.5 million for fiscal 2006 from $4.0 million for
fiscal 2005. This decrease was primarily due to lower sales
volumes under our video licensing agreement. We currently expect
that our licensing revenues for the current fiscal year will be
less than the $10.8 million achieved in fiscal 2005.
Cost of Sales - Cost of sales, as a percentage of net revenues, increased in
fiscal 2006 to 85.2% from 82.4% in fiscal 2005. In relative terms, the increase
in cost of sales was primarily due to a decrease in licensing revenues compared
to the prior year quarter. In absolute terms, cost of sales for fiscal 2006
decreased $6.5 million, or 16.5%, to $32.9 million from $39.4 million in fiscal
2005, primarily as as result of lower sales volume.
Gross profit margins continue to be subject to competitive pressures arising
from lower pricing of the product categories in the consumer electronics market
in which Emerson competes. Emerson's branded products are generally placed in
the low-to-medium priced category of the market.
Other Operating Costs and Expenses - Other operating costs and expenses, as a
percentage of consumer electronics net revenues, decreased to 3.1% in fiscal
2006 from 3.2% in fiscal 2005. In absolute terms, other operating costs and
expenses decreased to $1.2 million in fiscal 2006 from $1.6 million ($354,000 or
22.8%) in fiscal 2005. This decrease was primarily due to a decrease in returned
product servicing costs.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, decreased
approximately $741,000 or 16.2%, to $3.8 million (9.9% of net revenues) in
fiscal 2006 from $4.6 million (9.6% of net revenues) in fiscal 2005. The
decrease in absolute terms was primarily due to decreases in receivable reserves
and legal fees of approximately $191,000 and $480,000, respectively, as well as
various decreases in other S,G&A costs.
Acquisition Costs Recovered - In fiscal 2005, adjustments to acquisition costs
incurred in the prior year were recorded resulting in a recovery of such costs
of $71,000. These costs were associated with contemplated acquisition
transactions in fiscal 2004 that were not completed.
Stock Based Costs - Stock based costs relate to stock options expense associated
with the adoption of SFAS 123R "Share-Based Payments." Stock based costs for
fiscal 2006 and 2005 were approximately $82,000 and $0, respectively.
14
Interest Expense, net - Interest expense increased approximately $172,000, or
73.2%, to $407,000 in fiscal 2006 from $235,000 in fiscal 2005. The increase in
interest expense was the result of higher average borrowings and higher
borrowing costs. The higher average borrowings were used for increased inventory
in preparation for the traditionally higher demand holiday season, and
increasing inventory balances resulting from the continuing shift from our
direct import to our domestic business.
Provision for Income Taxes - The provision for income taxes was approximately
$62,000 in fiscal 2006 and $946,000 in fiscal 2005. The decrease in the
provision for the three month period was primarily the result of lower pre-tax
profit as compared to the same period in fiscal 2005.
Net Income - As a result of the foregoing factors, net income from continuing
operations amounted to approximately $144,000 (0.4% of net revenues) in fiscal
2006 as compared to $1.2 million (2.5% of net revenues) in fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005, we had cash and cash equivalents of approximately
$2.9 million compared to approximately $1.8 million at March 31, 2005. Working
capital increased to $20.4 million at June 30, 2005 as compared to $18.9 million
at March 31, 2005. The increase in cash and cash equivalents of approximately
$1.1 million was due to additional short term borrowings more than offsetting
cash used by operation and investing activities, as described below.
Cash flows used in continuing operating activities were approximately
$9.0 million for fiscal 2006, primarily related to increases in cash securing
bank loans ($2.1 million), and inventories ($7.1 million), offset by an increase
in accounts payable and accrued liabilities ($1.3 million). The increase in
inventory was due to the seasonal nature of the business, and the continuing
shift from the direct import to domestic business which creates a growing need
for inventory at domestic locations.
Net cash used by investing activities was approximately $118,000 in
fiscal 2006, which consisted of machinery and office equipment purchases.
Net cash provided from financing activities was approximately $10.1
million in fiscal 2006, primarily as a result of additional short term
borrowings. Cash was primarily utilized for the increase in inventory due to the
seasonal increase in inventory and the continuing shift from direct import to
domestic business.
Emerson maintains a credit facility as described in Note 8 to our
consolidated financial statements - Borrowings. At June 30, 2005, there were
approximately $11.0 million of borrowings outstanding under this facility with
no letters of credit outstanding, and Emerson was in material compliance with
the covenants in the loan agreement. The Revolver expires in June 2008, and
accordingly, all amounts outstanding under this facility have been presented as
long-term, while the Term Loan, which was repaid in July 2005, is presented as a
current debt.
15
Our foreign subsidiaries maintain various credit facilities,
aggregating $50.0 million, consisting of the following:
o Three letter of credit facilities totaling $20.0 million which is
used for inventory purchases; and
o Three back-to-back letter of credit facilities totaling $30.0
million.
At June 30, 2005, our foreign subsidiaries pledged approximately $7.7
million in certificates of deposit to these banks to assure the availability of
the $20.0 million of credit facilities. At June 30, 2005, there were
approximately $10.8 million of letters of credit outstanding under these credit
facilities. These letter of credit facilities require the foreign subsidiary to
meet a net worth covenant which was complied with at June 30, 2005.
At present, we believe that future cash flows from operations, our
existing institutional financing noted above and the sale of our investment in
SSG will be sufficient to fund all of our cash requirements for the next twelve
months.
The following summarizes our obligations at June 30, 2005 for the
periods shown (in thousands):
PAYMENT DUE BY PERIOD
-----------------------------------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1 - 3 YEARS 3 - 5 YEARS 5 YEARS
-------------- --------------- ------------------ ------------------- -------------------
Notes and $19,196 $ 7,574 $11,148 $ 148 $ 326
mortgages payable
Capital lease 28 11 17 -- --
obligations
Leases 2,961 737 1,393 767 64
------- ------- ------- ------- -------
Total $22,185 $ 8,322 $12,558 $ 915 $ 390
======= ======= ======= ======= =======
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, 2005.
CRITICAL ACCOUNTING POLICIES
For the three month period ended June 30, 2005, 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, 2005.
16
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 2006. Our exposure
to currency fluctuations has been minimized by the use of U.S. dollar
denominated purchase orders, and by sourcing production in more than one
country. The consumer electronics segment purchases virtually all of its
products from manufacturers located in various Asian countries.
The interest on borrowings under our credit facilities is based on the
prime and LIBOR rates. Given the present economic climate, interest rates, while
expected to continue to rise, are not expected to increase significantly during
the coming year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes from items disclosed in Form
10-K for the fiscal year ended March 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures.
During the first quarter of fiscal 2006, 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, 2005, 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.
17
(b) Changes in internal controls over financial reporting.
There have been no changes in our internal controls over financial
reporting that occurred during our last fiscal quarter to which this Quarterly
Report on Form 10-Q relates that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Putative Class Actions
Between September 4, 2003 and October 30, 2003, several putative class
action lawsuits were filed in the United States District Court for the District
of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth Corby and
John Raab (the "Individual Defendants") on behalf of purchasers of Emerson's
publicly traded securities between January 29, 2003 and August 12, 2003 (the
"Class Period"). On December 17, 2003, the Court entered a Joint Stipulation and
Order consolidating these putative class actions under the caption In Re Emerson
Radio Corp. Securities Litigation, 03cv4201 (JLL) (the "Consolidated Action").
Further to that Stipulation and Order, lead plaintiff was appointed and co-lead
counsel and co-liaison counsel were approved by the Court in the Consolidated
Action. Consistent with the Stipulation and Order, the plaintiffs filed an
Amended Consolidated Complaint (the "Amended Complaint") that, among other
things, added Jerome Farnum, one of Emerson's directors, as an individual
defendant in the litigation.
Generally, the Amended Complaint alleges that Emerson and the
Individual Defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and Rule 10b-5 promulgated 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. The Amended Complaint further alleges that these
statements were materially false and misleading when made because Emerson
allegedly misrepresented and omitted certain adverse facts which then existed
and disclosure of which was necessary to make the statements not false and
misleading. Emerson and the Individual Defendants deny all allegations and have
moved to dismiss the Complaint in its entirety for failure to state a claim. The
motion to dismiss was fully briefed and was submitted to the Court on October
15, 2004. The Court's decision on this motion is pending. Emerson and the
Individual Defendants intend to defend the lawsuit vigorously.
18
For other information on litigation to which the Company is a party,
reference is made to Part 1 Item 3 - Legal Proceedings in our most recent annual
report on Form 10-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
SHARE REPURCHASES:
The following table summarizes Emerson Radio Corp.'s common stock share
repurchase program for the quarter ending June 30, 2005. The share repurchase
program was publicly announced in September 2003 to repurchase up to 2,000,000
shares of Emerson's outstanding common stock. Share repurchases are made from
time to time in open market transactions in such amounts as determined in the
discretion of Emerson's management within the guidelines set forth by Rule
10b-18 under the Securities Exchange Act. Prior to the June 30, 2005 quarter,
the Company repurchased 1,111,625 shares under this program. As of June 30,
2005, the maximum number of shares that are available to be repurchased under
Emerson Radio Corp's common share repurchase program was 732,377.
Cumulative
Number of Maximum Number of
Shares Purchased Shares that May
Total Number Average as Part of Yet Be Purchased
of Shares Price Paid Publicly Under the
Period Purchased Per Share Announced Programs Programs
- --------------------------------------------------------------------------------------------------------------------
April 01, 2005
through
June 30, 2005 155,998 $2.53 1,267,623 732,377
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
(a) None
(b) None
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. 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.*
- ---------------------
* filed herewith
20
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 12, 2005 /s/ Geoffrey P. Jurick
----------------------
Geoffrey P. Jurick
Chairman of the Board,
Chief Executive Officer and
President
(Principal Executive Officer)
Date: August 12, 2005 /s/ Guy A. Paglinco
-------------------
Guy A. Paglinco
Vice President and
Chief Financial Officer
(Principal Finance and
Accounting Officer)
21