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UNITED STATES
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, 2003
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.
(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
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code): (973)884-5800
(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 8,
2003: 27,564,560.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS (LOSS) PER SHARE DATA)
Three Months Ended
------------------
June 30, June 30,
2003 2002
---- ----
Net revenues $ 57,598 $ 83,581
COSTS AND EXPENSES:
Cost of sales 45,189 65,180
Other operating costs and expenses 1,256 1,297
Selling, general & administrative expenses 11,197 11,537
-------- --------
57,642 78,014
-------- --------
OPERATING INCOME (LOSS) (44) 5,567
Interest expense, net (414) (787)
Minority interest in net income of consolidated subsidiary (54) (98)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF (512) 4,682
CHANGE IN ACCOUNTING PRINCIPLE
Provision (benefit) for income taxes (67) 2,022
-------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (445) 2,660
Cumulative effect of change in accounting principle -- (5,546)
-------- --------
NET LOSS $ (445) $ (2,886)
======== ========
BASIC NET INCOME (LOSS) PER SHARE
Income (loss) before cumulative effect of change in
accounting principle $ (.02) $ .09
Cumulative effect of change in accounting principle $ -- $ (.19)
-------- --------
$ (.02) $ (.10)
======== ========
DILUTED NET INCOME (LOSS) PER SHARE
Income (loss) before cumulative effect of change in
accounting principle $ (.02) $ .09
Cumulative effect of change in accounting principle $ -- $ (.16)
-------- --------
$ (.02) $ (.07)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 27,416 29,444
Diluted 28,482 35,025
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, March 31,
2003 2003
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,698 $ 11,413
Accounts receivable (less allowances of $4,313 and $3,938, respectively) 29,505 24,593
Other receivables 3,281 2,954
Inventories 54,812 45,177
Prepaid expenses and other current assets 4,077 6,871
Deferred tax assets 6,702 6,761
--------- ---------
Total current assets 102,075 97,769
Property and equipment - (net of accumulated depreciation and amortization
of $7,157 and $6,628, respectively) 9,367 9,823
Deferred catalog expenses 1,444 1,912
Trademarks and other intangible assets (net of accumulated amortization of
$3,537 and $3,403, respectively) 5,499 5,613
Deferred tax assets 17,622 17,595
Other assets 1,707 1,850
--------- ---------
Total Assets $ 137,714 $ 134,562
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 4,614 $ 1,918
Current maturities of long-term borrowings 3,670 11,634
Accounts payable and other current liabilities 31,367 30,596
Accrued sales returns 3,528 3,768
Income taxes payable 550 752
--------- ---------
Total current liabilities 43,729 48,668
Long-term borrowings 26,493 18,079
Minority interest 16,636 16,578
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; 51,993,131
and 51,981,431 shares issued; 27,424,789 and 27,413,089 shares
outstanding, respectively 520 520
Capital in excess of par value 115,152 115,122
Accumulated other comprehensive losses (70) (104)
Accumulated deficit (48,381) (47,936)
Treasury stock, at cost, 24,568,342 shares (19,675) (19,675)
--------- ---------
Total shareholders' equity 50,856 51,237
--------- ---------
Total Liabilities and Shareholders' Equity $ 137,714 $ 134,562
========= =========
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,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (445) $ (2,886)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Minority interest 54 99
Depreciation and amortization 811 841
Deferred tax assets 32 2,007
Cumulative effect of accounting change -- 5,546
Asset allowances and reserves 522 2,274
Other 38 --
Changes in assets and liabilities, net of acquisition of SSG:
Accounts receivable (4,991) (2,012)
Other receivables (327) (1,768)
Inventories (10,078) (3,683)
Prepaid expenses and other current assets 3,262 250
Other assets -- (120)
Accounts payable and other current liabilities 531 5,434
Income taxes payable (202) (129)
-------- --------
Net cash provided (used) by operating activities (10,793) 5,853
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (80) (165)
-------- --------
Net cash used by investing activities (80) (165)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit facility 2,696 (1,534)
Purchase of common stock -- (5,697)
Exercise of stock options and warrants 12 --
Long-term borrowings 450 --
Repayments of long-term borrowings -- (4,644)
-------- --------
Net cash provided (used) by financing activities 3,158 (11,875)
Net decrease in cash and cash equivalents (7,715) (6,187)
Cash and cash equivalents at beginning of year 11,413 19,228
-------- --------
Cash and cash equivalents at end of period $ 3,698 $ 13,041
======== ========
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 - "Us", "We", "Our") and its majority-owned
subsidiaries, including Sport Supply Group, Inc. ("SSG").
We operate in two business segments: consumer electronics and sporting
goods. The consumer electronics segment designs, sources, imports and markets a
variety of consumer electronic products and licenses the "[EMERSON LOGO]"
trademark for a variety of products domestically and internationally to certain
licensees. The sporting goods segment, which is operated through Emerson's 53.2%
ownership of SSG, manufactures, markets, and distributes sports related
equipment and leisure products to institutional customers in the United States.
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, 2003 and the results of operations for the quarters ended June 30,
2003 and 2002. 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. It is suggested that these
unaudited interim consolidated financial statements be read in conjunction with
the consolidated financial statements and notes thereto for the fiscal year
ended March 31, 2003 ("fiscal 2003"), included in our annual report on Form
10-K.
The consolidated financial statements include our accounts and those of
our majority-owned subsidiaries. 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.
Due to the seasonal nature of both segments, the results of operations for
the quarter ended June 30, 2003 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, 2004 ("fiscal 2004").
Emerson and SSG have elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees: ("APB 25") and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on date of grant, no
compensation expense is recognized. Emerson and SSG have adopted the
5
disclosure-only provisions under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). For the purposes of
SFAS 123 pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The Company's pro forma
information for the three months ended June 30, 2003 and 2002 follows:
JUNE 30, JUNE 30,
2003 2002
--------- ---------
Net loss: (in thousands)
As reported $ (445) $ (2,886)
Less: Stock-based compensation
expense (7) (27)
--------- ---------
Pro forma $ (452) $ (2,913)
========= =========
Net loss per common share:
Basic - as reported $ (.02) $ (.10)
Basic - pro forma $ (.02) $ (.10)
Diluted - as reported $ (.02) $ (.07)
Diluted - pro forma $ (.02) $ (.07)
Certain reclassifications were made to conform prior years' financial
statements to the current presentation.
NOTE 2 - COMPREHENSIVE LOSS
Our comprehensive loss for the three months ended June 30, 2003 and 2002
is as follows (in thousands):
Three Months Ended
------------------
June 30, June 30,
2003 2002
---- ----
(Unaudited)
Net loss $ (445) $ (2,886)
Currency translation adjustment -- 1
Interest rate swap (4) --
Unrealized loss on securities, net (4) (1)
Recognition of unrealized losses related
to investments included in net income 42 --
-------- --------
Comprehensive loss $(411) $ (2,886)
======== ========
6
NOTE 3 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share before cumulative effect of change in accounting
principle (in thousands, except per share amounts):
For the Three Months Ended
--------------------------
June 30, June 30,
2003 2002
--------- --------
(Unaudited)
NUMERATOR:
Net earnings (loss) before cumulative effect of change in accounting principle $ (445) $ 2,660
Add back to effect assumed conversions:
Interest on convertible debentures -- 441
--------- --------
Numerator for diluted earnings (loss) per share $ (445) $ 3,101
========= ========
DENOMINATOR:
Denominator for basic earnings (loss) per share - weighted average shares 27,416 29,444
Effect of dilutive securities:
Options 1,066 377
Convertible debentures -- 5,204
--------- --------
Denominator for diluted earnings (loss) per share - weighted average shares and
assumed conversions 28,482 35,025
========= ========
Basic earnings (loss) per share, before
cumulative effect of change in accounting
principle $ (0.02) $ 0.09
========= ========
Cumulative effect of change in accounting
principle $ -- $ (0.19)
========= ========
Basic (loss) per share $ (0.02) $ (0.10)
========= ========
Diluted earnings (loss) per share, before
cumulative effect of change in accounting
principle $ (0.02) $ 0.09
========= ========
Cumulative effect of change in accounting
principle $ -- $ (0.16)
========= ========
Diluted (loss) per share $ (0.02) $ (0.07)
========= ========
NOTE 4 - CAPITAL STRUCTURE
Our outstanding capital stock at June 30, 2003 consisted of common stock
and Series A convertible preferred stock in which the conversion feature expired
effective March 31, 2002.
7
At June 30, 2003, Emerson had outstanding approximately 1.2 million
options with exercise prices ranging from $1.00 to $1.50. At June 30, 2003, SSG
had outstanding approximately 279,000 options with exercise prices ranging from
$0.95 to $9.44.
On August 1, 2002, Emerson granted 200,000 warrants with an exercise price
of $2.20, vesting 50% in six months and 50% one year from date of grant in
conjunction with a consulting agreement. The warrants were valued using the
Black-Scholes option valuation model and are charged to earnings over the
related service period of the consulting agreement with $19,000 being charged to
operations for the three months ending June 30, 2003. In February 2003, 100,000
of these warrants were exercised, and accordingly the Company issued 100,000
shares of common stock.
As of August 15, 2002, Emerson's $20.8 million of 8.5% Senior Subordinated
Convertible Debentures (the "Debentures") were fully retired using funds secured
from a financing facility dated June 28, 2002 and from the generation of cash
from operations. See "Note 9 - Borrowings".
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 and
for the sporting goods segment, standard cost method for items manufactured and
weighted average cost for items purchased for resale. As of June 30, 2003 and
March 31, 2003, inventories consisted of the following (in thousands):
June 30, March 31,
2003 2003
--------- ---------
(Unaudited)
Raw materials $ 2,049 $ 2,095
Work-in-process 335 318
Finished 55,494 45,387
--------- ---------
57,878 47,800
Less inventory allowances (3,066) (2,623)
--------- ---------
$ 54,812 $ 45,177
========= =========
NOTE 6 - INCOME TAXES
We have tax net operating loss carry forwards included in net deferred tax
assets that can be used to offset future taxable income and can be carried
forward for 15 to 20 years. Although realization is not assured, we believe it
is likely 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,
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. At June 30, 2003,
8
approximately $24.3 million of deferred tax assets were reported on our balance
sheet.
NOTE 7 - INVESTMENT IN SPORT SUPPLY GROUP, INC.
As of June 30, 2003 and March 31, 2003, Emerson owned 4,746,023 (53.2% of
the issued and outstanding) shares of common stock of SSG. SSG's results of
operations and the minority interest related to those results have been included
in our quarterly results of operations.
Effective March 1997, Emerson entered into a Management Services Agreement
with SSG, under which each company provides various managerial and
administrative services to the other company for a fee at terms reflected in an
arms-length transaction. These charges have been eliminated in consolidation.
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 142 requires that goodwill not be amortized but instead
be tested for impairment at least annually by reporting unit. We adopted SFAS
142 effective April 1, 2002. As a result, we ceased recording amortization of
goodwill on April 1, 2002 and, as a result of our impairment testing, we
recorded a non-cash "cumulative effect of change in accounting principle" of
approximately $5.5 million ($-0.16 per diluted share for the three months ended
June 30, 2002) due to the impairment of all of the goodwill attributed to the
sporting goods segment for the three months ended June 30, 2002.
As of June 30, 2003, estimated amortization expense of other intangible
assets for each of the next five years is as follows (in thousands):
2004 $ 504
2005 504
2006 466
2007 406
2008 337
Thereafter 3,282
-----------
$ 5,499
===========
NOTE 9 - BORROWINGS
As of June 30, 2003 and March 31, 2003, short-term borrowings consisted of
the following (in thousands):
9
June 30, March 31,
2003 2003
---------- ----------
(Unaudited)
Foreign bank loan $ 4,614 $ 1,918
---------- ----------
Short-term borrowings $ 4,614 $ 1,918
========== ==========
As of June 30, 2003 and March 31, 2003, long-term borrowings consisted of
the following (in thousands):
June 30, March 31,
2003 2003
---- ----
(Unaudited)
Revolver (Revolver A) $ 3,000 $ --
Term Loan (Term Loan) 11,000 12,000
Notes payable under revolving line of credit (Revolver B) 16,032 17,522
Equipment notes and other 131 191
------- -------
30,163 29,713
Less current maturities 3,670 11,634
------- -------
Long term debt and notes payable $26,493 $18,079
======= =======
Refinancing Transaction in fiscal 2003 - On June 28, 2002, Emerson entered
into a $40 million Revolving Credit and Term Loan Agreement ("Loan Agreement")
with several U.S. financial institutions. The Loan Agreement provides for a $25
million revolving line of credit (Revolver A) and a $15 million term loan (Term
Loan). The $25 million revolving line of credit replaced Emerson's existing $15
million senior secured facility and provides for revolving loans, subject to
individual maximums which, in the aggregate, are not to exceed the lesser of $25
million or a "Borrowing Base" as defined in the Loan Agreement.
The $15 million term loan (Term Loan) combined with cash earned from
Emerson's operations was used to retire all of Emerson's 8.5% Senior
Subordinated Convertible Debentures (Debentures) in the amount of $20.75 million
in fiscal 2003.
Revolver A and Term Loan - On June 28, 2002, Emerson entered into a $40
million Loan Agreement with several U.S. financial institutions. The Loan
Agreement provides for a $25 million revolving line of credit (Revolver A) and a
$15 million term loan (Term Loan). The $25 million revolving line of credit
replaced Emerson's existing $15 million senior secured facility and provides for
revolving loans, subject to individual maximums which, in the aggregate, are not
to exceed the lesser of $25 million or a "Borrowing Base" amount based on
specified percentages of eligible accounts receivables and inventories and bears
interest ranging from Prime plus 0.50% to 1.25% or, at Emerson's election, LIBOR
plus 2.00% to 2.75% depending on
10
certain financial covenants. The interest rate charged on the term loan ranges
from Prime plus 1.00% to 1.75% or, at Emerson's election, LIBOR plus 2.50% and
3.25% depending on certain financial covenants and amortizes over a three-year
period. Pursuant to the Loan Agreement, Emerson is restricted from, among other
things, paying cash dividends other than on preferred shares, repurchasing
Emerson's common stock and entering into certain transactions without the
lender's prior consent and are subject to certain net worth and leverage
financial covenants. Amounts outstanding under the Loan Agreement are secured by
substantially all of Emerson's assets. As of June 30, 2003, $11.0 million was
outstanding under this term facility, and $3.0 million was outstanding under the
revolver. Pursuant to the terms of Emerson's term loan, excess cash flow earned
in the fiscal year ended March 31, 2003 of approximately $7.4 million is
required to be repaid. Repayment was made from borrowings under its revolving
credit facility subsequent to June 30, 2003.
Revolver B - Notes payable under a revolving line of credit (Revolver B)
were issued by SSG in March 2001, replacing a prior facility. The facility,
which expires on August 1, 2004 provides for a $25 million revolving line of
credit, and provides for revolving loans and is subject to individual maximums
which, in the aggregate, cannot exceed the lesser of $25 million or a "Borrowing
Base" amount based upon specified percentages of eligible accounts receivables
and inventories. Amounts outstanding under the senior credit facility are
secured by substantially all the assets of SSG and its subsidiaries. At June 30,
2003, the interest rate charged under this facility was a combination of LIBOR
plus 2.5% and the prime rate of interest ranging from minus .25% to prime plus
1.0%. Pursuant to the loan documents governing this line of credit, SSG is
restricted from, among other things, paying cash dividends and entering into
certain transactions without the lender's prior consent. As of June 30, 2003,
SSG was in compliance with the covenants contained in the senior credit
facility.
As of June 30, 2003, the carrying value of the credit facilities
approximated their fair value.
NOTE 10 - SEGMENT INFORMATION
The following table presents certain operating segment information for
each of the three-month periods ended June 30, 2003 and 2002 (in thousands):
Three Months Ended June 30, 2003:
------------------------------------
Consumer Sporting
Electronics Goods
----------- --------
Net revenues from external customers $ 31,637 $ 25,961
Income (loss) before income taxes and cumulative effect
of change in accounting principle $ (696) $ 184
Segment assets $ 84,346 $ 53,368
11
Three Months Ended June 30, 2002:
------------------------------------
Consumer Sporting
Electronics Goods
----------- --------
Net revenues from external customers $ 56,808 $ 26,773
Income before income taxes and cumulative effect of
change in accounting principle $ 4,345 $ 337
Segment assets $ 73,458 $ 53,024
NOTE 11 - LEGAL PROCEEDINGS
We are involved in legal proceedings and claims of various types in the
ordinary course of our business. While any such litigation to which we are a
party contains an element of uncertainty, we presently believe that the outcome
of each such proceeding or claim which is pending or known to be threatened, or
all of them combined, will not have a material adverse effect on our
consolidated financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Management's Discussion and Analysis of Results of Operation is presented
in three parts: consolidated operations, the consumer electronics segment and
the sporting goods segment.
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all figures are approximations.
CONSOLIDATED OPERATIONS:
The following table sets forth, for the periods indicated, certain items
related to our consolidated statements of operations as a percentage of
consolidated net revenues for the three month periods ended June 30, 2003 and
2002. A detailed discussion of the material changes in our operating results is
set forth under our discussion of our two operating segments: consumer
electronics and sporting goods.
2003 2002
--------- ---------
(Unaudited)
Net revenues (in thousands) $ 57,598 $ 83,581
100.0% 100.0%
Cost of sales 78.5% 78.0%
Other operating costs and expenses 2.2% 1.5%
12
Selling, general and administrative expenses 19.4% 13.8%
--------- ---------
Operating income (loss) (0.1)% 6.7%
Interest expense (0.7)% (1.0)%
Minority interest in net income of consolidated
subsidiary (0.1)% (0.1)%
Provision (benefit) for income taxes (0.1)% 2.4%
Cumulative effect of change in Accounting principle 0.0% (6.6)%
--------- ---------
Net loss (0.8)% (3.4)%
========= =========
Net Revenues - Net revenues for the three month period ended June 30, 2003 were
$57.6 million as compared to $83.6 million for the three month period ended June
30, 2002. The decrease of approximately $26.0 million (31.1%) was attributable
to decreases in both segments, with the majority of the decreases occurring in
the consumer electronics segment.
Cost of Sales - Cost of sales, as a percentage of consolidated net revenues,
increased from 78.0% for the three months ended June 30, 2002 to 78.5% for the
same period in fiscal 2004. The increase in cost of sales was primarily the
result of lower margins in both the consumer electronics and sporting goods
segments. In absolute terms, cost of sales decreased $20.0 million for the three
month period of fiscal 2004 as compared to the same period in fiscal 2003.
Other Operating Costs and Expenses - Other operating costs and expenses are
associated with the consumer electronics segment. As a percentage of
consolidated net revenues, other operating costs increased from 1.5% for the
three months ended June 30, 2002 as compared to 2.2% for the same period in
fiscal 2004. In absolute terms, other operating costs and expenses remained
relatively unchanged for the three month period of fiscal 2004 as compared to
the same period in fiscal 2003.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A Expenses, were
$11.2 million (19.4% of net revenues) for the three month period of fiscal 2004
as compared to $11.5 million (13.8% of net revenues) for the three months ended
June 30, 2002. The decrease in absolute terms was due to decreases in the
sporting goods segment, partially offset by increases in the consumer
electronics segment.
Interest Expense, Net - Interest expense decreased from $787,000 (1.0% of net
revenues) for the three months ended June 30, 2002 to $414,000 (0.7% of net
revenues) in the three months ended June 30, 2003. The decrease in interest
expense was in both segments as a result of lower borrowings and lower borrowing
costs in the consumer electronics segment.
Minority Interest in Net Income of Consolidated Subsidiary - Minority interest
in net income of consolidated subsidiary represents that portion of the sporting
goods segment income for the three month periods ended June 30,
13
2003 and 2002, that were not included in the consolidated statements of
operations. See "Note 1 - Background and Basis of Presentation."
Provision (Benefit) for Income Taxes - The benefit for income taxes for the
three months ended June 30, 2003 was $67,000 as compared to a provision of
approximately $2.0 million for the three months ended June 30, 2002.
Cumulative Effect of Change in Accounting Principle - On April 1, 2002, we
adopted Financial Accounting Standards Board's Statement No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142). SFAS 142 requires that goodwill not be
amortized, but instead be tested for impairment at least annually by reporting
unit. As a result of our impairment testing, we recorded a non-cash "cumulative
effect of accounting change" of approximately $5.5 million for the three months
ended June 30, 2002, due to the impairment of all of the goodwill attributed to
the Company's sporting goods segment. See "Note 8 - Goodwill and Other
Intangible Assets."
Net Loss - As a result of the foregoing factors, we generated a loss of $445,000
(-0.8% of net revenues) for the three months ended June 30, 2003 as compared to
a loss of $2.9 million (-3.4% of net revenues) for the three months ended June
30, 2002.
CONSUMER ELECTRONICS SEGMENT:
The following table summarizes certain financial information relating to the
consumer electronics segment for the three months ending June 30, 2003 and
2002(in thousands):
2003 2002
-------- --------
(Unaudited)
Net revenues $ 31,637 $ 56,808
Cost of sales 26,602 46,546
Other operating costs 1,256 1,297
Selling, general & administrative 4,143 3,911
-------- --------
Operating income (loss) (364) 5,054
Interest expense, net (278) (611)
-------- --------
Income (loss) before income taxes (642) 4,443
Provision (benefit) for income taxes (136) 1,895
-------- --------
Net income (loss) $ (506) $ 2,548
======== ========
Net Revenues - Net revenues for the three months ended June 30, 2003 decreased
$25.2 million (44.3%) as compared to the same period ended June 30, 2002. The
decrease in net revenues was the result of decreases in sales in all product
categories mainly due to the general slow down of the economy, a reduction in
license revenues, an increase in returned product and a reduction in inventory
levels maintained by our customers. Revenues earned from the licensing of
Emerson's trademarks decreased to $3.1 million for the
14
first three months of fiscal 2004 as compared to $3.9 million for the same
period in fiscal 2003. The Company has elected to discontinue the sale of
products marketed under the NASCAR(R) and Mary-Kate and Ashley(R) names. For the
quarter ending September 30, 2003, the Company expects net revenues for its
consumer electronics segment to be approximately 25% lower than that of the
September 30, 2002 quarter.
Cost of Sales - Cost of sales, as a percentage of consumer electronics net
revenues, increased to 84.1% for the three months ended June 30, 2003 as
compared to 81.9% for the three months ended June 30, 2002. The increase in cost
of sales as a percentage of consumer electronics net revenues was primarily
attributable to competitive market conditions and a reduction in sales of higher
margin themed products. In absolute terms, cost of sales decreased $20.0 million
for the three month period of fiscal 2004 as compared to the same period in
fiscal 2003.
The consumer electronics segment gross profit margins continue to be subject to
competitive pressures arising from pricing strategies associated with the price
categories of the consumer electronics market in which Emerson competes.
Emerson's products are generally placed in the low-to-medium priced category of
the market, which has a tendency to be highly competitive.
Other Operating Costs and Expenses - Other operating costs and expenses as a
percentage of consumer electronics net revenues increased from 2.3% for the
three months ended June 30, 2002 to 4.0% for the three months ended June 30,
2003. The increase between fiscal 2003 and 2004 was primarily due to a reduced
revenue base while maintaining a higher average inventory level. In absolute
terms, other operating costs and expenses remained relatively unchanged at $1.3
million for the three months ended June 30, 2003 and 2002.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a percentage
of consumer electronics net revenues, was 13.1% for the three months ended June
30, 2003 as compared to 6.9% for the three months ended June 30, 2002. The
increase in S,G&A as a percentage of net revenues was mainly due to a lower net
revenue base for the three months ended June 30, 2003. S,G&A, in absolute terms,
increased by $232,000 for the three months ended June 30,2003 as compared to the
same period ended June 30, 2002. The increase in absolute terms was primarily
due to costs of approximately $643,000 associated with an attempted acquisition
which was unsuccessful, that were partially offset by reductions in various
other categories of S,G&A.
Interest Expense, net - Interest expense decreased from $611,000 (1.1% of the
consumer electronics net revenues) for the three months ended June 30, 2002 to
$278,000 (0.9% of the consumer electronics net revenues) in the three months
ended June 30, 2003. In absolute terms, interest expense decreased by
approximately $333,000 for the three months ended June 30, 2003 as compared to
the same period ended June 30, 2002. The decrease in interest expense was the
result of lower borrowings and lower borrowing costs.
Provision (benefit) for Income Taxes - Emerson's provision for income taxes was
$1.9 million for the three months ended June 30, 2002 as compared to a benefit
of $136,000 for the three months ended June 30, 2003. The decrease in the
provision for income taxes for the three months ended June 30, 2003 was the
result of a loss in the current period as compared to income before income taxes
and cumulative effect of change in accounting principle of
15
approximately $4.7 million for the three months ended June 30, 2002. The benefit
of $136,000 in fiscal 2003 consisted of a benefit in foreign, Federal and state
taxes.
Net Income (Loss) - As a result of the foregoing factors, the consumer
electronics segment generated a net loss $506,000 (-1.6% of net revenues) for
the three months ended June 30, 2003 as compared to net income of $2.5 million
(4.5% of net revenues) for the three months ended June 30, 2002.
SPORTING GOODS SEGMENT:
The following table summarizes certain financial information relating to
the sporting goods segment as reported by SSG for the three months ended June
30, 2003 and 2002 (in thousands):
2003 2002
-------- --------
(Unaudited)
Net revenues $ 25,961 $ 26,773
Cost of sales 18,587 18,634
Selling, general & administrative 7,054 7,626
-------- --------
Operating income 320 513
Interest expense, net (136) (176)
-------- --------
Income before income taxes 184 337
Provision for income taxes 69 127
Cumulative effect of accounting change -- (7,442)
-------- --------
Net income (loss) $ 115 $ (7,232)
======== ========
Net Revenues - Net revenues decreased approximately $812,000 (3.0%) for the
three-month period ended June 30, 2003 as compared to the three-month period
ended June 30, 2002. The decrease in sporting goods net revenues was primarily
the result of decreases in sales to resellers and decreased sales in the team
dealer operations. Team dealer operations are being restructured, which SSG
believes will result in continued team dealer revenue declines, significantly
lower operating costs and an improved impact on operating income. We expect
continued revenue challenges in fiscal 2004, due to increased competition, a
decreased salesforce, continued restrictions in state, Federal and school
budgets, an overall soft economy, and declining participation and funding of
youth sports organizations.
Cost of Sales - Cost of sales, as a percentage of sporting goods net revenues,
increased from 69.6% for the three month period ended June 30, 2002 to 71.6% for
the three month period ended June 30, 2003. The increase is primarily the result
of increased competition and pricing pressure causing gross profit erosion.
16
Selling, General and Administrative Expenses ("S,G&A") - S,G&A expenses
decreased approximately $572,000 for the three month period ended June 30, 2003
as compared to the three month period ended June 30, 2002. As a percentage of
sporting goods net revenues, S,G&A decreased to 27.2% from 28.5% for the three
month period ended June 30, 2003 as compared to the three month period ended
June 30, 2002. The decrease was primarily the result of the following: (i) a
decrease in payroll related expenses attributable to a reduced headcount and
(ii) a decrease in selling and promotional expense, primarily as a result of
reduced spending on producing and mailing catalogs.
SSG expects continued S,G&A expense decreases this fiscal year as compared to
the prior year.
Interest Expense, net - Interest expense decreased by approximately $40,000 for
the three month period ended June 30, 2003 as compared to the three month period
ended June 30, 2002, due primarily to lower interest rates.
Provision for Income Taxes - Provision for income taxes decreased approximately
$58,000 (45.7%) for the three month period ended June 30, 2003 as compared to
the same period last year due to lower taxable income. SSG has a net operating
loss carryforward included in net deferred tax assets that can be used to offset
future taxable income and can be carried forward for 15 to 20 years. SSG
believes the net deferred tax assets will be realized through tax planning
strategies available in future periods and future profitable operating results.
Although realization is not assured, SSG believes it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced or
eliminated in the near term if certain tax planning strategies are not
successfully executed or estimates of future taxable income during the
carryforward period are reduced.
Cumulative Effect of Accounting Change - On March 30, 2002, we adopted Financial
Accounting Standards Board Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 142 requires that goodwill not be amortized but instead
be tested for impairment at least annually by reporting unit. Goodwill is
required to be tested for impairment in a transitional test upon adoption and
then at least annually by reporting unit. As a result of its impairment testing,
SSG recorded a non-cash "cumulative effect of accounting change" impairment
write down of approximately $7.4 million for the three month period ended June
30, 2002.
Net Income (loss) - As a result of the foregoing factors, the sporting goods
segment earned net income of $115,000 (0.4% of net revenues) for the three
months ended June 30, 2003 as compared to a net loss of $7.2 million (-27.0% of
net revenues) for the three months ended June 30, 2002.
Liquidity and Capital Resources
Net cash utilized by operating activities was $10.8 million for the three
months ended June 30, 2003. Cash was primarily utilized by an increase
17
in inventory and accounts receivable, partially offset by a decrease in other
current assets.
Net cash used by investing activities was $80,000 for the three months
ended June 30, 2003. Cash was utilized primarily for the purchase of fixed
assets, which consisted mainly of computer related equipment.
Net cash provided from financing activities was $3.2 million for the three
months ended June 30, 2003. Cash was primarily provided from borrowing under
short and long term facilities.
Emerson and SSG maintain credit facilities as described in Note 9 -
Borrowings. At June 30, 2003, there were approximately $30.0 million of
borrowings outstanding under these facilities, of which approximately $14.0
million of borrowings were outstanding by Emerson and $16.0 million of
borrowings were outstanding by SSG with letters of credit outstanding.
Two of our foreign subsidiaries maintain various credit facilities,
aggregating $52.5 million, with Hong Kong banks consisting of the following: (i)
a $7.5 million letter of credit facility with a $2.5 million seasonal increase
which is used for inventory purchases, and (ii) two back-to-back letters of
credit totaling $45 million. At June 30, 2003, our Hong Kong subsidiary pledged
$1.7 million in certificates of deposit to this bank to assure the availability
of the $7.5 million credit facility and a $2.5 million seasonal line increase.
At June 30, 2003, there were approximately $7.8 million and $610,000,
respectively, of letters of credit outstanding under these credit facilities.
At present, we believe that future cash flow from operations and our
existing institutional financing noted above will be sufficient to fund all of
our cash requirements for the next twelve months.
The following summarizes our obligations at June 30, 2003 for the periods
shown (in thousands):
PAYMENT DUE BY PERIOD
-----------------------------------------------------------------------------------
LESS THAN 1 1 - 3 YEARS 3 - 5 YEARS MORE THAN 5
TOTAL YEAR YEARS
-----------------------------------------------------------------------------------
Notes Payable $30,115 $11,058 $19,057 $ -- $ --
Capital lease obligations 47 37 10 -- --
Leases 6,563 2,500 3,143 920 --
------- ------- ------- ---- -------
Total $36,725 $13,595 $22,210 $920 $ --
======= ======= ======= ==== =======
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, 2003.
18
CONTINGENCIES
During the past several years, SSG has used the services of Strategic
Technologies, Inc. ("STI") to process their outbound truck freight bills. STI
audited SSG's freight bills and provided a listing of freight invoices that were
scheduled for payment, at which time SSG transferred funds to STI. STI was
required to issue checks to the various carriers within forty-eight (48) hours
of receipt of SSG's funds. STI filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code on July 19, 2002, which was converted to Chapter 7 of the
U.S. Bankruptcy Code on July 31, 2002. It is not possible for SSG to currently
determine the amount of funds, if any, that were transferred to STI and not
subsequently forwarded to SSG's carriers. In certain circumstances, SSG may have
to pay their freight carriers for invoices that were previously paid to STI and
to attempt to recover such monies from STI. No assurance can be made that SSG
will be able to recover such money.
CRITICAL ACCOUNTING POLICIES
For the quarter ended June 30, 2003, there were no significant changes to
our critical accounting policies from those reported in Form 10-K for the fiscal
year ended March 31, 2003.
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 2004. 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 rate and LIBOR rate. While a significant increase in interest rates could
have an adverse effect on the our financial condition and our results of
operations, we believe that given the present economic climate, interest rates
are not expected to increase significantly during the coming year.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,"
which addresses consolidation of variable interest entities ("VIE's"). FIN 46
requires a variable interest entity to be consolidated by a parent company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. A variable interest entity is a corporation,
partnership, trust or any other legal structure used for business purposes that
either does not have equity investors with voting rights or has equity investors
that do not provide sufficient financial
19
resources for the entity to support its activities. The consolidation
requirements of FIN 46 apply immediately to VIE's created after January 31,
2003. For older entities, these requirements will begin to apply in the first
fiscal year or interim period beginning after June 15, 2003. We do not believe
that FIN 46 will have an impact on the Company's consolidated financial
statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 (SFAS 150), "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which addresses how an issuer classifies and measures financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuers. This Statement shall be effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003. For financial instruments created before the issuance date of this
Statement and still existing at the beginning of the interim period of adoption,
transition shall be achieved by reporting the cumulative effect of a change in
an accounting principle by initially measuring the financial instruments at fair
value or other measurement attribute required by this Statement. We do not
believe that SFAS 150 will have an impact on the company's consolidated
financial statements.
FORWARD-LOOKING INFORMATION
This report contains various forward-looking statements made 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. We cannot guarantee the accuracy of the forward-looking statements,
and you 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, 2003 and other filings with the Securities and
Exchange Commission (the "SEC"). For additional risk factors as they relate to
the sporting goods segment, see SSG's Form 10-K for the fiscal year ended March
28, 2003 Item 7 - "Certain Factors that May Affect the Company's Business or
Future Operating Results", and other Filings with the SEC.
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, 2003.
20
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the period covered
by this Quarterly Report on Form 10-Q, the Company carried out an
evaluation, with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon
that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under
the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and
forms.
(b) Changes in internal controls over financial reporting. There have been
no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter to which this
Quarterly Report on Form 10-Q relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information on litigation to which we are a party, reference is made
to Part 1 Item-3-Legal Proceedings in the Company's most recent annual report on
Form 10-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
(a) None
(b) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
(a) None
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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.*
(b) REPORTS ON FORM 8-K - Current report on Form 8-K, dated June 30, 2003,
for the purpose of reporting our filing of Form 12b-25 Notification of
Late Filing of our Form 10-K for the fiscal year ended March 31, 2003.
Current report on Form 8-K, dated July 14, 2003 furnishing the press
release announcing the Company's financial results for the year ended
March 31, 2003.
Current report on Form 8-K, dated July 18, 2003 related to the earnings
teleconference.
Current report on Form 8-K, dated August 12, 2003, furnishing the press
release announcing the Company's financial results for the quarter ended
June 30, 2003.
- -----------------
* filed herewith
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERSON RADIO CORP.
(Registrant)
Date: August 12, 2003 /s/ Geoffrey P. Jurick
-------------------------------
Geoffrey P. Jurick
Chairman of the Board,
Chief Executive Officer and
President
(Principal Executive Officer)
Date: August 12, 2003 /s/ Kenneth A. Corby
------------------------------
Kenneth A. Corby
Executive Vice President and
Chief Financial Officer
(Principal Finance and
Accounting Officer)
23