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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 December 31, 2004 __________________
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)
(973) 884-5800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 January
24, 2005: 27,103,164.
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 Nine Months Ended
----------------------- -----------------------
December December December December
31, 2004 31, 2003 31, 2004 31, 2003
--------- --------- --------- ---------
NET REVENUES $ 94,679 $ 76,345 $ 250,738 $ 209,389
COSTS AND EXPENSES:
Cost of sales 80,108 62,992 204,637 171,381
Other operating costs
and expenses 1,127 1,414 4,057 3,963
Selling, general and
administrative expenses 10,249 10,564 31,183 29,964
Acquisition costs (29) (19) (204) 595
Stock based costs -- 487 1,563 523
--------- --------- --------- ---------
91,455 75,438 241,236 206,426
--------- --------- --------- ---------
OPERATING INCOME 3,224 907 9,502 2,963
Interest expense, net (458) (322) (1,133) (1,144)
Minority interest in net
(income) loss of
consolidated subsidiary 839 (272) (239) (190)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 3,605 313 8,130 1,629
Provision for income taxes 1,632 653 3,363 1,628
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING 1,973 (340) 4,767 1
OPERATIONS
Income from discontinued
operations, net of tax -- 3,153 -- 3,048
--------- --------- --------- ---------
NET INCOME $ 1,973 $ 2,813 $ 4,767 $ 3,049
========= ========= ========= =========
BASIC NET INCOME (LOSS)
PER SHARE:
Continuing operations $ 0.07 $ (0.01) $ 0.18 $ --
Discontinued operations -- 0.11 -- 0.11
--------- --------- --------- ---------
$ 0.07 $ 0.10 $ 0.18 $ 0.11
========= ========= ========= =========
DILUTED NET INCOME (LOSS)
PER SHARE:
Continuing operations $ 0.07 $ (0.01) $ 0.17 $ --
Discontinued operations -- 0.11 -- 0.11
--------- --------- --------- ---------
$ 0.07 $ 0.10 $ 0.17 $ 0.11
========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 27,103 27,189 26,938 27,388
Diluted 27,319 27,189 27,284 28,259
The accompanying notes are an integral part of the interim
consolidated financial statements.
2
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December March 31,
31, 2004 2004
----------- ----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 2,727 $ 6,369
Cash and cash equivalents - restricted 7,740 2,950
Accounts receivable (less allowances of $4,838 and
$3,653, respectively) 35,052 19,948
Other receivables 2,282 2,821
Inventories 54,314 46,997
Prepaid expenses and other current assets 3,211 2,394
Deferred tax assets 5,113 5,887
--------- ---------
TOTAL CURRENT ASSETS 110,439 87,366
Property and equipment - (net of accumulated depreciation
and amortization of $8,852 and $7,442, respectively) 8,097 7,822
Deferred catalog expenses 1,175 1,695
Trademarks and other intangible assets (net of accumulated
amortization of $4,184 and $3,845, respectively) 5,186 5,168
Deferred tax assets 12,546 15,263
Other assets 1,496 1,355
--------- ---------
TOTAL ASSETS $ 138,939 $ 118,669
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term borrowings $ 109 $ 58
Short-term borrowings 21,987 4,762
Revolver - current 11,300 --
Accounts payable and other current liabilities 30,278 32,787
Accrued sales returns 2,663 2,521
Income taxes payable 352 509
--------- ---------
TOTAL CURRENT LIABILITIES 66,689 40,637
Long-term borrowings 2,681 15,027
Minority interest 16,032 15,793
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; 52,783,131 shares issued and
27,103,164 shares outstanding 528 523
Capital in excess of par value 117,862 116,304
Accumulated other comprehensive losses (88) (83)
Accumulated deficit (44,243) (49,010)
Treasury stock, at cost, 25,679,967 shares (23,832) (23,832)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 53,537 47,212
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 138,939 $ 118,669
========= =========
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)
Nine Months Ended
-----------------------
December December
31, 2004 31, 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 4,767 $ 1
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest 239 190
Depreciation and amortization 2,249 2,769
Stock based costs 1,563 523
Deferred tax expenses 3,491 3,875
Asset allowances, reserves and other 1,832 628
Changes in assets and liabilities:
Cash and cash equivalents - restricted (4,790) --
Accounts receivable (17,157) (7,580)
Other receivables 539 1,072
Inventories (7,100) 2,367
Prepaid expenses and other current assets (297) 2,341
Other assets (474) (21)
Accounts payable and other current liabilities (2,340) 1,235
Income taxes payable (157) (740)
--------- ---------
Net cash provided (used) by continuing operations (17,635) 6,660
Net cash provided (used) by discontinued operations (27) 469
--------- ---------
Net cash provided (used) by operating activities (17,662) 7,129
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (continuing
operations) (2,210) (323)
Proceeds from sale of discontinued operations -- 10,517
--------- ---------
Net cash provided (used) by investing activities (2,210) 10,194
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 17,701 2,132
Purchase of common stock -- (2,943)
Exercise of stock options and warrants -- (242)
Long-term borrowings 106,669 114,010
Repayments of long-term borrowings (108,140) (134,753)
--------- ---------
Net cash provided (used) by financing activities 16,230 (21,796)
--------- ---------
Net decrease in cash and cash equivalents (3,642) (4,473)
Cash and cash equivalents at beginning of year 6,369 11,413
--------- ---------
Cash and cash equivalents at end of period $ 2,727 $ 6,940
========= =========
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 majority-owned
subsidiaries, including Sport Supply Group, Inc. ("SSG"), which has been 53.2%
owned since February 2002. 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 Company operates 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 SSG,
manufactures and markets sports related equipment and leisure products primarily
to institutional customers in the United States.
From July 2003 through November 2003, certain of SSG's team dealer
locations were discontinued. In November 2003, SSG sold all of the issued and
outstanding capital stock of its wholly-owned subsidiary, Athletic Training
Equipment Company, Inc. ("ATEC"). Collectively, SSG refers to these operations
as "Discontinued Operations" and accordingly, the accompanying financial
statements reflect these as discontinued operations. (See Note 11)
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 December 31, 2004 and the results of operations for the three and nine month
periods ending December 31, 2004 and 2003. 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, 2004 ("fiscal 2004"), included in our annual
report on Form 10-K for fiscal 2004.
Certain reclassifications were made to conform the prior
year's financial statements to the current presentation.
5
Due to the seasonal nature of both segments, the results of operations
for the three and nine month periods ending December 31, 2004 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, 2005 ("fiscal 2005").
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, if the exercise price of employee stock options equals or exceeds the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. Emerson and SSG have adopted the 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. Our pro forma information for the three and nine
months ended December 31, 2004 and 2003 is as follows (in thousands, except for
per share amounts):
Three Months Ended Nine Months Ended
December 31 December 31
----------------------- -------------------------
2004 2003 2004 2003
--------- --------- ---------- ----------
(Unaudited) (Unaudited)
Net income:
As reported $ 1,973 $ 2,813 $ 4,767 $ 3,049
Add: Employee stock-based
compensation expense, as recorded, net of tax -- -- 1,247 8
Less: Pro-forma employee
stock-based compensation
expense (86) (10) (219) (17)
--------- --------- --------- ---------
Pro forma $ 1,887 $ 2,803 $ 5,795 $ 3,040
========= ========= ========= =========
Net income per common share:
Basic - as reported $ 0.07 $ 0.10 $ 0.18 $ 0.11
Basic - pro forma $ 0.07 $ 0.10 $ 0.22 $ 0.11
Diluted - as reported $ 0.07 $ 0.10 $ 0.17 $ 0.11
Diluted - pro forma $ 0.07 $ 0.10 $ 0.21 $ 0.11
NOTE 2 - COMPREHENSIVE INCOME
Our comprehensive income for the three and nine months ended December
31, 2004 and 2003 is as follows (in thousands):
6
Three Months Ended Nine Months Ended
December 31 December 31
------------------ -------------------
2004 2003 2004 2003
------- ------- ------- -------
(Unaudited) (Unaudited)
Net income $ 1,973 $ 2,813 $ 4,767 $ 3,049
Interest rate swap -- (4) (4) (12)
Unrealized loss on securities, net -- (23) (1) (26)
Recognition of unrealized losses
related to investments
included in net income -- -- -- 42
------- ------- ------- -------
Comprehensive income $ 1,973 $ 2,786 $ 4,762 $ 3,053
======= ======= ======= =======
NOTE 3 - NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
December 31 December 31
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
NUMERATOR:
Net earnings (loss) from continuing
operations for basic and diluted
earnings per share $ 1,973 $ (340) $ 4,767 $ 1
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic earnings
per share - weighted average
shares 27,103 27,189 26,938 27,388
Effect of dilutive securities:
Options and warrants 216 -- 346 871
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share -
weighted average shares and
assumed conversions 27,319 27,189 27,284 28,259
========== ========== ========== ==========
Basic earnings (loss) per share:
Continuing operations $ 0.07 $ (0.01) $ 0.18 $ --
Discontinued operations -- 0.11 -- 0.11
---------- ---------- ---------- ----------
Basic earnings per share $ 0.07 $ 0.10 $ 0.18 $ 0.11
========== ========== ========== ==========
Diluted earnings (loss) per share:
Continuing operations $ 0.07 $ (0.01) $ 0.17 $ --
Discontinued operations -- 0.11 -- 0.11
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.07 $ 0.10 $ 0.17 $ 0.11
========== ========== ========== ==========
7
NOTE 4- SHAREHOLDERS' EQUITY
Our outstanding capital stock at December 31, 2004 consisted of common
stock and Series A convertible preferred stock in which the conversion feature
expired effective March 31, 2002.
At December 31, 2004, Emerson had outstanding approximately 732,000
options with exercise prices ranging from $1.00 to $3.26 and SSG had outstanding
approximately 556,000 options with exercise prices ranging from $0.95 to $9.44.
On August 1, 2002, in connection with a consulting agreement, Emerson
granted 200,000 warrants with an exercise price of $2.20, of which 100,000
warrants vested after six months and 100,000 warrants vested one year from date
of grant. In February 2003, 100,000 of these warrants were exercised. In
November 2003, the remaining 100,000 of these warrants were exercised under a
cashless exercise and 45,544 shares of common stock were issued. The warrants
were valued using the Black-Scholes valuation model and were charged to earnings
over the related service period of the consulting agreement with approximately
$396,000 and $421,000 being charged to operations for the three and nine months
ended December 31, 2003, respectively.
In September 2003, the Company publicly announced the Emerson Radio
Corp. common stock repurchase program. The program provides for share repurchase
of up to 2,000,000 shares of Emerson's outstanding common stock. As of December
31, 2004, the Company had repurchased 1,111,625 shares under this program.
During the quarter ended December 31, 2004, there were no shares repurchased
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, which resulted in $90,500 being charged
to earnings during the quarter ended December 31, 2003. For the three and nine
months ended December 31, 2004, no expense was charged to operations for these
warrants. As of December 31, 2004, 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, which resulted in $88,500 being charged
to earnings during the quarter ended September 30, 2004 and the nine month
period ended December 31, 2004. As of December 31, 2004, these warrants had not
been exercised.
8
During the quarter ended September 30, 2004, 725,000 of Emerson's stock
options were exercised in a cashless manner, resulting in 472,781 shares of
Emerson's common stock being issued. Such exercises were accounted for in
accordance with Emerging Issues Task Force Issue 84-18: Stock Option Pyramiding
(EITF 84-18), which resulted in a non-cash, pre-tax charge of approximately $1.5
million in the quarter ended September 30, 2004 and the nine month period ended
December 31, 2004.
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 the average cost method is used for the sporting goods segment. As
of December 31, 2004 and March 31, 2004, inventories consisted of the following
(in thousands):
December March 31,
31, 2004 2004
-------- --------
(Unaudited)
Raw materials $ 1,305 $ 1,138
Work-in-process 41 67
Finished goods 55,682 48,878
-------- --------
57,028 50,083
Less inventory allowances (2,714) (3,086)
-------- --------
$ 54,314 $ 46,997
======== ========
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.
9
NOTE 7 - RELATED PARTY TRANSACTIONS
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 fees at terms which reflect
arms length transactions. These charges have been eliminated in consolidation,
but are included in the determination of net income in the segment information
presented in Note 9.
NOTE 8 - BORROWINGS
As of December 31, 2004 and March 31, 2004, short-term borrowings
consisted of the following (in thousands):
December 31, March 31,
2004 2004
------------ ------------
(Unaudited)
Foreign bank loans $ 21,987 $ 4,762
=========== ============
As of December 31, 2004 Emerson's foreign subsidiaries had four letter
of credit facilities totaling $30.0 million which are used for inventory
purchases. In order to maintain the availability of these facilities $7.7
million in short term certificates of deposit has been pledged as collateral,
and is presented as restricted cash on the accompanying balance sheet as of
December 31, 2004.
As of December 31, 2004 and March 31, 2004, borrowings under long-term
facilities consisted of the following (in thousands):
December 31, March 31,
2004 2004
------------ -----------
(Unaudited)
Emerson Revolver $ 11,300 $ 8,000
Sport Supply Revolver 2,000 6,972
Mortgage Payable 732 --
Equipment notes and other 58 113
---------- ----------
14,090 15,085
Less Emerson Revolver - current (11,300) --
Less current maturities (109) (58)
---------- ----------
Long term debt and notes payable $ 2,681 $ 15,027
========== ==========
10
Emerson Credit Facility - On June 28, 2002, Emerson entered into a $40
million Revolving Credit and Term Loan Agreement (the "Emerson Loan Agreement")
with several U.S. financial institutions. The Emerson Loan Agreement provides
for a $25 million revolving line of credit (the "Emerson Revolver"). The Emerson
Loan Agreement also provided for a $15 million term loan, which was repaid in
full in fiscal 2004. The $25 million revolving line of credit replaced Emerson's
$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 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
0.50% to 1.25% or, at Emerson's election, LIBOR plus 2.00% to 2.75% depending on
certain financial covenants. The interest rate charged on the Term Loan ranged
from prime plus 1.00% to 1.75% or, at Emerson's election, LIBOR plus 2.5% and
3.25% 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, repurchasing Emerson's common
stock 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 December 31, 2004, there was approximately $11.3 million
outstanding under the Emerson Revolver and Emerson was in compliance with the
covenants contained in the Emerson Loan Agreement. The Emerson Revolver expires
in June 2005, and accordingly, all amounts outstanding under this facility have
been presented as a current liability. Prior to expiration, Emerson intends to
renew its banking facility or enter into a new banking facility with similar or
more favorable terms than those presently existing.
Sport Supply Credit Facility - During the quarter ended December 31,
2003, SSG amended its Loan and Security Agreement (the "SSG Loan Agreement") to
finance its working capital requirements through October 31, 2007. Under this
amendment, SSG's line of credit was reduced from $25 million to $20 million; its
borrowing rates were reduced from LIBOR plus 2.5% to LIBOR plus 2.25%; and its
inventory and accounts receivable borrowing bases were increased. The SSG Loan
Agreement provides for revolving loans and letters of credit which, in the
aggregate, cannot exceed the lesser of $20 million or a "Borrowing Base" amount
based upon specified percentages of eligible accounts receivable and
inventories. Amounts outstanding under the SSG Loan Agreement are secured by
substantially all of the assets of SSG and its subsidiaries. Pursuant to the SSG
Loan Agreement, SSG is restricted from, among other things, paying cash
dividends and entering into certain transactions without the lender's prior
consent and it is required to maintain certain net worth levels.
11
The SSG Loan Agreement allows its lender, under certain circumstances,
to accelerate payment upon the occurrence of an event that has a material
adverse affect upon the business, operations, properties, assets, goodwill, or
condition (financial or otherwise) of SSG on a consolidated basis. Effective
February 2004, SSG's lender amended the SSG Loan Agreement to make this clause
effective only in the event that net availability under the facility falls below
a certain level. Additionally, the SSG Loan Agreement requires SSG to maintain a
depository account in favor of SSG's lender. As of December 31, 2004, there was
approximately $2.0 million outstanding under the SSG Loan Agreement and SSG was
in compliance with the covenants in the SSG Loan Agreement.
As of December 31, 2004, the carrying value of these credit facilities
approximated fair value.
NOTE 9 - SEGMENT INFORMATION
The following table presents certain operating segment information for
each of the three and nine months ended December 31, 2004 and 2003 (in
thousands):
Three Months Ended Three Months Ended
December 31, 2004 December 31, 2003
------------------------------------ ---------------------------------
Consumer Sporting Consumer Sporting
Electronics Goods Electronics Goods
----------------- ------------------ ---------------- ----------------
(Unaudited) (Unaudited)
Net revenues from
external customers $ 80,345 $ 14,334 $ 61,632 $ 14,713
Income (loss) before
income taxes and
discontinued operations $ 5,458 $ (1,853) $ 2,944 $ (2,631)
Segment assets $ 101,607 $ 37,332 $ 70,260 $ 45,042
Nine Months Ended Nine Months Ended
December 31, 2004 December 31, 2003
----------------------------------- ------------------------------------
Consumer Sporting Consumer Sporting
Electronics Goods Electronics Goods
----------------- ----------------- ----------------- ------------------
(Unaudited) (Unaudited)
Net revenues from
external customers $ 188,051 $ 62,687 $ 149,722 $ 59,667
Income (loss) before
income taxes and
discontinued operations $ 7,796 $ 334 $ 4,448 $ (2,819)
12
NOTE 10 - 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 timely 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
The Company is a party to various other litigation matters, in
most cases involving ordinary and routine claims incidental to its business. The
Company cannot estimate with certainty its ultimate legal and financial
liability with respect to such pending litigation matters. However, the Company
believes, based on its examination of such matters, that its ultimate liability
will not have a material adverse effect on its financial position, results of
operations or cash flows.
13
NOTE 11 - DISCONTINUED OPERATIONS
From July 2003 through November 2003, certain of SSG's team
dealer locations were closed. In November 2003, SSG sold all of the issued and
outstanding capital stock of its wholly owned subsidiary, ATEC. These closures
and sale of stock, and related discontinued operations resulted in income of
approximately $3.2 million and $3.0 million for the three and nine months ended
December 31, 2003, respectively. The results of these transactions are presented
as discontinued operations in the accompanying Consolidated Statement of
Operations for the three and nine month periods ended December 31, 2003. (See
Note 1)
The following table summarizes the results of these discontinued
operations, net of related income taxes, as applicable (in thousands). (See
Note 6)
Three Months Ended Nine Months Ended
December 31 December 31
----------------------- ------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net revenues-ATEC $ -- $ 1,533 $ -- $ 6,184
Net revenues-Team Dealers -- 369 -- 3,043
-------- -------- -------- --------
Net revenues-Total $ -- $ 1,902 $ -- $ 9,227
======== ======== ======== ========
Income from operations-ATEC $ -- 182 $ -- 477
Income (loss) from
operations-Team Dealers -- 48 -- (352)
Loss on sale of Team Dealers net (829) (829)
Gain on sale of ATEC 3,752 3,752
-------- -------- -------- --------
Total discontinued
operations, net of tax $ -- $ 3,153 $ -- $ 3,048
======== ======== ======== ========
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.
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. Accordingly, all amounts are approximations.
14
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, 2004 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.
CONSOLIDATED OPERATIONS:
The following table sets forth, for the periods indicated, certain
items related to our consolidated statements of operations as a percentage of
net revenues for the three and nine months ended December 31, 2004 and 2003. A
detailed discussion of the material changes in operating results is set forth
under the discussion of our two operating segments: consumer electronics and
sporting goods.
Three Months Ended Nine Months Ended
December 31 December 31
------------------------------ -----------------------------
2004 2003 2004 2003
------------ ------------- ------------- ------------
(Unaudited) (Unaudited)
Net revenues (in thousands) $ 94,679 $ 76,345 $ 250,738 $ 209,389
100.0% 100.0% 100.0% 100.0%
Cost of sales 84.6% 82.5% 81.6% 81.9%
Other operating costs and
expenses 1.2% 1.9% 1.6% 1.9%
Selling, general and
administrative expenses 10.8% 13.8% 12.4% 14.3%
Acquisition costs --% --% --% 0.3%
Stock based costs --% 0.6% 0.6% 0.2%
----------- ------------ ------------ -----------
Operating income 3.4% 1.2% 3.8% 1.4%
Interest expense 0.5% 0.4% 0.5% 0.5%
Minority interest 0.9% (0.4)% (0.1)% (0.1)%
Provision for income taxes 1.7% 0.8% 1.3% 0.8%
Income from discontinued
operations --% 4.1% --% 1.5%
----------- ------------ ------------ ------------
Net income 2.1% 3.7% 1.9% 1.5%
=========== ============ ============ ============
15
Net Revenues - Consolidated net revenues for the three and nine month periods
ended December 31, 2004 increased to $94.6 million from $76.3 million ($18.3
million or 24.0%) and to $250.7 million from $209.4 million ($41.3 million or
19.7%) respectively, as compared to the same periods ended December 31, 2003.
The increase for the three month period ended December 31, 2004 is attributable
to increases of $18.7 million in the consumer electronics segment offset by a
decrease of approximately $0.4 million in the sporting goods segment. The
increase for the nine month period ended December 31, 2004 is attributable to
increases of $38.3 million in the consumer electronics segment and $3.0 million
in the sporting goods segment. Increases in both segments for the three and nine
month periods were due primarily to increases in units sold, and to a lesser
degree, higher pricing agreements.
Cost of Sales - Cost of sales, as a percentage of consolidated net revenues,
increased to 84.6% from 82.5% and decreased to 81.6% from 81.9% for the three
and nine month periods ended December 31, 2004, respectively, as compared to the
same periods in the prior year. The increase in cost of sales as a percentage of
net revenues for the three months ended December 31, 2004 was primarily the
result of decreased licensing revenues and lower margin sales in the consumer
electronics segment partially offset by higher margin sales in the sporting
goods segment. For the nine months ended December 31, 2004 the decrease in costs
of sales on a relative basis was due to higher licensing revenues in the
consumer electronic segment as well as higher margins in both the consumer
electronic and sporting goods segments. In absolute terms, cost of sales
increased to $80.1 million from $63.0 million ($17.1 million or 27.2%) and to
$204.6 million from $171.4 million ($33.2 million or 19.4%) for the three and
nine month periods of fiscal 2005 as compared to the same periods in fiscal
2004. The increases for both periods were primarily due to higher sales volumes.
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 and expenses decreased to 1.2%
from 1.9% for the three months ended December 31, 2004 as compared to the same
period in the prior year, and decreased to 1.6% from 1.9% for the nine month
period ended December 31, 2004 as compared to the same period in fiscal 2004. In
absolute terms, other operating costs and expenses decreased to $1.1 million
from $1.4 million ($0.3 million or 20.3%) and increased to $4.1 million from
$4.0 million ($0.1 million or 2.4%) for the three and nine month periods of
fiscal 2005 as compared to the same periods in fiscal 2004. These decreases were
primarily due to lower returned product servicing costs.
16
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a percentage
of consolidated net revenues, decreased to 10.8% for the three months ended
December 31, 2004 as compared to 13.8% for the three months ended December 31,
2003, and decreased to 12.4% from 14.3% for the nine month period ended December
31, 2004 as compared to the same period in fiscal 2004. In absolute terms, S,G&A
expenses decreased to $10.3 million from $10.6 million ($0.3 million or 3.0%)
for the three month period ended December 31, 2004 as compared to the same
period in fiscal 2004, and increased to $31.2 million from $30.0 million ($1.2
million or 4.1%) for the nine month period ended December 31, 2004 as compared
to the prior year period. The decrease for the three month period was due to the
sporting goods segment, partially offset by increases in the consumer
electronics segment. For the nine month period, the increase was due to a $2.0
million increase in the consumer electronics segment, offset by a decrease of
$0.8 million in the sporting goods segment.
Acquisition Costs - Acquisition costs are associated with the consumer
electronics segment. For the three and nine month periods ended December 31,
2004, adjustments to acquisition costs incurred in the prior year were recorded
in fiscal 2005, resulting in a reduction in such costs of $29,000 and $204,000,
respectively. For the three month period ended December 31, 2003, there was a
reduction to acquisition costs of $19,000, and for the nine month period ended
December 31, 2003, acquisition costs totaled $595,000, or 0.3% of consolidated
net revenues.
Stock Based Costs - Stock based costs are associated with the consumer
electronics segment and relate to the cost of warrants associated with
consulting service agreements and stock options exercised in a cashless manner
(See Note 4 to accompanying financial statements). In absolute terms, stock
based costs were approximately $1.6 million for the nine month period ended
December 31, 2004, as compared to $523,000 for the same period in the prior
year. For the three month period ended December 31, 2004 there were no costs as
compared to $487,000 for the three months ended December 31, 2003.
Interest Expense, Net - Interest expense increased $136,000 to $458,000 (0.5% of
net revenues) from $322,000 (0.4% of net revenues) for the three months ended
December 31, 2004 as compared to the same period in fiscal 2004. For the nine
months ended December 31, 2004, interest expense remained relatively unchanged
at $1.1 million (0.5% of net revenues) from the same period in fiscal 2004. The
increase in interest expense for the three month period ended December 31, 2004
was primarily the result of higher average borrowings and borrowing costs in the
consumer electronics segment.
Minority Interest in Net (Income) Loss of Consolidated Subsidiary - Minority
interest in net (income) loss of consolidated subsidiary represents that portion
of the sporting goods segment net (income) loss for the three and nine month
periods ended December 31, 2004 and 2003 that was attributable to SSG
shareholders other than Emerson, and therefore not included in the consolidated
statements of operations. (See Note 1)
17
Provision for Income Taxes - The provision for income taxes increased $979,000,
to $1.6 million for the three months ended December 31, 2004 from approximately
$653,000 for the three months ended December 31, 2003. For the nine months ended
December 31, 2004, the provision for income taxes increased $1.7 million to $3.4
million as compared to approximately $1.6 million for the nine months ended
December 31, 2003. The increase in the provision for income taxes for the nine
months ended December 31, 2004 was primarily due to an increase in pre-tax
profit in the consumer electronics segment.
Income from Discontinued Operations - From July 2003 through November 2003, SSG
ceased operating several of its Team Dealer locations. In November 2003, SSG
sold all of the issued and outstanding shares of capital stock of its wholly
owned subsidiary - ATEC. There were no amounts recorded for these operations
(the "discontinued operations") for the three and nine month periods ended
December 31, 2004 as compared to income of approximately $3.2 million and $3.0
million for the three and nine month periods ended December 31, 2003,
respectively.
Net Income - As a result of the foregoing factors, we earned net income of
approximately $2.0 million (2.1% of net revenues) and approximately $4.8 million
(1.9% of net revenues) for the three and nine months ended December 31, 2004 as
compared to $2.8 million (3.7% of net revenues) and $3.0 million (1.5% of net
revenues) for the same periods in fiscal 2004.
CONSUMER ELECTRONICS SEGMENT:
The following table summarizes certain financial information relating
to the consumer electronics segment for the three and nine month periods ended
December 31, 2004 and 2003 (in thousands):
Three Months Ended December 31 Nine Months Ended December 31
------------------------------ -----------------------------
2004 2003 2004 2003
------------ -------------- ------------- --------------
(Unaudited) (Unaudited)
Net revenues $ 80,345 $ 61,632 $ 188,051 $ 149,722
Cost of sales 69,607 52,027 160,010 127,696
Other operating costs 1,127 1,414 4,057 3,963
Selling, general and
administrative costs 4,621 4,300 13,626 11,572
Acquisition costs (29) (19) (204) 595
Stock based costs -- 487 1,563 523
----------- ------------ ----------- -----------
Operating income 5,019 3,423 8,999 5,373
Interest expense, net 400 207 964 735
----------- ------------ ----------- -----------
Income before
income taxes 4,619 3,216 8,035 4,638
Provision for
income taxes 1,632 653 3,363 1,628
----------- ------------ ----------- -----------
Net income $ 2,987 $ 2,563 $ 4,672 $ 3,010
=========== ============ =========== ===========
18
Net Revenues - Consumer electronics net revenues for the three months ended
December 31, 2004 increased $18.7 million, or 30.4%, to $80.3 million from $61.6
million for the three months ended December 31, 2003. For the nine months ended
December 31, 2004, net revenues increased $38.3 million, or 25.6%, to $188.0
million from $149.7 million for the nine months ended December 31, 2003.
Consumer electronics 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 increase in net revenues
for the three and nine month periods was comprised of:
i) An increase in revenues from the sale of Emerson(R) branded
product of $13.8 million, or 25.5%, to $68.0 million from
$54.2 million for the three months ended December 31, 2004 as
compared to the same period in fiscal 2004. Revenues for the
nine months ended December 31, 2004 of Emerson(R) branded
product increased $34.1 million, or 25.9%, to $165.5 million
from $131.4 million for the same period in fiscal 2004. These
revenue increases were primarily due to increased orders from
primary customers and the expansion of our customer base.
ii) An increase in themed product sales to $9.9 million and $13.4
million from $4.5 million and $10.2 million for the three and
nine months ended December 31, 2004 and December 31, 2003,
respectively. These increases were primarily due to the
continued increase in sales of Nickelodeon(R) themed products.
iii) Licensing revenues decreased by approximately $529,000, or
18.1% to approximately $2.4 million for the third quarter of
fiscal 2005 from $2.9 million in the third quarter of fiscal
2004, which was primarily due to the timing of sales between
the September and December 2004 quarters by the licensees. For
the nine month period ended December 31, 2004, licensing
revenues increased by approximately $969,000, or 11.9%, to
$9.1 million as compared to $8.1 in the same period of fiscal
2004, primarily due to increased video sales volume.
Cost of Sales - Cost of sales, as a percentage of consumer electronics net
revenues, increased for the three months ended December 31, 2004 to 86.7% from
84.4% for the three months ended December 31, 2003. For the nine months ended
December 31, 2004 cost of sales decreased to 85.1% from 85.3% for the nine
months ended December 31, 2003. In relative terms, the increase in cost of sales
for the three month period was primarily due to decreased licensing revenues and
lower margin sales. For the nine months ended December 31, 2004 the decrease in
cost of sales was primarily due to an increase in licensing revenue as well as
higher margin sales. Higher margins for the nine months were also partially due
to a continuing shift in sales from our direct import to our domestic business.
In absolute terms, cost of sales for the three months ended December 31, 2004
increased $17.6 million, or 33.8%, to $69.6 million from $52.0 million for the
three months ended December 31, 2003. For the nine months ended December 31,
2004, cost of sales increased $32.3 million, or 25.3%, to $160.0 million from
$127.7 million for the nine months ended December 31, 2003.
19
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 1.4% from 2.3% for
the three month period ended December 31, 2004 and December 31, 2003,
respectively, and decreased to 2.2% for the nine month period of fiscal 2005
compared to 2.6% for the same period in fiscal 2004. In absolute terms, other
operating costs and expenses decreased to $1.1 million from $1.4 million
($287,000 or 20.3%) and increased to $4.1 million from $4.0 million ($94,000 or
2.4%) for the three and nine month periods ended December 31, 2004 and December
31, 2003, respectively. The decrease for the three and nine month periods was
primarily due to a decrease in returned product servicing costs.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, increased
approximately $321,000 or 7.5%, to $4.6 million (5.7% of the consumer
electronics net revenues) from $4.3 million (7.0% of the consumer electronics
net revenues) for the three months ended December 31, 2004 as compared to the
three months ended December 31, 2003. For the nine months ended December 31,
2004, S,G&A expenses increased $2.0 million, or 17.8%, to $13.6 million (7.2% of
the consumer electronics net revenues) from $11.6 million (7.7% of the consumer
electronics net revenues). The increase in absolute terms for the three months
ended December 31, 2004, was primarily due to increased advertising, payroll
related costs and freight expenditures of approximately $185,000, $125,000 and
$445,000, respectively, partially offset by a decrease of $212,000 in
professional fees as well as decreases in various other S,G&A costs. The
increase in absolute terms for the nine months ended December 31, 2004,
primarily resulted from: (i) advertising and promotional expenses of
approximately $770,000; (ii) payroll related costs of approximately $335,000;
(iii) sales commission expenses of approximately $295,000; and (iv) freight
costs of approximately $812,000, partially offset by decreases in other S,G&A
costs.
20
Acquisition Costs - For the three and nine month periods ended December 31,
2004, adjustments to acquisition costs incurred in the prior year were recorded
in fiscal 2005, resulting in a reduction in such costs of $29,000 and $204,000,
respectively. For the three month period ended December 31, 2003, there was a
reduction to acquisition costs of $19,000, and for the nine month period ended
December 31, 2003, acquisition costs totaled $595,000, or 0.4% of consumer
electronics net revenues. These costs were associated with contemplated
acquisition transactions in fiscal 2004 that were not completed.
Stock Based Costs - Stock based costs relate to the cost of warrants issued in
exchange for consulting services and, in the second quarter of fiscal 2005, to
stock options exercised in a cashless manner (See Note 4 to accompanying
financial statements).
Interest Expense, net - Interest expense increased $193,000, or 93.2%, to
$400,000 for the three months ended December 31, 2004, from $207,000 for the
three months ended December 31, 2003. For the nine months ended December 31,
2004, interest expense increased $229,000, or 31.2%, to $964,000 from $735,000
for the same period ended December 31, 2003. The increases in interest expense
for the three and nine month periods were 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
$1.6 million and $3.4 million for the three and nine months ended December 31,
2004, respectively, as compared to $653,000 and $1.6 million for the three and
nine month periods ended December 31, 2003. The increase in the provision for
both the three and nine month periods ended December 31, 2004 was primarily the
result of higher pre-tax profit as compared to the same periods in fiscal 2004.
Net Income - As a result of the foregoing factors, the consumer electronics
segment earned net income of $3.0 million (3.7% of net revenues) for the three
months ended December 31, 2004 as compared to $2.6 million (4.2% of net
revenues) for the three months ended December 31, 2003. For the nine months
ended December 31, 2004 the consumer electronics segment earned $4.7 million
(2.5% of net revenues) as compared to $3.0 million (2.0% of net revenues) for
the nine months ended December 31, 2003.
21
SPORTING GOODS SEGMENT:
The following table summarizes certain financial information relating
to the sporting goods segment as reported by SSG for the three and nine months
ended December 31, 2004 and 2003 (in thousands):
Three Months Ended Nine Months Ended
December 31 December 31
------------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------ ------------- ------------
(Unaudited (Unaudited)
Net revenues $ 14,334 $ 14,713 $ 62,687 $ 59,667
Cost of sales 10,501 10,965 44,627 43,685
Selling, general and
administrative 5,628 6,264 17,557 18,392
------------ ----------- ----------- -----------
Operating income (loss) (1,795) (2,516) 503 (2,410)
Interest expense, net 58 115 169 409
----------- ----------- ----------- -----------
Income (loss) before
income taxes and
discontinued operations (1,853) (2,631) 334 (2,819)
Provision for
income taxes -- -- -- --
Income from discontinued
operations -- 3,153 -- 3,048
----------- ----------- ----------- -----------
Net income (loss) $ (1,853) $ 522 $ 334 $ 229
=========== =========== =========== ===========
Net Revenues - Net revenues decreased $379,000, or 2.6%, to $14.3 million from
$14.7 million and increased $3.0 million, or 5.1%, to $62.7 million from $59.7
million for the three and nine month periods ended December 31, 2004 and
December 31, 2003, respectively. The three month decrease in net revenues was
primarily due to fewer shipping days as compared to the same period of fiscal
2004, while the increase for the nine month period was primarily the result of
higher sales resulting from our increased marketing and selling efforts in a
very competitive marketplace, and the resulting increases in unit volume.
Cost of Sales - Cost of sales decreased by approximately $464,000 (4.2%) and
increased $942,000 (2.2%) for the three and nine month periods ended December
31, 2004 as compared to same periods in the prior fiscal year. As a percentage
of sporting goods net revenues, cost of sales decreased to 73.3% from 74.5%, and
to 71.2% from 73.2% for the three and nine month periods ended December 31, 2004
as compared to the same periods in the prior fiscal year. The improvements in
cost of sales as a percentage of net revenues in both periods were the result of
improved product margins.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A decreased
approximately $636,000 (10.2%) and $835,000 (4.5%) for the three and nine month
periods ended December 31, 2004, respectively. As a percentage of sporting goods
net revenues, SG&A decreased to 39.3% from 42.6% and to 28.0% from 30.8% for the
three and nine month periods ended December 31, 2004 as compared to the same
periods of fiscal 2004. The decrease in SG&A expenses for the three month period
was primarily due to decreases of approximately $299,000 in legal fees, $75,000
in staff related costs, $75,000 in facility expenses, $59,000 in insurance costs
and $128,000 in other operating expenses. For the nine month period, the
decrease in SG&A expenses was primarily due to decreases of approximately
$309,000 in legal fees, $231,000 in facility expenses, $103,000 in license and
royalty expenses, $110,000 in staff related costs and $80,000 in other operating
expenses.
Interest Expense, net - Interest expense decreased $57,000 and $240,000 for the
three and nine month periods ended December 31, 2004 and 2003, respectively. The
cash received from the sale of SSG's ATEC subsidiary in November 2003 resulted
in a reduction of SSG's debt and reduced interest expense.
22
Provision for Income Taxes - For the three and nine month periods ended December
31, 2004, SSG recorded no income tax provision due to the existence of prior net
operating losses to offset current income, and no change in management's
estimate of the extent to which deferred tax assets are realizable. (See Note 6)
Income from Discontinued Operations - For the three and nine month periods ended
December 31, 2003, discontinued operations reflect net operating losses or gains
as well as the proceeds related to the sale of certain Team Dealer operations
and of SSG's ATEC subsidiary. (See Note 11)
Net Income (Loss) - As a result of the foregoing factors, the sporting goods
segment generated a net loss of approximately $1.9 million for the three months
ended December 31, 2004 as compared to net income of $522,000 for the three
months ended December 31, 2003. For the nine months ended December 31, 2004 the
sporting goods segment earned net income of $334,000, or 0.5% of net revenues,
as compared to net income of $229,000, or 0.4% of net revenues, for the nine
months ended December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, we had cash and cash equivalents of
approximately $2.7 million compared to approximately $6.4 million at March 31,
2004. Working capital decreased to $43.8 million at December 31, 2004 as
compared to $46.8 million at March 31, 2004. The decrease in cash and cash
equivalents of approximately $3.7 million was primarily due to increases in cash
used by operating and investing activities, partially offset by increases in
cash provided by financing activities, as described below.
Cash flows used in continuing operating activities were approximately
$17.6 million for the nine months ended December 31, 2004, primarily related to
increases in accounts receivable and inventories due to the higher level of
sales in the current fiscal year, and the continuing shift from the direct
import to domestic business.
Net cash used by investing activities was approximately $2.2 million
for the nine months ended December 31, 2004, which consisted of acquisition of
real property, trademark investments, and machinery and office equipment
purchases.
Net cash provided from financing activities was approximately $16.2
million for the nine months ended December 31, 2004, due primarily to the net
increase in working capital needs described above.
23
Emerson and SSG maintain credit facilities as described in Note 8 to
our consolidated financial statements - Borrowings. At December 31, 2004, there
were approximately $13.3 million of borrowings outstanding under these
facilities and no letters of credit outstanding. Approximately $11.3 million of
borrowings were outstanding under the Emerson Loan Agreement and $2.0 million of
borrowings were outstanding under the SSG Loan Agreement. At December 31, 2004,
Emerson and SSG were in compliance with the covenants in each of the loan
agreements. The Emerson Revolver expires in June 2005, and accordingly, all
amounts outstanding under this facility have been presented as a current
liability. Emerson intends to renew its banking facility or enter into a new
banking facility with similar or more favorable terms than those presently
existing.
Our foreign subsidiaries maintain various credit facilities,
aggregating $85.0 million, consisting of the following:
o four letter of credit facilities totaling $30.0 million which is used for
inventory purchases; and
o five back-to-back letter of credit facilities totaling $55 million.
At December 31, 2004, our foreign subsidiaries pledged approximately
$7.7 million in certificates of deposit to these banks to assure the
availability of the $30.0 million of credit facilities. At December 31, 2004,
there were approximately $7.4 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 December 31,
2004.
At present, we believe that future cash flows 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 December 31, 2004 for the
periods shown (in thousands):
PAYMENT DUE BY PERIOD
---------------------------------------------------------------------
LESS THAN 1 MORE THAN 5
TOTAL YEAR 1 - 3 YEARS 3 - 5 YEARS YEARS
------------ ------------- ------------- -------------- -------------
Notes and
mortgages payable $ 14,033 $ 11,374 $ 148 $ 2,147 $ 364
Capital lease
obligations 57 35 22 -- --
Leases 8,330 1,804 4,204 2,002 320
------------ ------------- ------------- -------------- -------------
Total $ 22,420 $ 13,213 $ 4,374 $ 4,149 $ 684
============ ============= ============= ============== =============
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 December 31, 2004.
24
CRITICAL ACCOUNTING POLICIES
For the nine month period ended December 31, 2004, 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, 2004.
INFLATION, FOREIGN CURRENCY, AND INTEREST RATES
Neither inflation nor currency fluctuations had a significant effect on
our results of operations during the first three quarters of fiscal 2005. 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, 2004.
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, we
carried out an evaluation, with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-15. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in ensuring that information required to be disclosed by us in the
reports that we file or submit 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 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.
25
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 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 timely 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.
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.
26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
SHARE REPURCHASES:
For the quarter ended December 31, 2004, we did not repurchase any
shares under the Emerson Radio Corp.'s common stock share repurchase program.
The share repurchase program was publicly announced in September 2003 to
repurchase up to 2,000,000 shares of Emerson's outstanding common stock. Share
repurchases are made from time to time in open market transactions in such
amounts as determined in the discretion of Emerson's management within the
guidelines set forth by Rule 10b - 18 under the Securities Exchange Act. Prior
to the December 31, 2004 quarter, we repurchased 1,111,625 shares under this
program. As of December 31, 2004, the maximum number of shares that are
available to be repurchased under Emerson Radio Corp's common share repurchase
program was 888,375.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
(a) None
(b) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
10.12.4 Fourth Amendment to License Agreement effective December 3,2004 by
and between Funai Corporation, Inc. and Emerson.*
10.13.3 Fifth Lease Modification Agreement made the 2nd day of December 2004
between Hartz Mountain Industries, Inc. and Emerson.*
10.26.3 Employment Agreement extension letter between Emerson Radio Corp.,
Emerson Radio International Ltd., Emerson Radio (Hong Kong) Limited
and Geoffrey P. Jurick effective as of September 1, 2004.*
27
10.26.4 Employment Agreement extension letter between Emerson Radio Corp. and
John J. Raab effective as of September 1, 2004.*
10.26.5 Employment Agreement extension letter between Emerson Radio Corp. and
Elizabeth J. Calianese effective as of September 1, 2004.*
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 November 15, 2004, furnishing the
press release announcing the Company's financial results for the
quarter ended September 30, 2004.
Current report on Form 8-K, dated December 8, 2004, disclosing the
entry into a material definitive agreement with Funai Corporation,
Inc.
Current report on Form 8-K, dated January 18, 2005, furnishing the
press release announcing the Company's preliminary net revenues for
the three and nine months ended December 31, 2004.
Current report on Form 8-K, dated January 20, 2005, disclosing the
borrowings of Mr. Geoffrey Jurick and the settlement of all
outstanding litigation between Mr. Jurick and Ms. Stelling.
- ---------------------
* filed herewith
28
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: February 3, 2005 /s/ Geoffrey P. Jurick
----------------------
Geoffrey P. Jurick
Chairman of the Board,
Chief Executive Officer and
President
(Principal Executive Officer)
Date: February 3, 2005 /s/ Guy A. Paglinco
-------------------
Vice President and
Chief Financial Officer
(Principal Finance and
Accounting Officer)
29