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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-25226
EMERSON RADIO CORP.
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(Exact name of registrant as specified in its charter)
Delaware 22-3285224
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Nine Entin Road, Parsippany, NJ 07054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 884-5800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
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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
requirement for the past 90 days. [X] YES [ ] NO.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [ ] YES [X] NO.
Aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates of the registrant at September 30, 2004
(computed by reference to the last reported sale price of the Common Stock on
the American Stock Exchange on such date): $44,451,232.
Number of Common Shares outstanding at June 7, 2005: 27,203,164
DOCUMENTS INCORPORATED BY REFERENCE:
Document Part of the Form 10-K
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Proxy Statement for 2005 Annual Meeting of Part III
Stockholders
1
PART I
This Annual Report on Form 10-K contains, in addition to historical
information, "forward-looking statements" (within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties. See
"Business- Forward-Looking Statements."
ITEM 1. BUSINESS
THE COMPANY
We operate in two business segments:
o consumer electronics; and
o sporting goods.
The consumer electronics segment designs, sources, imports and markets
a variety of consumer electronic products and licenses its trademarks for a
variety of products worldwide. The sporting goods segment, which is operated
through our 53% ownership of Sport Supply Group, Inc., distributes and markets
sports related equipment and leisure products primarily to institutional
customers in the United States.
Emerson was originally formed in the State of New York in 1956 under
the name Major Electronics Corp. In 1977, we reincorporated in the State of New
Jersey and changed our name to Emerson Radio Corp. In 1994, we were
reincorporated in the State of Delaware. Our principal executive offices are
located at Nine Entin Road, Parsippany, New Jersey 07054-0430. Our telephone
number in Parsippany, New Jersey, is (973) 884-5800.
Unless the context otherwise requires, the term:
o "Emerson" refers to our "consumer electronics" segment which is
operated through Emerson Radio Corp. and its subsidiaries, other
than SSG;
o "SSG" refers to our "sporting goods" segment which is operated
through Sport Supply Group, Inc. and its subsidiaries; and
o "we", "us" and "our" refers to both Emerson and SSG.
For additional disclosures of our business segments and major
customers, as well as financial information about geographical areas, see Item 8
- - "Financial Statements and Supplementary Data" - Note 14 of Notes to
Consolidated Financial Statements.
2
SUPERVISION AND REGULATION
We file reports and other information with the Securities and Exchange
Commission ("SEC") pursuant to the information requirements of the Securities
Exchange Act of 1934. Readers may read and copy any document we file at the
SEC's public reference room at 450 Fifth St. N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operations
of the public reference room. Our filings are also available to the public from
commercial document retrieval services and at the SEC's website at www.sec.gov.
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 our website is not incorporated by reference in this report.
On March 5, 2004, SSG filed a Form 15 with the Securities and Exchange
Commission giving notice of the termination of the registration of its
securities and the suspension of duty to file periodic reports under Sections 13
and 15(d) of the Securities Exchange Act of 1934. As a result, SSG is no longer
required to file annual reports on Form 10-K, quarterly reports on Form 10-Q or
current reports on form 8-K with the SEC.
CONSUMER ELECTRONICS SEGMENT
General
Emerson, directly and through several subsidiaries, designs, sources,
imports, markets, sells and licenses to certain licensees a variety of consumer
electronic products, both domestically and internationally, under the Emerson(R)
and HH Scott(R) brand names. These products include:
o video products - televisions, combination television/VCR/DVDs,
digital video discs (DVD), video cassette recorders (VCR) and set
top boxes;
o microwave ovens;
o audio, clocks and clock radios, home theater systems and
multi-media;
o houseware products; and
o video accessories, telecommunication equipment, certain computer
accessories, specialty, other consumer electronic products and
mobile electronics.
Emerson also licenses a variety of specialty themed logos and marks
from third parties for use on audio products that bear the names of these third
parties. We refer to these licenses as inward licenses.
3
The trade name "Emerson Radio" dates back to 1912 and is one of the
oldest and most well respected names in the consumer electronics industry. See
"Consumer Electronics Segment - Licensing and Related Activities."
Emerson believes it possesses an advantage over its competitors due to
the combination of:
o the "[EMERSON LOGO]" brand recognition;
o its distribution base and established customer relations;
o its sourcing expertise and established vendor relations;
o an infrastructure with personnel experienced in servicing and
providing logistical support to the domestic mass merchant
distribution channel; and
o its extensive experience in establishing license and distribution
agreements on a global basis for a variety of products.
Emerson intends to continue leveraging its core competencies to offer a
broad variety of current and new consumer electronic products to customers. In
addition, Emerson intends to enter into additional licenses of third party trade
names and trademarks ("inward licenses"), as well as licenses for the use of
Emerson's trade names and trademarks by third parties ("outward licenses") and
distribution agreements that take advantage of Emerson's trademarks and utilize
the logistical and sourcing advantages for products that are more efficiently
marketed through these agreements. We continuously evaluate potential licenses
and distribution agreements. In March 2003, Emerson entered into a license
agreement with Nickelodeon to license the Nickelodeon name, trademark and logo,
along with several other Nickelodeon trademarks and logos. See - "Consumer
Electronics Segment - Licensing and Related Activities".
Emerson's core business consists of selling, distributing, and
licensing various low to moderately priced categories of consumer electronic
products. The majority of Emerson's marketing and sales efforts are concentrated
in the United States and, to a lesser extent, certain other international
regions. Major competitors in these markets are foreign-based manufacturers and
distributors. See "Consumer Electronics Segment - Competition."
Products
Emerson's current product and branded categories consist of the
following:
VIDEO PRODUCTS AUDIO PRODUCTS OTHER
- -------------- -------------- -----
Televisions Portable stereo systems Housewares
Specialty televisions Digital clock radios Home theater
Digital video discs (DVD) Shelf stereo systems Microwave ovens
Specialty video cassette players Specialty clock radios Multi-media
Video cassette recorders (VCR) Telecommunications
4
Growth Strategy
We believe growth opportunities exist through the implementation of the
following:
o higher penetration levels within our existing customers through
increases in the products offered and sold to existing accounts;
o expansion of our existing customer base in United States through our
sales staff and sales representative organizations;
o expansion of our existing worldwide customer base through our
foreign distribution agreements and direct selling, particularly in
Europe and Asia;
o expansion into distribution channels we are not currently utilizing
through new products that are being offered by Emerson;
o development and sales of new products not presently being offered by
Emerson, such as electronics and accessories that utilize popular
theme characters and logos through the use of various trademarks
licensed from third parties;
o further development of our direct to consumer sales channel, through
Emerson's internet web-site;
o continuing to capitalize on the "[EMERSON LOGO]" and "H.H.
Scott(R)" trademarks through continued efforts to enter into license
agreements with third parties to license the "[EMERSON LOGO]" and
"H.H. Scott(R)" trademarks for products not currently being sold,
and in geographic areas not presently being serviced; and
o expansion through strategic mergers with and acquisitions of other
businesses.
In connection with Emerson's strategic focus, Emerson may acquire an
equity position in other corporate entities.
Emerson believes that the "[EMERSON LOGO]" trademark is recognized in
many countries. A principal component of Emerson's growth strategy is to utilize
this global brand name recognition together with its reputation for quality and
cost competitive products to aggressively promote its product lines within the
United States and targeted geographic areas on an international basis. Emerson
believes that it will be able to compete more effectively in the highly
competitive consumer electronics and microwave oven industries, domestically and
internationally, by combining innovative approaches to its current product line
and augmenting its product line with complementary products. Emerson intends to
pursue such plans either independently or by forging new relationships,
including license arrangements, distributorship agreements and joint ventures.
See "Consumer Electronics Segment - Licensing and Related Activities."
5
Sales and Distribution
Emerson's Direct Import Program allows its customers to import and
receive product directly from Emerson's manufacturers located outside the United
States. Under the Direct Import Program, title for its products passes in the
country of origin upon shipment of the product by the manufacturer. Emerson also
sells product to customers from its U.S. based finished goods inventory, which
is referred to as its Domestic Program. Under the Domestic Program, title for
its products primarily passes at the time of shipment. Under both programs, we
recognize revenues at the time title passes to the customer. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Emerson has an integrated system to coordinate the purchasing, sales
and distribution aspects of its operations. Emerson receives orders from its
major accounts electronically, via electronic data interface (EDI), facsimile,
telephone or mail. Emerson does not have long-term contracts with any of its
customers, but rather receives orders on an ongoing basis. Products imported by
Emerson, generally from the Far East, are shipped by ocean and/or inland freight
and then stored in contracted public warehouse facilities for shipment to
customers. All inventory is monitored by Emerson's electronic inventory system.
As a purchase order is received and filled from inventory, warehoused product is
labeled and prepared for outbound shipment to customers by common, contract or
small package carriers for sales made from inventory.
Domestic Marketing
In the United States, Emerson markets its products primarily through:
o mass merchandisers;
o discount retailers;
o toy retailers; and
o distributors and specialty catalogers.
In fiscal 2005 and 2004, Wal-Mart Stores accounted for approximately
30% and 25% of our consolidated net revenues, respectively, and Target Stores
accounted for approximately 12% and 15% of our consolidated net revenues,
respectively. No other customer accounted for more than 10% of our consolidated
net revenues in either period. Management believes that a loss, or a significant
reduction of sales to Wal-Mart or Target would have a material adverse effect on
our business and results of operations.
Approximately 45% and 49% of the net consumer electronics revenues in
fiscal 2005 and 2004, respectively, were made through third party sales
representative organizations that receive sales commissions and work in
conjunction with Emerson's own sales personnel. With Emerson's permission, third
party sales representative organizations may sell competitive products in
addition to Emerson's products. In most instances, either party may terminate a
sales representative relationship on 30 days prior notice by Emerson and 90 days
prior notice by the sales representative organization in accordance with
customary industry practice. Emerson utilizes approximately 22 sales
representative organizations, including two through which approximately 18% and
16% of the net consumer electronics revenues were made in fiscal 2005. For
fiscal 2004, two sales organizations accounted for approximately 15% and 10% of
the net consumer electronics revenues. No other sales representative
organization accounted for more than 10% of the consumer electronics net
revenues in either year. The remainder of Emerson's sales are serviced by its
sales personnel. Management does not believe that the loss of one or more sales
representative organizations would have a material adverse effect on our
business and results of operations.
6
Foreign Marketing
Emerson primarily markets and distributes its products in the United
States. Accordingly, foreign sales account for less than 10% of total revenues
and are not considered material. Emerson intends to expand its existing
worldwide customer base through its foreign distribution agreements and direct
selling, particularly in Europe and Asia.
Licensing and Related Activities
Emerson has several license agreements that allow licensees to use our
trademarks for the manufacture and/or the sale of consumer electronics and other
products and are referred to as outward licenses. These license agreements allow
the licensee to use our trademarks by a specific product category, by a specific
geographic area (that primarily includes some or all the countries located in
North America, South America, Mexico and parts of Europe), by a specific
customer base, by any combination of the above, or by any other category that
might be defined in the license agreement. These license agreements are subject
to renewal at the initial expiration of the agreements and are governed by the
laws of the United States, and have expiration dates ranging from March 2006
through February 2010. Total license revenues recognized and earned in fiscal
2005, 2004, and 2003 were approximately $10,804,000, $10,973,000, and
$10,388,000, respectively. Emerson records licensing revenues as earned over the
term of the related agreements.
Effective January 1, 2001, Emerson entered into a license agreement
("Video License Agreement") with Funai Corporation, Inc. ("Funai"), which was
amended, to extend the Video License Agreement to December 31, 2006. The Video
License Agreement provides that Funai will manufacture, market, sell and
distribute specified products bearing the "[EMERSON LOGO]" trademark to
customers in the U.S. and Canadian markets. Under the terms of the agreement,
Emerson receives non-refundable minimum annual royalty payments of $4.3 million
each calendar year and a license fee on sales of products subject to the Video
License Agreement in excess of the minimum annual royalties. During fiscal 2005,
2004 and 2003, license revenues of $8,555,000, $8,759,000 and $8,520,000,
respectively, were recorded under this agreement.
Throughout various parts of the world, Emerson maintains distribution
and outward license agreements that encompass various Emerson(R) branded
products into defined geographic areas.
7
Emerson intends to pursue additional licensing and distribution
opportunities and believes that such activities have had and will continue to
have a positive impact on operating results by generating income with minimal
incremental costs, if any, and without the necessity of utilizing working
capital. See Item 1 - "Business - Forward-Looking Information" and Item 7
- -"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Effective March 2003, Emerson entered into a license agreement with MTV
Networks to license the Nickelodeon name, trademark and logo, along with several
of Nickelodeon's trademarks and logos. The initial term of the agreement expired
in December 2005, and has been, in accordance with the contract option, extended
by one year to December 2006. Additionally, Emerson entered into a second
contract with MTV Networks for increased Nickelodeon character trademarks and
logos, along with expanded product categories. The term of this second contract
also expires in December 2006. These licenses provide Emerson with the rights to
use such marks in the United States, and require certain minimum royalties to be
paid to MTV Networks.
Design and Manufacturing
Emerson's products are manufactured by several original equipment
manufacturers in accordance with Emerson's specifications. During fiscal 2005
and 2004, 100% of Emerson's purchases consisted of imported finished goods from
manufacturers primarily located in:
o South Korea;
o China;
o Malaysia; and
o Thailand.
Emerson's design team is responsible for product development and works
closely with Emerson's suppliers. Emerson's engineers determine the detailed
cosmetic, electronic and other features for new products, which typically
incorporate commercially available electronic parts to be assembled according to
their design. Accordingly, the exterior designs and operating features of the
products reflect Emerson's judgment of current styles and consumer preferences.
Emerson's designs are tailored to meet the consumer preferences of the local
market, particularly in the case of its international markets.
The following summarizes Emerson's purchases from its major suppliers:
Fiscal Year
-----------------------
SUPPLIER 2005 2004
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StarLite 16% 15%
Lasco Industries 15% 10%
Oxygen 11% *
Avatar Mfg * 14%
GMT Industries * 12%
Daewoo * 12%
* - less than 10%
8
No other supplier accounted for more than 10% of Emerson's total
purchases in fiscal 2005 or 2004. Emerson considers its relationships with its
suppliers to be satisfactory and believes that, barring any unusual material or
part shortages or economic, fiscal or monetary conditions, Emerson could
develop, as it already has, alternative suppliers. No assurance can be given
that ample supply of product would be available at current prices if Emerson was
required to seek alternative sources of supply without adequate notice by a
supplier or a reasonable opportunity to seek alternate production facilities and
component parts. See Item 1 - "Business - Forward-Looking Information, Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 7A - "Inflation, Foreign Currency and Interest Rates."
Warranties
Emerson offers limited warranties for its consumer electronics,
comparable to those offered to consumers by its competitors in the United
States. Such warranties typically consist of a 90 day period for audio products
and one year period for microwave products, under which Emerson will pay for
labor and parts, or offer a new or similar unit in exchange for a non-performing
unit.
Returned Products
Emerson's customers return product to Emerson for a variety of reasons,
including:
o retailer return policies with their customers;
o damage to goods in transit and cosmetic imperfections; and
o mechanical failures.
Emerson has entered into agreements with the majority of its suppliers
that require the supplier to accept returned defective product. Emerson pays a
fee to the supplier and in exchange receives a unit.
Backlog
We do not believe that backlog is a significant factor in our consumer
electronics segment. The ability of management to correctly anticipate and
provide for inventory requirements is essential to the successful operation of
our consumer electronics business.
9
Trademarks
Emerson owns the:
o "[EMERSON LOGO]";
o "Emerson Research(R)";
o "Emerson Interactive sm";
o "Girl Power TM";
o "H.H. Scott(R)"; and
o "Scott(R)"
trademarks for certain of its home entertainment and consumer electronic
products in the United States, Canada, Mexico and various other countries. Of
the trademarks owned by Emerson, those registered in the United States and
Canada must be renewed at various times through 2011 and 2014, respectively.
Emerson's trademarks are also registered in various other countries, which
registrations must be renewed at various times. Emerson intends to renew all
trademarks necessary for its business. Emerson considers the "[EMERSON LOGO]"
and HH Scott(R) trademarks to be of material importance to its business
and, to a lesser degree, the remaining trademarks. Emerson licenses the
"[EMERSON LOGO]" and HH Scott(R) trademarks to third parties, the scope of
which is on a limited product and geographic basis and for a period of time.
See "Consumer Electronics Segment - Licensing and Related Activities."
Competition
As published in the January 2005 edition of the Consumer Electronics
Association Market Research report, the market segments of the consumer
electronics industry in which Emerson competes generates approximately $21
billion of factory sales annually and is highly fragmented, cyclical and very
competitive. The industry is characterized by the short life cycle of products,
which requires continuous design and development efforts.
Emerson primarily competes in the low to medium-priced sector of the
consumer electronics market. Management estimates that Emerson has several dozen
competitors that are manufacturers and/or distributors, many of which are much
larger and have greater financial resources than Emerson. Emerson competes
primarily on the basis of:
10
o its reliability;
o quality;
o price;
o design;
o consumer acceptance of its products; and
o quality service and support to retailers and their customers.
Emerson also competes at the retail level for shelf space and
promotional displays, all of which have an impact on its established and
proposed distribution channels.
Seasonality
Emerson generally experiences stronger demand from its customers for
its products in the fiscal quarters ending September and December. However,
during the last several years, this revenue pattern has been less prevalent due
to the need for retailers to plan earlier for the winter holiday selling season
and our management's ability to obtain additional orders to meet increased
product demand during the March and June fiscal quarters.
Working Capital
Our consumer electronics segment is impacted by its seasonality in that
it generally records the majority of annual sales in the quarters ending
September and December, requiring it to maintain higher inventory levels during
the quarters ending June and September, therefore increasing the working capital
needs during these periods. Management believes that the outward license
agreements, sales margin stability and the policies in place for returned
products should continue to favorably impact our cash flow. Management believes
that anticipated cash flow from operations and the financing presently in place
will provide sufficient liquidity to meet its operating and debt service cash
requirements in the year ahead. Management believes the Company's working
capital practices are similar to those of its competitors.
SPORTING GOODS SEGMENT
General
Management believes SSG is a leading direct mail marketer of sports
related equipment and leisure products for sale primarily to the institutional
market 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 it's wholly-owned subsidiary, Athletic Training
Equipment Company, Inc. ("ATEC"). Collectively, we refer to these as
"Discontinued Operations" and accordingly, the accompanying financial statements
reflect these as discontinued operations. These transactions helped reduce the
overhead of SSG along with providing funds to reduce the debt of SSG.
11
Products
Management believes SSG manufactures and distributes one of the
broadest lines of sporting goods, physical educational, recreational and leisure
products to the institutional market. SSG offers over 10,000 products, of which
SSG manufactures approximately 1,000 of these products and the remainder are
purchased from other manufacturers. The SSG product lines include: archery;
baseball; softball; basketball; camping; football; tennis and other racquet
sports; gymnastics; indoor recreation; game tables; physical education; soccer;
field and floor hockey; lacrosse; track and field; volleyball; weight lifting;
fitness equipment; outdoor playground equipment; and early childhood development
products.
Management believes brand recognition is important to the institutional
market. Most of SSG's products are marketed under trade names or trademarks
owned or licensed by SSG and include the following:
Alumagoal(R) Blastball(R) BSN(R)
Champion Barbell Curvemaster(R) Fibersport
Flag A Tag(R) Gamecraft GSC Sports
Maxpro(R) MacGregor(R) New England Camp & Supply
NorthAmerican Recreation(R) Passon's Sports Pillo Polo(R)
Port-A-Pit(R) Pro Base(R) Pro Down(R)
Pro Net Rol-Dri(R)and Tidi-Court Toppleball(R)
U.S. Games, Inc(R) Voit (R)
Growth Strategy
SSG believes it is well positioned to grow its business due to:
o its ability to process and fulfill a high capacity of orders;
o its well-developed expertise in catalog design and merchandising;
and
o its information technology system and its Internet platform.
One of the most important contributions of SSG's information technology
platform is that the order processing and fulfillment capabilities are
integrated throughout the operations of SSG, including all of SSG's websites.
Each website is strategically targeted to a specific customer group or product
line. The continued migration of SSG's customers to its websites is important to
SSG's growth and success.
Sales and Distribution
SSG's websites enable its customers to place orders, access account
information, track orders, and perform routine customer service inquiries on a
real-time basis, twenty-four hours a day, seven days a week. This functionality
allows for more convenience and added flexibility for its customers.
12
SSG's sourcing, warehousing, distribution and fulfillment capabilities
and its fully integrated information system, provide the necessary capacities,
logistics, information and technological capabilities to meet the demands and
growth potential of commerce.
Domestic Marketing
SSG offers products directly to the institutional market primarily
through:
o a variety of distinctive, information-rich catalogs;
o sales personnel strategically located in certain large
metropolitan areas;
o in-bound and out-bound telemarketers;
o a team of experienced bid and quote personnel; and
o the Internet.
SSG's marketing efforts are supported by a database of over 250,000
customers, a call center, a custom-designed distribution center and several
manufacturing facilities. SSG currently offers approximately 10,000 sports
related equipment products to over 100,000 customers, which include: public and
private schools; colleges; universities and military academies; municipal and
governmental agencies; military facilities; churches; clubs; camps; hospitals;
youth sports leagues; non-profit organizations; team dealers; and certain large
retail sporting goods chains.
SSG believes that its customer base in the United States is the largest
in the institutional direct mail market for sports related equipment.
Licensing and Related Activities
SSG has inward licenses for certain well-known names and trademarks
that allow it to manufacture, sell, and distribute specified sport related
products and equipment to institutional customers using the licensed names for
specified royalty fees paid to licensors. See "Business-Sporting Goods Segment -
Trademarks."
Design and Manufacturing
SSG manufactures, assembles and distributes many of its products at its
facilities. See Item 2 - "Properties."
Most of SSG's manufactured products are standardized. Certain products
manufactured by SSG are custom made; such as tumbling mats ordered in color or
size specifications. The principal raw materials used by SSG in manufacturing
are, for the most part, readily available from several different sources. No one
supplier accounts for more than 10% of the total raw materials supplied to SSG.
Such raw materials include: foam; vinyl; nylon thread; steel and aluminum
tubing.
13
Items not manufactured by SSG are purchased from various suppliers
primarily located in the United States, Taiwan, Australia, the Philippines,
Thailand, China, Pakistan, Sweden and Canada. SSG has no significant purchase
contracts with any major supplier of finished products, and most products
purchased from suppliers are available from other sources. Purchases of most
finished products are made in U.S. dollars and are, therefore, not subject to
direct foreign exchange rate differences.
Warranties
SSG typically offers limited warranties for its sporting goods, which
are comparable to its competitors.
Returned Products
In most instances, SSG's customers have the right to return product
within 30 days. Returned products in the sporting goods segment are less
frequent than the consumer electronics segment, and are not considered a
significant factor in SSG's operations.
Backlog
SSG had a backlog of approximately $2.4 million at March 31, 2005, $2.2
million at March 31, 2004, and $2.9 million at March 31, 2003.
Trademarks
SSG licenses certain well known trade names and trademarks allowing it
to manufacture, sell, and distribute specified sport related products and
equipment to institutional customers using these names for specified royalty
fees. These license agreements have expiration dates ranging from December 2009
through 2040, in some cases with renewable terms and include our license with
MacGregor(R), which expires in 2040 and allows us to manufacture, promote, sell
and distribute specified products and equipment under the MacGregor(R) name.
Competition
SSG competes in the institutional sporting goods market principally
with:
o local sporting goods dealers;
o retail sporting goods stores;
o other direct mail catalog marketers; and
o providers of sporting goods on the Internet.
14
SSG has identified approximately 15 other direct mail and internet
companies in the institutional market most of whom management believes are
competitors that are substantially smaller than SSG in terms of geographic
coverage, products, e-commerce capability, customer base and revenues.
SSG competes in the institutional market principally on the basis of
brand, price, product availability, quality and customer service. SSG believes
it has an advantage in the institutional market over traditional sporting goods
retailers and team dealers because its selling prices do not include comparable
price markups attributable to traditional multi-distribution channel markups. In
addition, SSG's expansive product lines and the ability to control the
availability of goods that SSG sources enables it to respond more rapidly to
customer demand.
Seasonality
SSG has historically experienced strong revenues during the March, June
and September quarters primarily due to volume generated by spring and summer
sports, favorable outdoor weather conditions and school needs before summer
closings.
Working Capital
The sporting goods segment is impacted by seasonality with its March
quarter being the highest sales period, and the quarter ending December being
its lowest sales period. This seasonality requires the sporting goods segment to
maintain higher amounts of inventory during the quarters ending March and June,
therefore increasing the working capital needs during these periods.
GOVERNMENT REGULATION
Pursuant to the Tariff Act of 1930, as amended, the Trade Act of 1974
and regulations promulgated there under, the United States government charges
tariff duties, excess charges, assessments and penalties on many imports. These
regulations are subject to constant change and revision by government agencies
and by action by the United States Trade Representative and may have the effect
of increasing the cost of goods purchased by us or limiting quantities of goods
available to us from our overseas suppliers. A number of states have adopted
statutes regulating the manner of determining the amount of payments to
independent service centers performing warranty service on products such as
those sold by us. Additional Federal legislation and regulations regarding the
importation of consumer electronics products, including the products marketed by
us, have been proposed from time-to-time and, if enacted into law, could
adversely affect our financial condition and results of operations.
Many of our products are subject to Federal regulations, among other
laws, which empowers the Consumer Product Safety Commission (the "CPSC") to
protect consumers from hazardous sporting goods and other articles. The CPSC has
the authority to exclude from the market certain articles that are found to be
hazardous and can require a manufacturer to refund the purchase price of
products that present a substantial product hazard. CPSC determinations are
subject to court review. Similar laws exist in some states and cities in the
United States.
15
PRODUCT LIABILITY AND INSURANCE
Because of the nature of the products sold by us, particularly those
products sold by SSG, we are periodically subject to product liability claims
resulting from personal injuries. We may become involved in various lawsuits
incidental to our business. Additionally, significantly increased product
liability claims continue to be asserted successfully against manufacturers and
distributors of sports equipment throughout the United States resulting in
general uncertainty as to the nature and extent of manufacturers' and
distributors' liability for personal injuries. See Item 3 - "Legal Proceedings".
In recent years, product liability insurance has become much more
expensive, more restrictive and more difficult to obtain. Accordingly, there can
be no assurance that our general product liability insurance will be sufficient
to cover any successful product liability claims made. In our opinion, any
ultimate liability arising out of currently pending product liability claims
will not have a material adverse effect on the financial condition or results of
operations. However, any claims substantially in excess of the insurance
coverage, or any substantial claim not covered by insurance, could have a
material adverse effect on our financial condition and results of operations.
EMPLOYEES
As of April 29, 2005, we had approximately 379 employees, of which 139
were employed by Emerson, and 240 were employed by SSG. None of our employees
are represented by unions, and we believe our labor relations are good.
RISK FACTORS
You should carefully consider these risk factors in addition to our
financial statements, including the notes to such financial statements.
Additional risks that we do not yet know of or that we currently think are
immaterial may also impair our business operations. If any of the following
risks occur, our business, financial condition or operating results could be
adversely affected. In that case, the trading price of our common stock could
decline.
BUSINESS RELATED RISKS
The loss, or significant reduction in business of any of our key
customers, including Wal-Mart and Target, could negatively affect our revenues
and could decrease our earnings.
We are highly dependent upon sales of our consumer electronic products
to certain of our customers, including Wal-Mart and Target. During our fiscal
years ended March 31, 2005 and 2004, Wal-Mart stores accounted for approximately
30% and 25%, respectively, and Target stores accounted for approximately 12% and
15%, respectively, of our consolidated net revenues. Although no other customer
in either of our operating segments accounted for greater than 10% of our
consolidated net revenues during these periods, other customers may account for
more than 10% of our consolidated net revenues in future periods. All purchases
of our products by customers in both of our operating segments are made through
purchase orders and we do not have any long-term contracts with any of our
customers. The loss of Wal-Mart or Target, or any of our other customers to
which we sell a significant amount of our products or any significant portion of
orders from Wal-Mart or Target, or such other customers or any material adverse
change in the financial condition of such customers could negatively affect our
revenues and decrease our earnings.
16
The failure to maintain our relationships with our licensees, licensors and
distributors or the failure to obtain new licensees, licensors or distribution
relationships could negatively affect our revenues and decrease our earnings.
We maintain license agreements that allow licensees to use our
Emerson(R) and H.H. Scott(R) trademarks for the manufacture and sale of consumer
electronics and other products. In addition, we maintain distribution agreements
for the distribution of our consumer electronics products into defined
geographic areas. Although we have entered into agreements with certain of our
licensees and distributors of consumer electronics products, most of which have
a term of three years or less and expire between March 2006 and February 2010,
including our agreement with Funai, we cannot assure that such agreements will
be renewed when the terms of such agreements expire, or that our relationships
with our licensees or distributors will be maintained on satisfactory terms or
at all. The failure to maintain our relationships with Funai and our other
licensees and distributors, the failure to obtain new licensees or distribution
relationships or the failure by our licensees to protect the integrity and
reputation of our Emerson(R) and H.H. Scott(R) trademarks could negatively
affect our licensing revenues and decrease our earnings. In addition, we
maintain license agreements with MTV Networks to license the Nickelodeon name,
trademark and logo, along with several of Nickelodeon's trademarks and logos,
each of which expire in December 2006. We may not be able to renew the license
on terms favorable to us or at all. The failure to maintain our relationship
with MTV Networks or other licensors could negatively affect our revenues and
decrease our earnings.
Our sporting goods business licenses certain well-known names and
trademarks, including MacGregor(R) that expires in 2040, and allows us to
manufacture, promote, sell and distribute specified products and equipment.
Although the MacGregor(R) agreement expires in 2040, we cannot be assured that
our relationship with MacGregor(R) will be maintained on satisfactory terms or
at all. The non-renewal or termination of one or more of our material licenses
in our sporting goods business would eliminate our ability to sell products
bearing such names and trademarks and decrease our earnings.
Our revenues and earnings could be negatively affected if we cannot anticipate
market trends or enhance existing products or achieve market acceptance of new
products.
Our success is dependent on our ability to successfully anticipate and
respond to changing consumer demands and trends in a timely manner. In addition,
to increase our penetration of current markets and gain footholds in new markets
for our products, we must maintain existing products and integrate them with new
products. We may not be successful in developing, marketing and releasing new
products that respond to technological developments or changing customer needs
and preferences. We may also experience difficulties that could delay or prevent
the successful development, introduction and sale of these new products. In
addition, these new products may not adequately meet the requirements of the
marketplace and may not achieve any significant degree of market acceptance. If
release dates of any future products or enhancements to our products are
delayed, or if these products or enhancements fail to achieve market acceptance
when released, our sales volume may decline and earnings could be negatively
affected. In addition, new products or enhancements by our competitors may cause
customers to defer or forgo purchases of our products, which could also
negatively affect our revenues and earnings.
17
We depend on a limited number of suppliers for our components and raw materials
and any interruption in the availability of these components and raw materials
used in our products could reduce our revenues and adversely affect our
relationship with our customers.
We rely on a limited number of suppliers, most of which are located
outside of the United States, for the components and raw materials used in our
consumer electronics and sporting good products. Although there are many
suppliers for each of our component parts and raw materials, we are dependent on
a limited number of suppliers for many of the significant components and raw
materials. This reliance involves a number of significant risks, including:
o lack of availability of materials and interruptions in delivery
of components and raw materials from our suppliers;
o manufacturing delays caused by such lack of availability or
interruptions in delivery;
o fluctuations in the quality and the price of components and raw
materials, in particular due to the petroleum price impact on
such materials; and
o risks related to foreign operations.
We do not have any long-term or exclusive purchase commitments with any
of our suppliers. StarLite, Lasco Industries and Oxygen are our largest
suppliers of components for our consumer electronics products, each of which
accounted for more than 10% of our purchases of components for our consumer
electronics products for our latest fiscal year. Our failure to maintain
existing relationships with our suppliers or to establish new relationships in
the future could also negatively affect our ability to obtain our components and
raw materials used in our products in a timely manner. If we are unable to
obtain ample supply of product from our existing suppliers or alternative
sources of supply, we may be unable to satisfy our customers' orders which could
reduce our revenues and adversely affect our relationship with our customers.
The operating results of our sporting good segment may continue to be affected
by budgetary restrictions of schools and government agencies.
A substantial portion of our sporting goods product revenues are
generated through sales to the institutional market, including:
o public and private schools;
o colleges and universities;
o military academies;
o municipal and governmental agencies;
o military and correctional facilities;
o youth sports leagues.
18
As a result, our sporting goods business is substantially dependent on
the budgetary allowances of schools as well as local, state and federal
government agencies. Restrictions or reductions to the budgeted spending of
these entities could reduce the amount of goods purchased from us and could
materially adversely affect our revenues and earnings.
If our original equipment manufacturers are unable to deliver our products in
the required amounts and in a timely fashion, we could experience delays or
reductions in shipments to our customers which could reduce our revenues and
adversely affect our relationship with our customers.
All of our consumer electronic products and approximately 23.0% of our
sporting good products are manufactured in accordance with our specifications by
original equipment manufacturers principally located in:
o South Korea;
o China;
o Malaysia;
o Thailand; and
o Taiwan
If we are unable to obtain our products from the original equipment
manufacturers located in these countries in the required quantities and quality
and in a timely fashion, we could experience delays or reductions in product
shipments to our customers which could negatively affect our ability to meet the
requirements of our customers, as well as our relationships with our customers.
Unanticipated disruptions in our operations or slowdowns by our suppliers,
manufacturers and shipping companies could adversely affect our ability to
deliver our products and service our customers which could reduce our revenues
and adversely affect our relationship with our customers.
Our ability to provide high quality customer service, process and
fulfill orders and manage inventory depends on:
o the efficient and uninterrupted operation of our call center,
distribution center and manufacturing facilities related to our
sporting goods segment; and
o the timely and uninterrupted performance of third party
manufacturers and suppliers, shipping companies, and dock workers
relating to both our consumer electronics and sporting goods
segments.
19
Any material disruption or slowdown in the operation of our call
center, distribution center, manufacturing facilities or management information
systems, or comparable disruptions or slowdowns suffered by our principal
manufacturers, suppliers and shippers could cause delays in our ability to
receive, process and fulfill customer orders and may cause orders to be
canceled, lost or delivered late, goods to be returned or receipt of goods to be
refused. Our sporting goods segment ships approximately 60% of its products
using United Parcel Service. A strike by UPS or any of our other major carriers
or any other disruption in our ability or our customer's ability to receive our
products as a result of a strike or otherwise could materially adversely affect
our results of operations as a result of our failure to deliver our products in
a timely manner and using other more expensive freight carriers.
The operations of our sporting goods segment are subject to high fixed costs,
which could adversely affect our earnings.
The operations and maintenance of our call center, distribution center,
manufacturing facilities and management information systems related to our
sporting goods segment involve substantial fixed costs. Paper and postage are
significant components of our sporting goods segment operating costs. Catalog
mailings entail substantial paper, postage, and costs associated with catalog
development, each of which is subject to price fluctuations. If net revenues are
substantially below expectations, these fixed costs may not be proportionately
reduced and could materially adversely affect the earnings of our sporting goods
segment and, in turn, our consolidated earnings.
Our revenues and earnings could be adversely affected by foreign regulations and
changes in the political, public health and economic conditions in the foreign
countries in which we operate our business.
We derive a significant portion of our revenues from sales of products
manufactured by third parties located primarily in China, South Korea, Malaysia,
Thailand and Taiwan. In addition, third parties located in these and other
countries located in the same region produce and supply many of the components
and raw materials used in our products. Conducting an international business
inherently involves a number of difficulties and risks that could adversely
affect our ability to generate revenues and could subject us to increased costs.
The main factors that may adversely affect our revenues and increase our costs
are:
o currency fluctuations which could cause an increase in the price of
the components and raw materials used in our products and a decrease
in our profits;
o more stringent export restrictions in the countries in which we
operate which could adversely affect our ability to deliver our
products to our customers;
o tariffs and other trade barriers which could make it more expensive
for us to obtain and deliver our products to our customers;
o political instability and economic downturns in these countries
which could adversely affect our ability to obtain our products from
our manufacturers or deliver our products to our customers in a
timely fashion; and
o seasonal reductions in business activity in these countries during
the summer months which could adversely affect our sales.
20
In addition, the prior outbreak of severe acute respiratory syndrome,
or SARS, which had particular impact in China, Hong Kong and Singapore, had a
negative effect on our consumer electronics operations. Our operations,
including our ability to obtain our products in a timely fashion, could be
impacted again, including disrupting the operation of our suppliers,
manufacturers and shipping companies, each of which could adversely affect our
earnings, should SARS reoccur in the future.
We have experienced, and may in the future experience, many of these
risks and cannot predict the impact of any particular risk on our operations.
However, any of these factors may materially adversely affect our revenues
and/or increase our operating expenses.
The seasonality of our business, as well as changes in consumer spending and
economic conditions, may cause our quarterly operating results to fluctuate and
cause our stock price to decline.
Our net revenue and operating results may vary significantly from
quarter to quarter. The main factors that may cause these fluctuations are:
o seasonal variations in operating results;
o variations in the sales of our products to our significant
customers;
o increases in returned consumer electronics products in the March
quarter which follows our peak September and December selling
quarters;
o variations in manufacturing and supplier relationships;
o if we are unable to correctly anticipate and provide for inventory
requirements from quarter to quarter, we may not have sufficient
inventory to deliver our products to our customers in a timely
fashion or we may have excess inventory that we are unable to sell;
o the discretionary nature of our customers' demands and spending
patterns;
o changes in market and economic conditions; and
o competition.
In addition, our quarterly operating results could be materially
adversely affected by political instability, war, acts of terrorism or other
disasters.
Sales of our consumer electronics products are somewhat seasonal due to
consumer spending patterns, which tend to result in significantly stronger sales
in our September and December fiscal quarters, especially as a result of the
holiday season. Our sporting goods segment is also somewhat seasonal due to
stronger demand for its products during the March fiscal quarter due to volume
generated by spring and summer sports, favorable outdoor weather conditions and
school needs before summer closings. These patterns will probably not change
significantly in the future. Although we believe that the seasonality of our
business is based primarily on the timing of consumer demand for our products,
fluctuations in operating results can also result from other factors affecting
us and our competitors, including new product developments or introductions,
availability of products for resale, competitive pricing pressures, changes in
product mix, pricing and product reviews and other media coverage. Due to the
seasonality of our business, our results for interim periods are not necessarily
indicative of our results for the year.
21
Our sales and earnings can also be affected by changes in the general
economy since purchases of consumer electronics and sporting goods are generally
discretionary for consumers and subject to budgetary constraints by schools and
government agencies. Our success is influenced by a number of economic factors
affecting disposable consumer income, such as employment levels, business
conditions, budgetary restrictions of schools and government agencies, interest
rates and taxation rates. Adverse changes in these economic factors, among
others, may restrict consumer spending or increase budgetary restrictions at
schools and government agencies, thereby negatively affecting our sales and
profitability.
As a result of these and other factors, revenues for any quarter are
subject to significant variation, which may adversely affect our results of
operations and the market price for our common stock.
If our third party sales representatives fail to adequately promote, market and
sell our consumer electronic products, our revenues could significantly
decrease.
A portion of our consumer electronic product sales are made through
third party sales representative organizations, whose members are not our
employees. Our level of sales depends on the effectiveness of these
organizations, as well as the effectiveness of our own employees. Some of these
third party representatives may sell, with our permission, competitive products
manufactured by other third parties as well as our products. During our fiscal
years ended March 31, 2005 and 2004, these organizations were responsible for
approximately 45% and 49%, respectively, of our net consumer electronics
revenues during such periods. In addition, two of these representative
organizations were responsible for a significant portion of these revenues. If
any of our third party sales representative organizations engaged by us,
especially our two largest, fails to adequately promote, market and sell our
consumer electronics products, our revenues could be significantly decreased
until a replacement organization or distributor could be retained by us. Finding
replacement organizations and distributors could be a time consuming process
during which our revenues could be negatively impacted.
The ownership of our common stock by Geoffrey P. Jurick, our Chairman, Chief
Executive Officer and President, substantially reduces the influence of our
other stockholders.
Geoffrey Jurick, our Chairman, Chief Executive Officer and President,
owns approximately 38.0% of our outstanding common stock. As a result, Geoffrey
Jurick currently has the ability to influence significantly the actions that
require stockholder approval, including:
o the election of our directors; and
o the approval of mergers, sales of assets or other corporate
transactions or matters submitted for stockholder approval.
22
As a result, our other stockholders may have little or no influence
over matters submitted for stockholder approval.
In January 2005, Geoffrey P. Jurick, the Chairman, Chief Executive
Officer and President of Emerson Radio Corp., obtained a $16 million loan from a
foreign financial institution. The loan (which, prior to extension, came due on
April 20, 2005) currently matures on July 20, 2005, is guaranteed by a third
party unaffiliated with Emerson and is secured by a pledge by Mr. Jurick of
approximately 10 million shares of his Emerson common stock (approximately 38%
of Emerson's common stock). If the loan term is not further extended and the
loan is not repaid at maturity, the stock could be utilized to satisfy Mr.
Jurick's obligations.
We may seek to make acquisitions that prove unsuccessful or strain or divert our
management's attention and our capital resources.
We may seek to grow our business through acquisitions of related
businesses. Such acquisitions present risks that could materially adversely
affect our earnings, including:
o the diversion of our management's attention from our everyday
business activities;
o the assimilation of the operations and personnel of the acquired
business;
o the incurring of additional expenses related to such acquisitions,
whether or not such acquisitions are consummated;
o the contingent and latent risks associated with the past operations
of, and other unanticipated problems arising in, the acquired
business; and
o the need to expand management, administration and operational
systems.
If we make such acquisitions, we cannot predict whether:
o we will be able to successfully integrate the operations of any new
businesses into our business;
o we will realize any anticipated benefits of completed acquisitions;
or
o there will be substantial unanticipated costs associated with
acquisitions.
In addition, future acquisitions by us may result in:
o potentially dilutive issuances of our equity securities;
o the incurrence of additional debt; and
o the recognition of significant charges for depreciation and
amortization related to goodwill and other intangible assets.
23
We continuously evaluate potential acquisitions of related businesses. However,
competition for such potential acquisitions is intense and we have not reached
any agreement or arrangement with respect to any particular acquisition and we
may not be able to complete any acquisitions on favorable terms or at all.
We are subject to intense competition in the industries in which we operate,
which could cause material reductions in the selling price of our products or
losses of our market share.
The consumer electronics industry and the institutional market for
sporting goods and leisure products are highly competitive, especially with
respect to pricing and the introduction of new products and features. Our
consumer electronics segment competes in the low to medium-priced sector of the
consumer electronics market and competes primarily on the basis of:
o reliability;
o quality;
o price;
o design;
o consumer acceptance of the Emerson(R) trademark; and
o quality service and support to retailers and our customers.
Our sporting goods segment competes in the institutional sporting
goods market principally with local sporting goods dealers, retail sporting
goods stores, other direct mail catalog marketers and providers of sporting
goods on the Internet. Our sporting goods segment competes principally on the
basis of:
o brand;
o quality;
o price;
o product availability; and
o customer service.
24
In recent years we and many of our competitors have regularly lowered
prices, and we expect these pricing pressures to continue. If these pricing
pressures are not mitigated by increases in volume, cost reductions or changes
in product mix, our revenues and profits could be substantially reduced. As
compared to us, many of our competitors have:
o significantly longer operating histories;
o significantly greater managerial, financial, marketing, technical
and other competitive resources; and
o greater name recognition.
As a result, our competitors may be able to:
o adapt more quickly to new or emerging technologies and changes in
customer requirements;
o devote greater resources to the promotion and sale of their products
and services; and
o respond more effectively to pricing pressures.
These factors could materially adversely affect our operations and
financial condition. In addition, competition could increase if:
o new companies enter the market;
o existing competitors expand their product mix; or
o we expand into new markets.
An increase in competition could result in material price reductions or
loss of our market share.
Our business could be adversely affected if we cannot protect our intellectual
property rights or if we infringe on the intellectual property rights of others.
Our ability to compete effectively will depend on our ability to
maintain and protect our proprietary rights. We own the Emerson(R) trademark,
which is materially important to our business, as well as our license, other
trademarks and proprietary rights that are used for certain of our home
entertainment and consumer electronics products. In addition, we license names
and trademarks in connection with our sporting goods business. Our trademarks
are registered throughout the world, including the United States, Canada,
Mexico, France, Spain, Germany and the United Kingdom. However, third parties
may seek to challenge, invalidate, circumvent or render unenforceable any
proprietary rights owned by or licensed to us. In addition, in the event third
party licensees fail to protect the integrity of our trademarks, the value of
these marks could be adversely affected.
25
The laws of some foreign countries in which we operate may not protect
our proprietary rights to the same extent as do laws in the United States. The
protections afforded by the laws of such countries may not be adequate to
protect our intellectual property rights.
Our inability to protect our proprietary rights could materially
adversely affect the license of our trade names and trademarks to third parties
as well as our ability to sell our products. Litigation may be necessary to:
o enforce our intellectual property rights;
o protect our trade secrets; and
o determine the scope and validity of such intellectual property
rights.
Any such litigation, whether or not successful, could result in substantial
costs and diversion of resources and management's attention from the operation
of our business.
We may receive notice of claims of infringement of other parties'
proprietary rights. Such actions could result in litigation and we could incur
significant costs and diversion of resources in defending such claims. The party
making such claims could secure a judgment awarding substantial damages, as well
as injunctive or other equitable relief. Such relief could effectively block our
ability to make, use, sell, distribute or market our products and services in
such jurisdiction. We may also be required to seek licenses to such intellectual
property. We cannot predict, however, whether such licenses would be available
or, if available, that such licenses could be obtained on terms that are
commercially reasonable and acceptable to us. The failure to obtain the
necessary licenses or other rights could delay or preclude the sale, manufacture
or distribution of our products and could result in increased costs to us.
We could be exposed to product liability or other claims for which our product
liability or other insurance may be inadequate.
A failure of any of the products marketed by us, particularly those
products sold by our sporting goods segment, may subject us to the risk of
product liability claims and litigation arising from injuries allegedly caused
by the improper functioning or design of our products. Although we currently
maintain product liability insurance in amounts which we consider adequate, we
cannot assure that:
o our insurance will provide adequate coverage against potential
liabilities;
o adequate product liability insurance will continue to be available
in the future; or
o our insurance can be maintained on acceptable terms.
We and certain of our officers and directors, are party to a class
action lawsuit and we cannot assure the outcome of such litigation. Although we
maintain liability insurance in amounts that we consider adequate, we cannot
assure that such policies will provide adequate coverage against potential
liabilities. To the extent product liability or other litigation losses are
beyond the limits or scope of our insurance coverage, our expenses could
materially increase. See Item 3 - "Legal Proceedings".
26
The inability to use our tax net operating losses could result in a charge to
earnings and could require us to pay higher taxes.
Both Emerson and SSG have substantial tax net operating losses
available to reduce taxable income for federal and state income tax purposes. A
portion of the benefit associated with the tax net operating losses has been
recognized as a deferred tax asset in our financial statements and could be used
to reduce our tax liability in future profitable periods. We believe these 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 at either Emerson or SSG, we believe it is more likely than not
that all of the remaining 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 is reduced.
In addition, transactions consummated by us or Geoffrey Jurick, that
together with other transactions consummated by Emerson, SSG or Mr. Jurick or
that involve the common stock of Emerson or SSG, are deemed collectively to
result in a change of control of Emerson or SSG, respectively, and under the tax
code could limit the use of our tax net operating losses. In the event that
either Emerson or SSG is unable to utilize its tax net operating losses in a
reasonable time frame, it would be required to adjust its deferred tax asset on
its financial statements which would result in a charge to earnings.
Additionally, should the utilization of tax net operating losses be limited, we
would be required to pay a greater amount of taxes in future periods.
Our existing indebtedness may adversely affect our ability to obtain additional
funds and may increase our vulnerability to economic or business downturns.
From time to time we incur debt in connection with our operations. As a
result, we may be subject to the risks associated with indebtedness, including:
o we must dedicate a portion of our cash flows from operations to pay
debt service costs and, as a result, we have less funds available
for operations and other purposes;
o it may be more difficult and expensive to obtain additional funds
through financings, if available at all;
o we are more vulnerable to economic downturns and fluctuations in
interest rates, less able to withstand competitive pressures and
less flexible in reacting to changes in our industry and general
economic conditions; and
o if we default under any of our existing credit facilities or if our
creditors demand payment of a portion or all of our indebtedness, we
may not have sufficient funds to make such payments.
27
We have pledged substantially all of our assets to secure our borrowings under
our credit facilities and are subject to covenants that may restrict our ability
to operate our business.
Our indebtedness under our credit facilities are secured by
substantially all of our assets. If we default under the indebtedness secured by
our assets, those assets would be available to the secured creditor to satisfy
our obligations to the secured creditor. In addition, our credit facilities
impose certain restrictive covenants, including financial, ownership,
operational and net worth covenants. Failure to satisfy any of these covenants
could result in all or any of the following:
o acceleration of the payment of our outstanding indebtedness;
o our inability to borrow additional amounts under our existing
financing arrangements; and
o our inability to secure financing on favorable terms or at all from
alternative sources.
Any of these consequences could significantly reduce the amount of
cash and financing available to us which in turn would adversely affect our
ability to operate our business, including acquiring our products from our
manufacturers and distributing our products to our customers.
MARKET RELATED RISKS
The market price of our common stock has experienced significant price and
volume fluctuations from time to time.
The market price for our common stock and for securities of similar
companies has from time to time experienced significant price and volume
fluctuations. Factors which may affect our market price include:
o market conditions in the industries in which we operate;
o competition;
o sales or the possibility of sales of our common stock;
o our results of operations and financial condition; and
o general economic conditions.
Furthermore, the stock market has experienced significant price and
volume fluctuations unrelated to the operating performance of particular
companies. These market fluctuations may also adversely affect the market price
of our common stock.
Our organizational documents and Delaware law may make it harder for us to be
acquired without the consent and cooperation of our board of directors and
management.
28
Several provisions of our organizational documents and Delaware law
may deter or prevent a takeover attempt, including a takeover attempt in which
the potential purchaser offers to pay a per share price greater than the current
market price of our common stock. Under the terms of our certificate of
incorporation, our board of directors has the authority, without further action
by the stockholders, to issue shares of preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof. The
ability to issue shares of preferred stock could tend to discourage takeover or
acquisition proposals not supported by our current board of directors.
FORWARD-LOOKING INFORMATION
This report contains various forward-looking statements made
pursuant to the safe harbor provisions of 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 above and "Critical Accounting
Policies" set forth in Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Due to these uncertainties and risks, readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report.
ITEM 2. PROPERTIES
The following table sets forth the material properties owned or leased
by us:
Approximate Lease
Square Expires
Facility Purpose Footage Location or is Owned
---------------- ------- -------- --------
Consumer electronics segment:
Corporate headquarters 22,500 Parsippany, NJ December 2009
Hong Kong office 10,000 Hong Kong, China October 2005
Macao office (1) 2,000 Macao, China Owned
Macao office 8,700 Macao, China Owned
Warehouse 97,105 Irving, TX June 2010
Sporting goods segment:
Manufacturing and corporate 135,000 Farmers Branch, TX December 2007
headquarters
Warehouse and fulfillment processing 181,000 Farmers Branch, TX December 2007
Manufacturing 35,000 Anniston, AL Owned
Manufacturing 45,000 Anniston, AL Owned
(1) - currently in process of being sold.
29
Emerson also utilizes public warehouse space with terms typically of
one year. Public warehouse expenses for Emerson varies based on a percentage of
sold products shipped from the location.
We believe that the properties used for our operations are in
satisfactory condition and adequate for our present and anticipated future
operations. In addition to the facilities listed above, SSG leases space in
various locations, primarily for use as sales offices, which lease terms range
from month to month to three years and are not material to us.
ITEM 3. LEGAL PROCEEDINGS
Putative Class Actions
Between September 4, 2003 and October 30, 2003, several putative
class action lawsuits were filed in the United States District Court for the
District of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth
Corby and John Raab (the "Individual Defendants") on behalf of purchasers of
Emerson's publicly traded securities between January 29, 2003 and August 12,
2003 (the "Class Period.") On December 17, 2003, the Court entered a Joint
Stipulation and Order consolidating these putative class actions under the
caption In Re Emerson Radio Corp. Securities Litigation, 03cv4201 (JLL) (the
"Consolidated Action.") Further to that Stipulation and Order, lead plaintiff
was appointed and co-lead counsel and co-liaison counsel were approved by the
Court in the Consolidated Action. Consistent with the Stipulation and Order, the
plaintiffs filed an Amended Consolidated Complaint (the "Amended Complaint")
that, among other things, added Jerome Farnum, one of Emerson's directors, as an
individual defendant in the litigation.
Generally, the Amended Complaint alleges that Emerson and the
Individual Defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and Rule 10b-5 promulgated there under, by (i) issuing
certain positive statements during the Class Period regarding our ability to
replace lost revenues attributable to the Hello Kitty(R) license and (ii)
omitting to disclose that Emerson suffered allegedly soured relationships with
its largest retail customers. The Amended Complaint further alleges that these
statements were materially false and misleading when made because Emerson
allegedly misrepresented and omitted certain adverse facts which then existed
and disclosure of which was necessary to make the statements not false and
misleading. Emerson and the Individual Defendants deny all allegations and have
moved to dismiss the Complaint in its entirety for failure to state a claim. The
motion to dismiss was fully briefed and was submitted to the Court on October
15, 2004. The Court's decision on the motion is pending. Emerson and the
Individual Defendants intend to defend the lawsuit vigorously.
30
Other Matters
We are a party to various other litigation matters, in most cases
involving ordinary and routine claims incidental to our business. We cannot
estimate with certainty our ultimate legal and financial liability with respect
to such pending litigation matters. However, we believe, based on our
examination of such matters, that our ultimate liability will not have a
material adverse effect on our financial position, results or operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
(a) Market Information
Our common stock has traded on the American Stock Exchange under the
symbol MSN since December 22, 1994. The following table sets forth the range of
high and low sales prices for our common stock as reported by the American Stock
Exchange during the last two fiscal years.
FISCAL 2005 FISCAL 2004
------------------- ------------------
High Low High Low
First Quarter $ 4.10 $ 3.00 $ 7.88 $ 5.95
Second Quarter 3.25 2.56 7.80 2.47
Third Quarter 3.83 2.58 4.28 3.15
Fourth Quarter 3.98 3.00 4.05 3.27
There is no established trading market for our Series A convertible
preferred stock, whose conversion feature expired as of March 31, 2002.
(b) Holders
At April 25, 2005, there were approximately 342 stockholders of record
of our common stock. We believe that the number of beneficial owners is
substantially greater than the number of record holders, because a large portion
of our common stock is held of record in broker "street names."
(c) Dividends
Our policy has been to retain all available earnings, if any, for the
development and growth of our business. We have not paid and do not intend to
pay cash dividends on our common stock. In addition, our credit facility
restricts our ability to pay cash dividends on our common stock.
(d) Unregistered Securities
None
(e) Share Repurchases
For the fiscal year ended March 31, 2005, 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 fiscal year ended March 31, 2005, we repurchased 1,111,625 shares under
this program. The maximum number of shares that are available to be repurchased
under Emerson Radio Corp's common share repurchase program as of March 31, 2005
was 888,375.
31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data
for the five years ended March 31, 2005. The selected consolidated financial
data should be read in conjunction with our Consolidated Financial Statements,
including the notes thereto, and Item 7 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
-------------- ------------- -------------- -------------- ------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2003 2002 2001 (1)
-------------- ------------- -------------- -------------- ------------
(In thousands, except per share data)
Summary of Operations:
Net Revenues (2) $ 320,704 $ 263,774 $ 330,315 $ 297,175 $ 354,760
Operating Income (loss) $ 11,303 $ (1,032) $ 18,685 $ 9,535 $ 13,980
Income (loss) from continuing
operations $ 5,855 $ (3,735) $ 26,206 $ 18,649 $ 13,495
Income (loss) from discontinued operations,
net of tax $ 50 $ 2,661 $ 840 $ 758 (842)
Cumulative effect of change in accounting
principle
-- -- (5,546) -- --
Net income (loss) $ 5,905 $ (1,074) $ 21,500 $ 19,407 $ 12,653
Balance Sheet Data at Period End:
Total Assets $ 131,168 $ 118,669 $ 134,562 $ 135,839 $ 119,006
Current Liabilities 45,899 40,637 48,668 54,723 45,330
Long-Term Debt 14,970 15,027 18,079 29,046 38,257
Shareholders' Equity 53,603 47,212 51,237 34,740 15,131
Working Capital 56,116 46,729 49,101 49,290 39,497
Current Ratio 2.2 to 1 2.2 to 1 2.0 to 1 1.9 to 1 1.9 to 1
Per Common Share: (3)
Basic net income (loss) per share:
Income (loss) from
continuing operations $ .22 $ (.14) $ .95 $ .60 $ .38
Discontinued operations -- .10 .03 .02 (.02)
Cumulative effect of change in
accounting principle -- -- (.20) -- --
------------- ------------ ------------- ------------ -----------
$ .22 $ (.04) $ .78 $ .62 $ .36
============= ============ ============= ============ ===========
Diluted net income (loss) per share:
Income (loss) from
continuing operations $ .22 $ (.14) $ .91 $ .50 $ .35
Discontinued operations -- .10 .03 .02 (.02)
Cumulative effect of change in
accounting principle -- -- (.19) -- --
------------- ------------ ------------- ------------ ------------
$ .22 $ (.04) $ .75 $ .52 $ .33
============= ============ ============= ============ ===========
Weighted Average Shares Outstanding:
Basic 26,991 27,227 27,716 31,298 35,066
Diluted 27,264 27,227 28,640 40,485 38,569
32
(1) Prior to March 23, 2001, the investment in SSG was accounted for under the
equity method of accounting. On March 23, 2001, a majority interest in SSG
was reached and required this interest be accounted for as a partial
purchase to the extent of the change in control. The assets and liabilities
of SSG have been revalued to fair value to the extent of Emerson's interest
in SSG. SSG's results of operations and the minority interest related to
those results have been included in our results of operations as though it
had been acquired at April 1, 2000.
(2) During fiscal 2004, SSG discontinued operations of certain team dealer
operations, and sold all of the capital stock of Athletic Training
Equipment Company, Inc. ("ATEC"). These transactions were classified as
discontinued operations, and accordingly reported separate from continuing
operations. The financial statements for fiscal 2001 through 2003 have been
reclassified to reflect such discontinued results.
(3) For fiscal 2002 and 2001, dilutive securities include 3,531,000 and
3,066,000 shares, respectively, assuming conversion of Series A preferred
stock at a price equal to 80% of the weighted average market value of a
share of common stock, determined as of March 31, 2002, and 2001. For
fiscal 2005, 2003, 2002 and 2001, dilutive securities also include 322,000,
924,000, 452,000 and 437,000 shares assuming conversion of 632,000,
1,195,000, 1,645,000 and 1,658,000 options, respectively, and 100,000
warrants for fiscal 2003. For fiscal 2002, dilutive securities also
included 5,204,000 shares assuming the conversion of convertible
debentures. Per common share data is based on the net income or loss for
the year and deduction of the amount of dividends required to be paid to
the holders of the preferred stock and the weighted average of common stock
outstanding during each fiscal year. Loss per share in fiscal 2004 does not
include potentially dilutive securities assumed outstanding since the
effects of such conversion would be anti-dilutive.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During fiscal 2001, Emerson increased its ownership in SSG to 50.1%.
Accordingly, Emerson's and SSG's results of operations are consolidated for
fiscal 2005, 2004 and 2003. See Item 8 - "Financial Statements and Supplementary
Data - Note 1 and Note 3 of Notes to Consolidated Financial Statements."
Management's Discussion and Analysis of Financial Condition and Results of
Operation is presented in three parts: consolidated operations, consumer
electronics segment and sporting goods segment.
The following discussion of our operations and financial condition
should be read in conjunction with the Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
Special Note: Certain statements set forth below constitute
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. See Item 1 - "Business-
Forward-Looking Information."
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
net revenues for the fiscal years ended March 31. 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.
2005 2004 2003
---- ---- ----
Net revenues (in thousands) $ 320,704 $ 263,774 $ 330,315
================= ================= ===============
100.0% 100.0% 100.0%
Cost of sales 81.8% 81.7% 80.0%
Other operating costs and expenses 1.8% 2.0% 1.3%
Selling, general and administrative expenses 12.9% 15.9% 13.0%
Acquisition costs (recovered) incurred (0.1%) 0.6% --
Stock based costs 0.1% 0.2% --
----------------- ----------------- ---------------
Operating income (loss) 3.5% (0.4%) 5.7%
Interest expense, net 0.5% 0.5% 0.8%
Minority interest in net (income) loss of
consolidated subsidiary (0.2%) 0.3% 0.2%
----------------- ----------------- ---------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 2.8% (0.6%) 5.1%
Provision (benefit) for income taxes 1.0% 0.8% (2.8%)
----------------- ----------------- ---------------
Income (loss) from continuing operations 1.8% (1.4%) 7.9%
Income from discontinued operations, net of
tax -- 1.0% 0.3%
Cumulative effect of change in
accounting principle -- -- (1.7%)
----------------- ----------------- ---------------
Net income (loss) 1.8% (0.4%) 6.5%
================= ================= ===============
34
RESULTS OF CONSOLIDATED OPERATIONS - FISCAL 2005 COMPARED WITH FISCAL 2004
Net Revenues - Net revenues for fiscal 2005 increased approximately
$56.9 million, or 21.6%, to $320.7 million as compared to $263.8 million for
fiscal 2004. The increase in net revenues was primarily due to an increase of
approximately $50.8 million, or 28.3%, in the consumer electronics segment, as
well as an increase of $6.1 million, or 7.3%, in the sporting goods segment.
Cost of Sales - Cost of sales, in absolute terms, increased $46.8
million, or 21.7%, to $262.3 million for fiscal 2005 as compared to $215.5
million for fiscal 2004. This increase was primarily due to an increase of $44.6
million, or 29.0% in the consumer electronics segment, as well as an increase of
$2.3 million, or 3.6%, in the sporting goods segment. As a percentage of
consolidated net revenues, cost of sales increased from 81.7% in fiscal 2004 to
81.8% in fiscal 2005.
Other Operating Costs and Expenses - Other operating costs and expenses
are associated with the consumer electronics segment and include those
components as described in Note 1 of the Notes to Consolidated Financial
Statements. As a result of increased activity in these areas, other operating
costs increased $635,000, or 12.1%, from $5.3 million (2.0% of consolidated net
revenues) in fiscal 2004 to $5.9 million (1.8% of consolidated net revenues) in
fiscal 2005.
Selling, General and Administrative Expenses ("S,G&A") - In absolute
terms, S,G&A costs decreased by approximately $717,000, or 1.7%, from $42.0
million in fiscal 2004 to $41.3 million in fiscal 2005. In the consumer
electronics segment, S,G&A expenses increased $1.6 million, or 9.8%, while the
sporting goods segment recorded a decrease in S,G&A costs of $2.3 million, or
8.7%. As a percentage of consolidated net revenues, S,G&A expenses decreased to
12.9% for fiscal 2005 as compared to 15.9% for fiscal 2004, principally as a
result of the increase in consolidated net revenues.
Acquisition Costs (Recovered) Incurred - Acquisition costs are
associated with the consumer electronics segment. Adjustments to acquisition
costs incurred in the prior year were recorded in fiscal 2005, resulting in a
recovery of such costs of $454,000, or -0.1% of consolidated net revenues. For
fiscal 2004, acquisition costs were $1.6 million, or 0.6% of consolidated net
revenues, due to two unsuccessful acquisition attempts during the year.
35
Stock Based Costs - Stock based costs relate to the cost of warrants
associated with consulting service agreements and stock options expense
associated with the early adoption of SFAS 123R, "Share-Based Payments" for
fiscal 2005. (See Note 1 to accompanying financial statements). In absolute
terms, stock based costs were approximately $377,000, or 0.1% of consolidated
net revenues, for fiscal 2005, as compared to $524,000, or 0.2% of consolidated
net revenues, for fiscal 2004.
Interest expense, net - In absolute terms, interest expense increased
$220,000, or 16.4%, from $1.3 million in fiscal 2004 to $1.6 million in fiscal
2005. The increase was primarily due to higher borrowing amounts and borrowing
costs in the consumer electronics segment, resulting in an increase of $463,000,
or 52.4%, partially offset by a decrease of $243,000, or 52.9%, in the sporting
goods segment. Interest expense, as a percentage of consolidated net revenues,
remained unchanged at 0.5% for both fiscal 2005 and fiscal 2004.
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 (income) loss for the fiscal year
that relates to the ownership of SSG by shareholders other than us. See Item 8 -
"Financial Statements and Supplementary Data - Note 1 of Notes to Consolidated
Financial Statements."
Provision (Benefit) For Income Taxes - The provision for income taxes,
which primarily represents the deferred tax charges associated with Emerson's
profits in the United States, increased approximately $833,000, or 38.7%, to
$3.0 million for fiscal 2005 from approximately $2.2 million for fiscal 2004.
The increase in the provision for income taxes was primarily due to an increase
in pre-tax profit in the consumer electronics segment.
Income from Discontinued Operations, Net of Tax - 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. Income of $50,000 was
recorded during the wind down of these operations (the "discontinued
operations") in fiscal 2005 as compared to income of approximately $2.7 million,
or 1.0% of consolidated net revenues for fiscal 2004.
Net Income (loss) - As a result of the foregoing factors, we had net
earnings of approximately $5.9 million (1.8% of consolidated net revenues) for
fiscal 2005 as compared to a net loss of $1.1 million (-0.4% of consolidated net
revenues) for fiscal 2004.
RESULTS OF CONSOLIDATED OPERATIONS - FISCAL 2004 COMPARED WITH FISCAL 2003
Net Revenues - Net revenues for fiscal 2004 decreased approximately
$66.5 million, or 20.1%, to $263.8 million as compared to $330.3 million for
fiscal 2003. The decrease in net revenues was primarily due to a decrease of
approximately $65.3 million, or 26.6%, in the consumer electronics segment, as
well as a decrease of $1.3 million, or 1.5%, in the sporting goods segment.
36
Cost of Sales - Cost of sales, in absolute terms, decreased $48.6
million, or 18.4%, to $215.4 million for fiscal 2004 as compared to $264.0
million for fiscal 2003. This decrease was primarily due to a decrease of $49.1
million, or 24.2%, in the consumer electronics segment, partially offset by an
increase of $474,000, or 0.8%, in the sporting goods segment. As a percentage of
consolidated net revenues, cost of sales increased from 80.0% in fiscal 2003 to
81.7% in fiscal 2004. The percentage increase in cost of sales was primarily the
result of lower margins in the consumer electronics segment in fiscal 2004.
Other Operating Costs and Expenses - Other operating costs and expenses
are associated with the consumer electronics segment and include those
components as described in Note 1 of Note to Consolidated Financial Statements.
As a result of increased activity in these areas, other operating costs
increased $0.9 million, or 20.8%, from $4.3 million (1.3% of consolidated net
revenues) in fiscal 2003 to $5.3 million (2.0% of consolidated net revenues) in
fiscal 2004.
Selling, General and Administrative Expenses ("S,G&A") - In absolute
terms, S,G&A expenses decreased $1.2 million, or 2.7%, to $42.0 million in
fiscal 2004 as compared to $43.2 million in fiscal 2003. This decrease in S,G&A
was primarily the result of a decrease of $1.5 million, or 8.6%, in the consumer
electronics segment, partially offset by an increase of $319,000, or 1.2% in the
sporting goods segment. As a percentage of consolidated net revenues, S,G&A
expenses increased to 15.9% for fiscal 2004 as compared to 13.0% for fiscal
2003, principally as a result of the decline in revenues.
Acquisition Costs - Acquisition costs are associated with the consumer
electronics segment. Acquisition costs were $1.6 million (0.6% of consolidated
net revenues) for fiscal 2004, due to two unsuccessful acquisition attempts
during the year. There were no acquisition costs in fiscal 2003.
Stock Based Costs - Stock based costs are associated with the consumer
electronics segment, which relate to the value of warrants issued in exchange
for consulting services. Stock based costs increased from $49,000 (less than
0.1% of consolidated net revenues) in fiscal 2003 to $523,000 (0.2% of
consolidated net revenues) in fiscal 2004.
Interest expense, net - Interest expense decreased $1.2 million, or
46.2%, from $2.5 million (0.8% of consolidated net revenues) in fiscal 2003 to
$1.3 million (0.5% of consolidated net revenues) in fiscal 2004. The decrease
was primarily due to lower borrowing amounts and lower interest rates, resulting
in a decrease of $1.0 million, or 53.4%, in the consumer electronics segment, as
well as a decrease of $0.2 million, or 23.4%, in the sporting goods segment.
Minority Interest in Net Loss of Consolidated Subsidiary - Minority
interest in net loss of consolidated subsidiary represents that portion of the
sporting goods segment loss for the fiscal year that relates to the ownership of
SSG by shareholders other than us. See Item 8 - "Financial Statements and
Supplementary Data - Note 1 of Notes to Consolidated Financial Statements."
37
Provision (Benefit) For Income Taxes - The provision for income taxes
in absolute terms was $2.2 million in fiscal 2004 as compared to a tax benefit
of $9.3 million in fiscal 2003. The provision of $2.2 million in fiscal 2004
primarily represents the deferred tax charges associated with Emerson's profits
in the United States. The tax benefit in fiscal 2003 was primarily the result of
a reduction in the valuation reserve in the consumer electronics segment,
previously established against the deferred tax assets relating to the accounts
receivable and temporary inventory differences, as well as the recognition of
management's estimation of net operating loss carry forwards subject to
limitations under IRC Section 382. See Item 8 - "Financial Statements and
Supplementary Data - Note 7 of Notes to Consolidated Financial Statements."
Income from Discontinued Operations, Net of Tax - Income from
discontinued operations, net of tax, is associated with the sporting goods
segment. In July, October and November 2003, SSG ceased operations of its Team
Dealer locations in Little Rock, Arkansas, Enid, Oklahoma, and Wichita, Kansas,
respectively. In addition, SSG sold all of the issued and outstanding capital
stock of ATEC. Income from discontinued operations increased $1.9 million to
$2.7 million (1.0 % of consolidated net revenues) in fiscal 2004 from $0.8
million (0.3% of consolidated net revenues) in fiscal 2003. See Item 8 -
"Financial Statements and Supplementary Data - Note 17 of Notes to Consolidated
Financial Statements."
Net Income (loss) - As a result of the foregoing factors, we had a net
loss of approximately $1.1 million (-0.4% of consolidated net revenues) for
fiscal 2004 as compared to net income of $21.5 million (6.5% of consolidated net
revenues) for fiscal 2003.
CONSUMER ELECTRONICS SEGMENT:
The following table summarizes certain financial information relating
to the consumer electronics segment for the fiscal years ended March 31 (in
thousands):
2005 2004 2003
---------------- ----------------- -----------------
Net revenues $ 230,783 $ 179,952 $ 245,216
---------------- ----------------- -----------------
Cost of sales 198,221 153,643 202,699
Other operating costs 5,889 5,254 4,348
Selling, general & administrative 17,436 15,885 17,380
Acquisition costs (recovered) incurred (454) 1,553 --
Stock based costs 249 524 49
---------------- ----------------- -----------------
Operating income 9,442 3,093 20,740
Interest expense, net 1,346 883 1,893
---------------- ----------------- -----------------
Income before income taxes 8,096 2,210 18,847
Provision (benefit) for income taxes 2,983 2,150 (9,281)
---------------- ----------------- -----------------
Net income $ 5,113 $ 60 $ 28,128
================ ================= =================
RESULTS OF CONSUMER ELECTRONICS OPERATIONS - FISCAL 2005 COMPARED WITH FISCAL
2004
Net Revenues - Net revenues for fiscal 2005 increased $50.8 million, or
28.3%, to $230.8 million as compared to $180.0 million for fiscal 2004. 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
comprised of:
38
i) Emerson(R) branded products sales increased to $202.9 million
in fiscal 2005 compared to $158.5 million in fiscal 2004, an
increase of $44.3 million, or 28.0%, primarily resulting from
increased sales volume.
ii) Themed product sales increased to $17.1 million in fiscal 2005
compared to $10.4 million in fiscal 2004, an increase of $6.7
million (63.7%), primarily due to increased Nickelodeon sales
volume.
iii) Licensing revenues decreased $169,000, or 1.5%, to $10.8
million in fiscal 2005 compared to $11.0 million in fiscal
2004, primarily due to slightly lower sales volumes from our
video licensing agreements.
Cost of Sales - In absolute terms, cost of sales increased $44.6
million, or 29.0%, to $198.2 million in fiscal 2005 as compared to $153.6
million in fiscal 2004. Cost of sales, as a percentage of net revenues,
increased from 85.4% in fiscal 2004 to 85.9% in fiscal 2005. The increase in
cost of sales in relative terms was primarily due to lower margins on Emerson(R)
branded and themed products, primarily attributable to competitive market
conditions.
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, accordingly, a change in
revenues does not directly correlate to a change in unit volume. 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
include those components as described in Note 1 of Notes to Consolidated
Financial Statements. As a result of increased activity in these areas, other
operating costs and expenses as a percentage of net revenues were 2.6% in fiscal
2005 as compared to 2.9% in fiscal 2004. In absolute terms, other operating
costs and expenses increased $635,000, or 12.1%, to $5.9 million for fiscal 2005
as compared to $5.3 million in fiscal 2004.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a
percentage of net revenues, were 7.6% in fiscal 2005 as compared to 8.8% in
fiscal 2004. S,G&A, in absolute terms, increased $1.5 million, or 9.8%, to $17.4
million in fiscal 2005 as compared to $15.9 million for fiscal 2004. The
increase in S,G&A in absolute terms between fiscal 2005 and 2004 was primarily
due to increased freight out costs totaling $1.0 million, and increased
advertising expenditures of $800,000, partially offset by a decrease in
professional fees of $700,000, offset by smaller variances in other S,G&A
expenses.
Acquisition Costs (Recovered) Incurred - Acquisition costs are
associated with the consumer electronics segment. Adjustments to acquisition
costs incurred in the prior year were recorded in fiscal 2005, resulting in a
recovery of such costs of $454,000, or -0.2% of consumer electronics net
revenues. For fiscal 2004, acquisition costs were $1.6 million, or 0.9% of
consumer electronics net revenues, due to two unsuccessful acquisition attempts
during the year.
39
Stock Based Costs - Stock based costs relate to the cost of warrants
associated with consulting service agreements and stock options expense
associated with the early adoption of SFAS 123R "Share-Based Payments" for
fiscal 2005. Stock based costs decreased from $524,000 (0.3% of consumer
electronics net revenues) in fiscal 2004 to $249,000 (0.1% of consumer
electronics net revenues) in fiscal 2005, including approximately $161,000
related to the early adoption of SFAS 123R.
Interest Expense, net - Interest expense increased $463,000, or 52.4%,
to $1.3 million (0.6% of consumer electronics net revenues) in fiscal 2005 from
$0.9 million (0.5% of net revenues) in fiscal 2004. The increase was
attributable primarily to increased borrowings and borrowing costs.
Provision (benefit) for Income Taxes - Emerson's provision for income
taxes, which primarily represents the deferred tax charges associated with
Emerson's profits in the United States, was $3.0 million for fiscal 2005, or
1.3% of consumer electronics net revenues, as compared to $2.2 million for
fiscal 2004, or 1.2% of consumer electronics net revenues.
Net Income - As a result of the foregoing factors, the consumer
electronics segment generated net income of $5.1 million (2.2% of net revenues)
in fiscal 2005 as compared to $60,000 (less than 0.1% of net revenues) in fiscal
2004.
RESULTS OF CONSUMER ELECTRONICS OPERATIONS - FISCAL 2004 COMPARED WITH FISCAL
2003
Net Revenues - Net revenues for fiscal 2004 decreased $65.3 million, or
26.6%, to $180.0 million as compared to $245.2 million for fiscal 2003. Consumer
electronics net revenues are comprised of Emerson branded(R) product sales,
themed product sales and licensing revenues. Emerson(R) branded product sales
are earned from the sale of products bearing the Emerson(R) or HH Scott(R) brand
name; themed product sales represent products sold bearing a certain theme or
character; and licensing revenues are derived from licensing the Emerson(R) and
HH Scott(R) brand names to licensees for a fee. The decrease in net revenues
comprised of:
i) A decrease in Emerson(R) branded products sales of $34.2
million, or 17.7% to $158.5 million in fiscal 2004
compared to $192.6 million in fiscal 2003. These decreases
were associated with increased competition, decreased
orders from our primary customers and an overall slower
economy.
ii) Themed product sales decreased to $10.4 million in fiscal
2004 compared to $42.2 million fiscal 2003, or a decrease
of $31.7 million (75.2%). These decreases were due to the
discontinuance of sales of NASCAR(R), Mary Kate and
Ashley(R) and Hello Kitty(R) themed products, and
decreases in Girl Power TM themed product, partially
offset by the start up sales from Nickelodeon themed
products.
iii) Licensing revenues increased to $11.0 million in fiscal
2004 compared to $10.4 million in fiscal 2003, primarily
due to increased sales volumes from our video licensing
agreements.
40
Cost of Sales - In absolute terms, cost of sales decreased $49.1
million, or a 24.2% decrease, to $153.6 million in fiscal 2004 as compared to
$202.7 million in fiscal 2003. Cost of sales, as a percentage of net revenues,
increased from 82.7% in fiscal 2003 to 85.4% in fiscal 2004. The increase in
cost of sales in relative terms was primarily due to lower margins on product
sales of traditionally higher margin themed products, and lower margins on
Emerson(R) branded products, primarily attributable to competitive market
conditions. In absolute terms, cost of sales decreased by $49.1 million due to a
lower revenue base.
Other Operating Costs and Expenses - Other operating costs and expenses
include those components as described in Note 1 of Notes to Consolidated
Financial Statements. As a result of increased activity in these areas, other
operating costs and expenses as a percentage of net revenues were 2.9% in fiscal
2004 as compared to 1.8% in fiscal 2003. In absolute terms, other operating
costs and expenses increased $906,000, or 20.8%, to $5.3 million for fiscal 2004
as compared to $4.3 million in fiscal 2003.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a
percentage of net revenues, were 8.8% in fiscal 2004 as compared to 7.1% in
fiscal 2003. S,G&A, in absolute terms, decreased $1.5 million, or 8.6%, to $15.9
million in fiscal 2004 as compared to $17.4 million for fiscal 2003. The
decrease in S,G&A in absolute terms between fiscal 2004 and 2003 was primarily
due to a reduction of bad debt expenses totaling approximately $1.5 million.
Acquisition Costs - Acquisition costs were $1.6 million (0.9% of
consumer electronics segment net revenues) for fiscal 2004, due to two
unsuccessful acquisition attempts during the year. There were no acquisition
costs in fiscal 2003.
Stock Based Costs - Stock based costs, are the value of warrants issued
in exchange for consulting services. Stock based costs increased from $49,000
(less than 0.1% of consumer electronics net revenues) in fiscal 2003 to $524,000
(0.3% of consumer electronics net revenues) in fiscal 2004.
Interest Expense, net - Interest expense decreased $1.0 million, or
53.4%, from $1.9 million (0.8% of consumer electronics net revenues) in fiscal
2003 to $0.9 million (0.5% of net revenues) in fiscal 2004. The decrease was
attributable primarily to decreased borrowing amounts and lower interest rates.
Provision (benefit) for Income Taxes - Emerson's provision for income
taxes was $2.2 million for fiscal 2004 as compared to a benefit of $9.3 million
for fiscal 2003. The provision of $2.2 million in fiscal 2004 represents
deferred tax charges associated with Emerson's profits in the United States. The
benefit for fiscal 2003 consisted primarily of the reduction in the valuation
reserve previously established against the deferred tax assets relating to the
accounts receivable and inventory temporary differences, as well as the
recognition of management's estimation of net operating loss carryforward's
subject to limitations under IRC Section 382, which management believes it was
likely to realize the benefit of such net deferred tax assets. See Item 8 -
"Financial Statements and Supplementary Data - Note 7 of Notes to Consolidated
Financial Statements."
41
Net Income - As a result of the foregoing factors, the consumer
electronics segment generated net income of $60,000 (less than 0.1% of net
revenues) in fiscal 2004 as compared to $28.1 million (11.5% of net revenues) in
fiscal 2003.
SPORTING GOODS SEGMENT:
During fiscal 2004, SSG discontinued operations of certain team dealer
operations, and sold all of the capital stock of ATEC. These businesses have
been classified as discontinued operations, and, accordingly, their operating
results have been reported separate from continuing operations. The following
table summarizes certain financial information relating to the sporting goods
segment for the fiscal years 2005, 2004, and 2003 (in thousands):
2005 2004 2003
Net revenues $ 89,921 $ 83,822 $ 85,099
---------------- ----------------- ---------------
Cost of sales 64,064 61,812 61,338
Selling, general & administrative
expenses 23,868 26,135 25,816
Stock based costs 128 -- --
---------------- ----------------- ---------------
Operating income (loss) 1,861 (4,125) (2,055)
Interest expense, net 216 459 599
---------------- ----------------- ---------------
Income (Loss) before income taxes and
cumulative effect of change in
accounting principle 1,645 (4,584) (2,654)
Benefit for income taxes -- -- (1)
---------------- ----------------- ---------------
Income (loss) from continuing operations 1,645 (4,584) (2,653)
Income from discontinued operations,
net of tax 50 2,661 840
Cumulative effect of change in
accounting principle -- -- (7,442)
---------------- ----------------- ---------------
Net income (loss) $ 1,695 $ (1,923) $ (9,255)
================ ================= ===============
RESULTS OF SPORTING GOODS OPERATIONS - FISCAL 2005 COMPARED WITH FISCAL 2004
Net Revenues - Net revenues for fiscal 2005 increased approximately
$6.1 million, or 7.3%, to $89.9 million as compared to $83.8 million in fiscal
2004. The increase in net revenues was primarily a result of increased product
and customer sales volumes, representing a 6.6% increase, as well as fiscal 2005
having three additional business days as compared to fiscal 2004, representing
approximately 0.7% of the net revenue increase.
42
Cost of Sales - Cost of sales, as a percentage of net revenues,
decreased for fiscal 2005 to 71.2% as compared to 73.7% for 2004, or by $2.3
million. The 2.5% cost of sales improvement was due to a 1.8% improvement in
product margins along with a 0.7% decrease in inventory write off expense.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A expenses
for fiscal 2005 decreased by $2.3 million, or 8.7%, to $23.9 million as compared
to $26.1 million in fiscal 2004. As a percentage of net revenues, S,G&A
decreased to 26.5% in fiscal 2005 from 31.2% in fiscal 2004. The decrease in
S,G&A in absolute and relative terms was primarily due to decreases in: legal,
accounting and professional services of $1.0 million; facilities and insurance
costs of $480,000; licenses and royalties of $175,000; depreciation and
amortization expenses of $162,000; MIS costs of $137,000; bad debt expense of
$122,000; and approximately $160,000 of various other expenses . This decrease
was partially offset by an increase in payroll related costs of $266,000.
Additionally, freight carrier bankruptcy expenses of $296,000 recorded in fiscal
2004 contributed to the current fiscal year improvement.
Interest Expense, net - Interest expense, net decreased approximately
$243,000 (52.9%) in fiscal 2005 as compared to fiscal 2004. The decrease was
attributable primarily to decreased overall levels of borrowing.
Provision for Income Taxes - The sporting goods segment has a portion
of the tax benefits associated with a net operating loss carryforward included
in net deferred tax assets. This net operating loss carryforward can be used to
offset future taxable income and can be carried forward for 15 to 20 years.
Realization of the net deferred tax asset is dependent on generating sufficient
taxable income, either through operations or tax planning strategies, prior to
the expiration of loss carryforwards. The current year taxes on income were
applied against the deferred tax asset and related valuation allowance,
resulting in no income tax expense in fiscal 2005.
Discontinued Operations - Discontinued operations reflect net operating
losses related to our discontinued and sold team dealer operations and the net
income from and net gain on sale of our ATEC subsidiary, all of which occurred
in fiscal 2004. The $50,000 in fiscal 2005 reflects the income after the
finalization of discontinuing these operations.
Net Income (Loss) - As a result of the foregoing factors, income of
$1.7 million, or 1.9% of net revenues, was reported for fiscal 2005 as compared
to a net loss of $1.9 million, or 2.3%, for fiscal 2004.
RESULTS OF SPORTING GOODS OPERATIONS - FISCAL 2004 COMPARED WITH FISCAL 2003
Net Revenues - Net revenues for fiscal 2004 decreased approximately
$1.3 million (1.5%) as compared to fiscal 2003. The decrease in net revenues was
primarily a result of increased competition, a decreased sales force, continued
restrictions in state, federal and school budgets and declining participation
and funding of youth sports organizations.
43
Cost of Sales - Cost of sales, as a percentage of net revenues,
increased for fiscal 2004 to 73.7% as compared to 72.1% for 2003, or by
$474,000. This was due to a $542,000 write-down for obsolete and slow moving
inventory, and to a lesser extent, more aggressive pricing, increased freight
and increased importing costs.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A expenses
for fiscal 2004 increased by $319,000 (1.2%) as compared to fiscal 2003. As a
percentage of net revenues, S,G&A increased to 31.2% in fiscal 2004 from 30.3%
in fiscal 2003. The increase in S,G& A in absolute and relative terms was
primarily due to an increase in professional service fees of approximately
$617,000, bankrupt freight carrier expenses of $296,000 and $181,000 in
uncollectable trade account receivable allowances partially offset by decreases
in payroll related expenses of $460,000, employee travel and entertainment
expense of $215,000 and $145,000 in facility expenses.
Interest Expense, net - Interest expense, net decreased approximately
$140,000 (23.4%) in fiscal 2004 as compared to fiscal 2003. The decrease was
attributable primarily to decreased overall levels of borrowing.
Benefit for Income Taxes - The sporting goods segment 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.
Realization of the deferred tax asset is dependent on generating sufficient
taxable income, either through operations or tax planning strategies, prior to
the expiration of loss carryforwards. The deferred tax asset associated with the
current year losses was offset with a full valuation allowance and accordingly
no benefit for income taxes was recorded in fiscal 2004.
Discontinued Operations - Discontinued operations reflect net operating
losses related to our discontinued and sold team dealer operations and the net
income from and net gain on sale of our ATEC subsidiary, which occurred in
fiscal 2004.
Net loss - As a result of the foregoing factors, a net loss of $1.9
million was reported for fiscal 2004 as compared to a net loss of $9.3 million
for fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had cash and cash equivalents of approximately
$3.0 million, compared to approximately $6.4 million at March 31, 2004. Working
capital increased to $56.1 million at March 31, 2005 as compared to $46.7 at
March 31, 2004. The decrease in cash and cash equivalents of approximately $3.4
million was primarily due to operating and financing activities, as described
below.
Operating cash flow used in continuing operating activities was
approximately $9.3 million for fiscal 2005, resulting from income before
depreciation and amortization and deferred tax expenses of approximately $12.0
million, primarily offset by growth in accounts receivable and inventory. Growth
in accounts receivable accounted for a usage of cash of approximately $10.3
million as a result of the shift from the direct import business (which
represents sales under LC arrangements) to domestic business (which represents
sales on account), and an increase in consumer demand. Also as a result of the
shift to domestic business, increases in inventory accounted for a usage of cash
of approximately $6.3 million in order to meet the growing need for inventory at
domestic locations. Increases in cash securing bank loans and reductions of
accounts payable and other current liabilities also contributed to the use of
cash by operations.
44
Operating cash flow used by discontinued operations for the fiscal year
2005 was approximately $143,000 due to the results and disposals of SSG's ATEC
subsidiary and Team Dealer locations in fiscal 2004.
Net cash used by investing activities was $2.6 million for fiscal 2005,
due to the purchase of fixed assets, which consisted primarily of acquisition of
real property, trademark investments, and machinery and office equipment
purchases.
Net cash provided by financing activities was $8.6 million for fiscal
2005. Cash was primarily utilized for the increase in inventories due to the
higher level of sales in the current fiscal year, as well as the continuing
shift from the direct import to domestic business.
Emerson and SSG maintain credit facilities as described in Note 6 -
"Borrowings." At March 31, 2005, there were approximately $14.3 million of
borrowings outstanding under these facilities, of which no letters of credit
were outstanding. At March 31, 2005, Emerson and SSG were in compliance with the
covenants on its credit facilities. On June 27, 2005, Emerson entered into a
$42.5 million Revolving Credit and Term Loan Agreement with two U.S. financial
institutions to replace the existing $25 million revolver. (See Note 6).
Our foreign subsidiaries maintain various credit facilities,
aggregating $76.0 million, with foreign banks consisting of the following:
o four letter of credit facilities totaling $21.0 million which
is used for inventory purchases; and
o five back-to-back letter of credit facilities totaling $55.0
million.
At March 31, 2005, our foreign subsidiaries pledged approximately $5.6
million in certificates of deposit to these banks to assure the availability of
the $21.0 million credit facilities. At March 31, 2005, there were approximately
$15.7 million of letters of credit outstanding under these credit facilities.
These letter of credit facilities contain a net worth covenant of the foreign
subsidiaries with which the subsidiaries were in compliance at March 31, 2005.
45
Short-Term Liquidity. Liquidity for the consumer electronics segment is
impacted by its seasonality in that we generally record the majority of our
annual sales in the quarters ending September and December. This requires the
consumer electronics segment to maintain higher inventory levels during the
quarters ending June and September, therefore increasing the working capital
needs during these periods. Additionally, the consumer electronics segment
receives the largest percentage of product returns in the quarter ending March.
The higher level of returns during this period adversely impacts Emerson's
collection activity, and therefore its liquidity. Management believes that the
license agreements as discussed above, continued sales margin improvement and
the policies in place for returned products, should continue to favorably impact
its cash flow. In fiscal 2005, products representing approximately 38% of net
revenues of the consumer electronics segment were imported directly to our
customers. This contributes significantly to Emerson's liquidity in that this
inventory does not need to be financed directly by the Company.
Liquidity for the sporting goods segment is also impacted by its
seasonality in that it generally records the majority of revenues in the March
quarter, which is its highest sales period. The quarter ending December is its
lowest sales period. This requires the sporting goods segment to maintain higher
amounts of inventory during the quarters ending March, June and December,
therefore increasing the working capital needs during these periods.
Our principal existing sources of cash are generated from operations
and borrowings available under our revolving credit facilities. As of March 31,
2005, we had $26.6 million of borrowing capacity available under our $45.0
million revolving credit facilities (reflecting outstanding loans of
approximately $14.3 million). In addition, at March 31, 2005, we had $76.0
million of letter of credit facilities, of which approximately $47.3 million was
available. We believe that our existing sources of cash for the consumer
electronics segment and sporting goods segment will be sufficient to support our
existing operations over the next 12 months; provided, however, we may raise
additional financing, which may include the issuance of equity securities, or
the incurrence of additional debt, in connection with our operations or if we
elect to grow our business through acquisitions.
Long-Term Liquidity. We continue to be subject to competitive pressures
arising from pricing strategies. SSG has discontinued certain lower margin
products in favor of higher margin replacement products. Management believes
that this, together with our various license agreements and the continued
introduction of higher margin products in both segments, the sourcing of less
costly product from foreign manufacturers by SSG combined with reduced selling,
general and administrative expenses will result in a return to profitability by
SSG. Both senior secured credit facilities for Emerson and SSG impose financial
covenants. Non-compliance with the covenants could materially affect our future
liquidity. Management believes that anticipated cash flow from operations and
the financing noted above will provide sufficient liquidity to meet our
operating and debt service cash requirements on a long-term basis.
46
The following summarizes our obligations at March 31, 2005 for the
periods shown (in thousands):
PAYMENT DUE BY PERIOD
------------------------------------------------------------------------------
Less than 1 1 - 3 3 - 5 More than
Total year Years years 5 years
------------------------------------------------------------------------------
Notes and mortgages
payable $ 15,025 $ 74 $ 3,158 $ 11,448 $ 345
--
Capital lease obligations 55 36 19 -- --
Leases 6,934 2,663 3,440 767 64
------------------------------------------------------------------------------
Total $ 22,014 $ 2,773 $ 6,617 $ 12,215 $ 409
==============================================================================
As of March 31, 2005, there were no material capital expenditure
commitments and no substantial commitments for purchase orders outside the
normal purchase orders used to secure product.
Off-Balance Sheet Arrangements. We do not have any off-balance sheet
arrangements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with United States accounting principles. The preparation
of these financial statements require us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. We
consider certain accounting policies related to inventories, trade accounts
receivables, impairment of long lived assets, valuation of deferred tax assets,
sales return reserves and cooperative advertising accruals to be critical
policies due to the estimation processes involved in each.
Inventories. Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out basis for our consumer
electronics segment, and average cost for our sporting goods segment. We record
inventory reserves to reduce the carrying value of inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory reserves may be
required. Conversely, if market conditions improve, such reserves are reduced.
Trade Accounts Receivable. We extend credit based upon evaluations of a
customer's financial condition and provide for any anticipated credit losses in
our financial statements based upon management's estimates and ongoing reviews
of recorded allowances. If the financial conditions of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional reserves may be required. Conversely, reserves are reduced to reflect
credit and collection improvements.
Intangible Assets. SSG has assets related to other acquired
intangibles. The determination of related estimated useful lives and whether or
not these assets are impaired involves management judgments. Changes in strategy
and/or market conditions could significantly impact these judgments and require
adjustments to recorded asset balances. On April 1, 2002, we adopted SFAS 142,
which requires us to cease amortization of goodwill, to perform a transitional
test for potential goodwill impairment upon adoption, and then test goodwill for
impairment at least annually by reporting unit. See Note 5 - "Goodwill and Other
Intangible Assets."
47
Income Taxes. We record a valuation allowance to reduce the amount of
our deferred tax assets to the amount that management estimates is more likely
than not to be realized. While we have considered future taxable income and
ongoing tax planning strategies in assessing the need for the valuation
allowance, in the event that we determined that we would not be able to realize
our deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, if it was determined that we would not be able
to realize all or part of the net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
Sales Return Reserves. Our management must make estimates of potential
future product returns related to current period product revenue. Management
analyzes historical returns, current economic trends and changes in customer
demand for our products when evaluating the adequacy of the reserve for sales
returns. Management judgments and estimates must be made and used in connection
with establishing the sales return reserves in any accounting period. If actual
sales returns increase above the historical return rates, then additional
reserves may be required. Conversely, the sales return reserve could be
decreased if the actual return rates are less than the historical return rates,
which were used to establish such sales return reserve.
Cooperative Advertising Accruals. Cooperative advertising programs,
promotions and other volume-based incentives, which are provided to retailers
and distributors for advertising and sales promotions, are accounted for on an
accrual basis as a reduction in net revenues in the period in which the related
sales are recognized as per EITF 01-09 "Accounting for Consideration Given by a
Vendor to a Customer." If additional cooperative advertising programs,
promotions and other volume-based incentives are required to promote the
Company's products, then additional reserves may be required. Conversely,
reserves are decreased to reflect the lesser need for cooperative advertising
programs.
RECENTLY-ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position FASNo.106-2, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003"(Act),
which supersedes FASB Staff Position (FSP) No. 106-1, to provide guidance on
accounting for the effects of the Act. The Act introduces a prescription drug
benefit under Medicare Part D, as well as a federal subsidy to sponsors of
retiree healthcare benefit plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. The FSP provides guidance on
measuring the accumulated postretirement benefit obligation (APBO) and net
periodic postretirement benefit cost, and the effects of the Act on the APBO. In
addition, the FSP addresses accounting for plan amendments and requires certain
disclosures about the Act and its effects on the financial statements. This FSP
was effective for the first interim or annual period beginning after June 15,
2004 for public entities. The implementation of this FSP did not have a material
impact on the Company's financial statements.
48
During the fourth quarter of fiscal 2005 the Company elected to
early-adopt SFAS No. 123R, "Share-Based Payment" ("SFAS 123R") under the
modified retrospective approach applied only to prior interim periods in the
current year. As a result, the Company has applied SFAS 123R to new awards and
to awards modified, repurchased, or cancelled after April 1, 2004. Additionally,
compensation cost for the portion of awards for which the requisite service had
not been rendered that were outstanding as of April 1, 2004 are being recognized
as the requisite service is rendered on or after April 1, 2004 (generally over
the remaining option vesting period). The compensation cost for that portion of
awards has been based on the grant-date fair value of those awards as calculated
for pro forma disclosures under Statement 123. As a result of the early
adoption, under the provision of SFAS 123R, the Company has recorded
compensation costs of $289,000 during fiscal 2005 and eliminated compensation
costs, net of tax, of $1,247,000 ($0.05 per share) previously recorded in the
September 2004 quarter when 725,000 stock options were exercised in a cashless
manner. Prior to the adoption of SFAS 123R, the Company followed 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 the
date of grant, no compensation expense was recognized. The Company 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.
In November 2004, the FASB issued SFAS No.151, "Inventory Costs", which
is an amendment of Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing". This Statement clarifies that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current period charges. The provisions of this statement are
effective for inventory costs incurred during the fiscal year beginning after
June 15, 2005 and are applied on a prospective basis. The Company does not
expect the impact of implementing this Statement to have a material effect on
its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INFLATION, FOREIGN CURRENCY, AND INTEREST RATES
Neither inflation nor currency fluctuations had a significant effect on
our results of operations during 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 rate. While a significant increase in interest rates could have an adverse
effect on our financial condition and results of operations, management believes
that given the present economic climate, interest rates are expected to
increase, but not so significantly during the coming year as to have an adverse
effect or our financial condition and results of operations.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
-----------------------------
Page No.
--------
o Report of Independent Registered Public Accounting Firm 51
o Report of Independent Registered Public Accounting Firm 52
o Consolidated Statements of Operations for the years ended
March 31, 2005, 2004 and 2003 53
o Consolidated Balance Sheets as of March 31, 2005 and 2004 54
o Consolidated Statements of Changes in Shareholders' Equity
for the years ended March 31, 2005, 2004 and 2003 55
o Consolidated Statements of Cash Flows for the years ended
March 31, 2005, 2004 and 2003 56
o Notes to Consolidated Financial Statements 57
o Schedule II--Valuation and Qualifying Accounts and Reserves 97
o All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Emerson Radio Corp.
We have audited the accompanying consolidated balance sheets of Emerson
Radio Corp. and Subsidiaries as of March 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. Our audit also included the financial statement schedule
listed in the Index at Item 15(a). These consolidated financial statements and
schedule are the responsibility of the management of Emerson Radio Corp. and
Subsidiaries. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements and schedule are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Emerson
Radio Corp. and Subsidiaries at March 31, 2005 and 2004, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
New York, New York
May 20, 2005, except Note 6,
as to which the date is
June 27, 2005.
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Emerson Radio Corp.
We have audited only the consolidated statement of operations,
shareholders' equity, and cash flows for the year ended March 31, 2003 of
Emerson Radio Corp. and Subsidiaries. Our audit also included the financial
statement schedule listed in the Index at Item 15(a). These consolidated
financial statements and schedule are the responsibility of the management of
Emerson Radio Corp. and Subsidiaries. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and schedule are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluation the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Emerson Radio Corp. and Subsidiaries at March 31, 2003, and the consolidated
results of its operations and cash flows for the year ended March 31, 2003, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 5 to the consolidated financial statements, the
Company adopted Statement of Accounting Standard No. 142, "Goodwill and Other
Intangible Assets," effective April 1, 2002.
ERNST & YOUNG, LLP
New York, New York
May 19, 2003
52
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2005, 2004, AND 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005 2004 2003
---------------- -------------- -------------
NET REVENUES $ 320,704 $ 263,774 $ 330,315
COSTS AND EXPENSES:
Cost of sales 262,285 215,455 264,037
Other operating costs and expenses 5,889 5,254 4,348
Selling, general and administrative expenses 41,304 42,021 43,196
Acquisition costs (recovered) incurred (454) 1,553 --
Stock based compensation 377 523 49
---------------- -------------- -------------
309,401 264,806 311,630
---------------- -------------- -------------
OPERATING INCOME (LOSS) 11,303 (1,032) 18,685
Interest expense, net (1,562) (1,342) (2,492)
Minority interest in net (income) loss of
consolidated subsidiary (903) 789 731
---------------- -------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 8,838 (1,585) 16,924
Provision (benefit) for income taxes 2,983 2,150 (9,282)
---------------- -------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 5,855 (3,735) 26,206
Income from discontinued operations, net of tax 50 2,661 840
Cumulative effect of change in accounting principle -- -- (5,546)
---------------- -------------- -------------
NET INCOME (LOSS) $ 5,905 $ (1,074) $ 21,500
================ ============== =============
BASIC NET INCOME (LOSS) PER SHARE
Continuing operations $ .22 $ (.14) $ .95
Discontinued operations -- .10 .03
Cumulative effect of change in accounting principle -- -- (.20)
---------------- -------------- -------------
$ .22 (.04) .78
================ ============== =============
DILUTED NET INCOME (LOSS) PER SHARE
Continuing operations $ .22 $ (.14) $ .91
Discontinued operations -- .10 .03
Cumulative effect of change in accounting principle -- -- (.19)
---------------- -------------- -------------
$ .22 (.04) .75
================ ============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 26,991 27,227 27,716
Diluted 27,264 27,227 28,640
The accompanying notes are an integral part of the consolidated financial
statements.
53
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS 2005 2004
------------ -----------
Current Assets:
Cash and cash equivalents $ 2,954 $ 6,369
Cash securing bank loans 5,620 2,950
Accounts receivable (less allowances of $4,146 and $3,653, respectively) 29,634 19,948
Other receivables 1,620 2,821
Inventories 53,517 46,997
Prepaid expenses and other current assets 3,747 2,394
Deferred tax assets 4,923 5,887
------------ -----------
Total current assets 102,015 87,366
Property, plant, and equipment, net 8,275 7,822
Deferred catalog expenses 1,597 1,695
Trademarks and other intangible assets 5,078 5,168
Deferred tax assets 13,375 15,263
Other assets 828 1,355
------------ -----------
Total Assets $ 131,168 $ 118,669
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 13,044 $ 4,762
Current maturities of long-term borrowings 110 58
Accounts payable and other current liabilities 30,365 32,787
Accrued sales returns 2,137 2,521
Income taxes payable 243 509
------------ -----------
Total current liabilities 45,899 40,637
Long-term borrowings 14,970 15,027
Minority interest 16,696 15,793
Commitments and contingencies
Shareholders' Equity:
Preferred shares - 10,000,000 shares authorized; 3,677
shares issued and outstanding 3,310 3,310
Common shares -- $.01 par value, 75,000,000 shares authorized;
52,883,131 and 52,310,350 shares issued; 27,203,164 and 26,630,383
shares outstanding, respectively 529 523
Capital in excess of par value 116,788 116,304
Accumulated other comprehensive losses (87) (83)
Accumulated deficit (43,105) (49,010)
Treasury stock, at cost, 25,679,967 shares (23,832) (23,832)
------------ -----------
Total shareholders' equity 53,603 47,212
------------ -----------
Total Liabilities and Shareholders' Equity $ 131,168 $ 118,669
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
54
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2005, 2004, AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON SHARES ISSUED ACCUMULATED
---------------------- CAPITAL OTHER TOTAL
PREFERRED NUMBER PAR TREASURY IN EXCESS OF COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
STOCK OF SHARES VALUE STOCK PAR VALUE LOSSES DEFICIT EQUITY
--------- ---------- --------- ---------- ------------ ------------ ------------ -------------
Balance - March 31, 2002 $ 3,310 51,475,511 $ 515 $(13,978) $114,451 $ (122) $ (69,436) $34,740
Purchase of treasury stock (5,697) (5,697)
Exercise of stock options
and warrants 505,920 5 622 627
Stock based costs 49 49
Comprehensive income:
Net income 21,500 21,500
Interest rate swap 20 20
Unrealized loss on
securities (2) (2)
Comprehensive ----------
income 21,518
--------- ---------- --------- ---------- ------------ ----------- ------------ ----------
Balance - March 31, 2003 3,310 51,981,431 520 (19,675) 115,122 (104) (47,936) 51,237
Purchase of treasury stock (4,157) (4,157)
Exercise of stock options
and warrants 328,919 3 281 284
Stock based costs 511 511
Tax benefit from exercise
of employee stock options 390 390
Comprehensive income (loss):
Net loss (1,074) (1,074)
Interest rate swap (16) (16)
Recognition of realized
loss in net loss 42 42
Unrealized loss on
securities (5) (5)
-----------
Comprehensive
income (loss) (1,053)
--------- ----------- --------- ---------- ------------ ----------- ------------ -----------
Balance - March 31, 2004 3,310 52,310,350 523 (23,832) 116,304 (83) (49,010) 47,212
Exercise of stock options
and warrants 572,781 6 107 113
Stock based costs 377 377
Comprehensive income:
Net income 5,905 5,905
Interest rate swap (4) (4)
-----------
Comprehensive income 5,901
--------- ----------- --------- ---------- ------------ ----------- ------------ -----------
Balance - March 31, 2005 $ 3,310 52,883,131 $ 529 $ (23,832) $ 116,788 $ (87) $ (43,105) $ 53,603
========= =========== ========= ========== ============ =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
55
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2005, 2004, AND 2003
(IN THOUSANDS)
2005 2004 2003
------------ ------------ -----------
Cash Flows from Operating Activities:
Income (loss) from continuing operations $ 5,855 $ (3,735) $ 20,660
Adjustments to reconcile income (loss) to net cash
provided by operating activities:
Minority interest 903 (789) (731)
Depreciation and amortization 3,284 3,375 2,968
Deferred tax expense (benefit) 2,852 1,483 (10,957)
Cumulative effect of accounting change -- -- 5,546
Asset allowances, reserves, and other 413 128 (40)
Changes in assets and liabilities:
Cash securing bank loans (2,670) (1,250) 50
Accounts receivable (10,324) (66) 5,132
Other receivables 968 (47) (363)
Inventories (6,293) (7,191) (3,590)
Prepaid expenses and other current assets (1,390) 2,944 (3,104)
Other assets (521) (72) (1,198)
Accounts payable and other current liabilities (2,118) 3,386 312
Income taxes payable (266) (243) 649
------------ ------------ -----------
Net cash provided by (used in) continuing operations (9,307) (2,077) 15,334
Net cash provided by (used in) discontinued operations (143) 2,394 91
------------ ------------ -----------
Net cash provided by (used in) operating activities (9,450) 317 15,425
------------ ------------ -----------
Cash Flows from Investing Activities:
Additions to property and equipment (2,598) (257) (512)
------------ ------------ -----------
Net cash used by continuing operations (2,598) (257) (512)
----------- ------------ -----------
Proceeds from sale of ATEC -- 10,517 --
Other investing activities of discontinued operations -- -- (110)
------------ ------------ -----------
Net cash provided by (used in) discontinued operations -- 10,517 (110)
------------ ------------ -----------
Net cash provided by (used in) investing activities (2,598) 10,260 (622)
------------ ------------ -----------
Cash Flows from Financing Activities:
Short-term borrowings (repayments) 8,282 2,844 (9,385)
Net borrowings (repayments) under line of credit facility 52 (11,556) 11,533
Purchases of common stock -- (4,157) (5,697)
Exercise of stock options and warrants 201 284 627
Long-term borrowings 148,962 146,655 123,457
Repayments of long-term borrowings (148,864) (149,691) (143,153)
------------ ------------ -----------
Net cash provided by (used in) financing activities 8,633 (15,621) (22,618)
------------ ------------ -----------
Net decrease in cash and cash equivalents (3,415) (5,044) (7,815)
Cash and cash equivalents at beginning of year 6,369 11,413 19,228
------------ ------------ -----------
Cash and cash equivalents at end of year $ 2,954 $ 6,369 $ 11,413
============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,366 $ 1,158 $ 2,184
============ ============ ===========
Cash paid for income taxes $ 587 $ 1,625 $ 1,226
============ ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
56
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
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 transactions and
balances have been eliminated.
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 "[OBJECT
OMITTED]" 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 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 as
"Discontinued Operations" and accordingly, the accompanying financial statements
reflect these as discontinued operations for all periods presented. (See Note
17).
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, the Company is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH EQUIVALENTS
Short-term investments with original maturities of three months or less
at the time of purchase are considered to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, cash securing bank
loans, trade accounts receivable, accounts payable and accrued liabilities
approximate fair value due to short-term maturity of these financial
instruments. The carrying amounts of bank debt approximate their fair values due
to their variable rate interest features.
57
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INVESTMENTS
The Company determines the appropriate classifications of securities at the
time of purchase and evaluates the continuing appropriateness of that
classification thereafter. The investments held by the Company of approximately
$175,000 and $3,000 at March 31, 2005 and 2004, respectively, were classified as
"available-for-sale securities", and are included in prepaid expenses and other
current assets. Realized gains and losses are reported separately as a component
of income, and unrealized gains and losses are reported separately as a
component of comprehensive income. Declines in the market value of securities
deemed to be other than temporary are included in earnings.
CONCENTRATIONS OF CREDIT RISK
Certain financial instruments potentially subject the Company to
concentrations of credit risk. Accounts receivable for the consumer electronics
segment represent sales to retailers and distributors of consumer electronics
throughout the United States and Canada. Accounts receivable for the sporting
goods segment represent sales to all levels of public and private schools,
colleges, universities, military academies, municipal and governmental agencies,
military facilities, churches, clubs, camps, hospitals, youth sports leagues,
non-profit organizations, team dealers and certain large retail sporting goods
chains. The Company periodically performs credit evaluations of its customers
but generally does not require collateral. The Company provides for any
anticipated credit losses in the financial statements based upon management's
estimates and ongoing reviews of recorded allowances. The allowance for doubtful
accounts was approximately $545,000, $818,000, and $1,243,000 as of March 31,
2005, 2004, and 2003, respectively. (See Note 14)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation is being computed using the
straight-line method over the estimated useful lives. Leasehold improvements are
amortized on a straight-line basis over the shorter of the useful life of the
improvement or the term of the lease. The cost of maintenance and repairs is
charged to expense as incurred. Significant renewals and betterments are
capitalized and depreciated over the remaining estimated useful lives of the
related assets. At time of disposal, the cost and related accumulated
depreciation are removed from the Company's records and the difference between
net carrying value of the asset and the sale proceeds is recorded as a gain or
loss.
Depreciation of property, plant and equipment is provided by the
straight-line method as follows:
|X| Buildings Thirty years to forty years
|X| Machinery and Equipment Five years to ten years
|X| Computer Equipment and Software Three years to ten years
|X| Furniture & Fixtures and Office Equipment Five years to seven years
58
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-LIVED ASSETS
The Company's long-lived assets include property and equipment,
trademark and other amortizable intangibles. At March 31, 2005, the Company had
approximately $8,275,000 of property and equipment, net of accumulated
depreciation, and approximately $5,078,000 of trademark and other amortizable
intangible assets, net of amortization, accounting for approximately 10% of the
Company's total assets. The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposals
of Long-Lived Assets". Recoverability of assets held and used are measured by a
comparison of the carrying amount of an asset to estimated undiscounted pre-tax
future net cash flows. Future events could cause the Company to conclude that
impairment indicators exist and that long-lived assets may be impaired. Any
resulting impairment loss could have a material adverse impact on the Company's
financial condition and results of operations.
REVENUE RECOGNITION
Revenues are recognized at the time title passes to the customer. Under
the Direct Import Program for the consumer electronics segment, title passes in
the country of origin. Under the Domestic Program for the consumer electronics
segment and the sporting goods segment, title passes primarily at the time of
shipment. Estimates for possible returns are based upon historical return rates
and netted against revenues. Customers in the sporting goods segment, subject to
certain limitations, have the right to return product within a set period if
they are not completely satisfied. In the consumer electronics segment, returns
are not permitted unless defective.
COST OF SALES
Cost of sales includes actual product cost, change in inventory
reserves, duty, buying costs, the cost of transportation to the Company's
warehouses from its manufacturers, warehousing costs, and an allocation of
depreciation and amortization.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses pertains only to the consumer
electronics segment, and include costs associated with returned product received
from retailers, the costs associated with the markdown of returned inventory,
and an allocation of depreciation and amortization. Because we do not include
other operating costs and expenses in cost of sales, our gross margin may not be
comparable to those of other distributors that may include all costs related to
the cost of product to their cost of sales and in the calculation of gross
margin.
59
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include all operating costs
of the Company that are not directly related to the cost of procuring product or
costs not included in other operating costs and expenses.
ACQUISITION COSTS (RECOVERED) INCURRED
Acquisition costs include all costs incurred by the Company in
unsuccessful acquisition attempts. These costs are charged to operations when
the potential acquisition is terminated.
FOREIGN CURRENCY
The assets and liabilities of foreign subsidiaries have been translated
at current exchange rates, and related revenues and expenses have been
translated at average rates of exchange in effect during the year. Related
translation adjustments are reported as a separate component of shareholders'
equity. Losses resulting from foreign currency transactions are included in the
results of operations.
The Company does not enter into foreign currency exchange contracts to
hedge its exposures related to foreign currency fluctuations.
ADVERTISING AND DEFERRED CATALOG EXPENSES
Advertising expenses are charged to operations as incurred, except for
production costs related to direct-response advertising activities, which are
capitalized. Direct response advertising pertains to the sporting goods segment
of the Company, which consists primarily of catalogs. Production and
distribution costs, primarily printing and postage, associated with catalogs are
amortized over twelve months which approximates average usage of the catalogs
produced. Advertising and catalog amortization expenses, which are included in
selling, general and administrative expenses, were approximately $3,810,000,
$2,979,000, and $3,231,000 for fiscal 2005, 2004, and 2003, respectively.
COOPERATIVE ADVERTISING EXPENSES
Cooperative advertising programs and other volume-based incentives are
accounted for on an accrual basis as a reduction in net revenue according to the
requirements of Emerging Issue Task Force 01-09, "Accounting for Consideration
Given By a Vendor to a Customer or a Reseller of the Vendor's Products" in the
period in which the related sales are recognized. Cooperative advertising
expenses were approximately $4,446,000, $2,671,000, and $4,632,000, for fiscal
2005, 2004, and 2003, respectively.
60
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INTERNET EXPENSES
The Company expenses the operating and development costs of its
Internet websites when incurred.
INCOME TAXES
Deferred income taxes are provided for the tax effects of differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets have
been recorded, net of an appropriate valuation allowance, to the extent
management believes it is more likely than not that such assets will be
realized. (See Note 7).
COMPREHENSIVE INCOME
Comprehensive income or loss, as disclosed in the Consolidated
Statements of Changes in Shareholders' Equity, is net income or loss adjusted
for changes in the fair value of hedge instruments, unrealized gains or losses
on securities, and foreign currency translation adjustments.
NET EARNINGS PER COMMON SHARE
Net earnings per share are based upon the weighted average number of
common and common equivalent shares outstanding. Outstanding stock options and
warrants are treated as common stock equivalents when dilution results from
their assumed exercise.
STOCK- BASED COMPENSATION
During the fourth quarter of fiscal 2005, the Company elected to
early-adopt Statement of Financial Accounting Standard No. 123R, "Share-Based
Payment" ("SFAS 123R") under the modified retrospective approach applied only to
prior interim periods in the current year. As a result, the Company has applied
SFAS 123R to new awards and to awards modified, repurchased, or cancelled after
April 1, 2004. Additionally, compensation cost for the portion of awards for
which the requisite service had not been rendered that were outstanding as of
April 1, 2004 are being recognized as the requisite service is rendered on or
after April 1, 2004 (generally over the remaining option vesting period). The
compensation cost for that portion of awards has been based on the grant-date
fair value of those awards as calculated for pro forma disclosures under
previously issued accounting standards. As a result of applying the provisions
of SFAS 123R, the Company has recorded compensation costs of $289,000 during
fiscal 2005 and eliminated compensation costs, net of tax, of $1,247,000 ($0.05
per share) previously recorded in the September 2004 quarter when 725,000 stock
options were exercised in a cashless manner. Prior to the adoption of SFAS 123R,
the Company followed 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 the
61
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
date of grant, no compensation expense was recognized. The Company 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. The Company's pro forma
information for fiscal 2004 and 2003 is as follows:
2004 2003
---------- ----------
Income (loss) from continuing
operations (in thousands):
As reported $(3,735) $26,206
Less: Stock-based compensation
expense (35) (110)
---------- ----------
Pro forma income (loss) $(3,770) $26,096
========== ==========
Income (loss) from continuing
operations per common share:
Basic - as reported $ (.14) $ .95
Basic - pro forma $ (.14) $ .94
Diluted - as reported $ (.14) $ .91
Diluted - pro forma $ (.14) $ .91
2004 2003
---------- ----------
Net income (loss) (in thousands):
As reported $(1,074) $21,500
Less: Stock-based compensation
expense (35) (110)
---------- ----------
Pro forma income (loss) $(1,109) $21,390
========== ==========
Net income (loss) per common share:
Basic - as reported $ (.04) $ .78
Basic - pro forma $ (.04) $ .77
Diluted - as reported $ (.04) $ .75
Diluted - pro forma $ (.04) $ .75
The fair value of Emerson's options for purposes of recording expenses under
SFAS 123R and pro forma disclosures under SFAS 123 were calculated using the
Black-Scholes option valuation model and the following assumptions for fiscal
2003 and 2005, respectively: (i) a risk free interest rate of 5.91% and 3.50%;
(ii) a weighted average expected life of 10 years and 5 years; (iii) an expected
volatility of 98% and 71%; and (iv) no dividend yield for both years. The
weighted average fair value of employee stock options granted for the Emerson
Plan in fiscal 2003 and 2005 was $0.68 and $1.78, respectively. No options were
granted by Emerson in fiscal 2004.
62
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of SSG's options for purposes of recording expenses
under SFAS 123R and pro forma disclosures under SFAS 123 were calculated using
the Black-Scholes option valuation model and the following assumptions: (i) risk
free interest rates of 4.00%, 4.00% and 4.10% for years 2005, 2004 and 2003
respectively; (ii) a weighted average expected life of five years; (iii)
dividend yield of 0% for all years; and (iv) expected volatility of 54%, 36% and
36% for 2005, 2004 and 2003 respectively. The weighted average fair value of
employee stock options granted for the SSG plan in fiscal 2005, 2004 and 2003
was $1.08, $.57 and $.49, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Emerson's and SSG's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for its interest rate protection agreement under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires all derivatives to be recorded as assets or liabilities and measured at
fair value. Gains or losses resulting from changes in the values of derivatives
are recognized immediately or deferred, depending on the use of the derivative
and whether or not it qualifies as a hedge. The Company uses a derivative
financial instrument to manage its interest rate risk associated with
fluctuations in interest rates on its debt. (See Note 15).
RECENT PRONOUCEMENTS
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position No.106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003"(Act),
which supersedes FASB Staff Position (FSP) No. 106-1, to provide guidance on
accounting for the effects of the Act. The Act introduces a prescription drug
benefit under Medicare Part D, as well as a federal subsidy to sponsors of
retiree healthcare benefit plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. The FSP provides guidance on
measuring the accumulated postretirement benefit obligation (APBO) and net
periodic postretirement benefit cost, and the effects of the Act on the APBO. In
addition, the FSP addresses accounting for plan amendments and requires certain
disclosures about the Act and its effects on the financial statements. This FSP
was effective for the first interim or annual period beginning after June 15,
2004 for public entities. The implementation of this FSP did not have a material
impact on the Company's financial statements.
63
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 2004, the FASB issued SFAS No.151, "Inventory Costs", which
is an amendment of Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing". This Statement clarifies that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current period charges. The provisions of this statement are
effective for inventory costs incurred during the fiscal year beginning after
June 15, 2005 and are applied on a prospective basis. The Company does not
expect the impact of implementing this Statement to have a material effect on
its financial statements.
RECLASSIFICATIONS
Certain reclassifications were made to conform prior year's financial
statements to the current presentation.
NOTE 2 -- INVENTORIES:
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 average cost for the sporting goods segment. As of March 31, 2005
and 2004, inventories consisted of the following:
MARCH 31, 2005 MARCH 31, 2004
---------------- ---------------
(IN THOUSANDS)
Raw materials $ 1,370 $ 1,138
Work-in-process 33 67
Finished goods 55,075 48,878
------------- ------------
56,478 50,083
Less inventory allowances (2,961) (3,086)
------------- ------------
$ 53,517 $ 46,997
============= ============
NOTE 3 - 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 management
believes reflect arms length transaction. For the fiscal years 2005, 2004, and
2003, SSG billed Emerson fees of approximately $354,000, $626,000, and $627,000,
respectively, while Emerson billed SSG fees of $148,000, $307,000, and $320,000,
respectively. These charges have been eliminated in consolidation.
64
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 -- PROPERTY, PLANT, AND EQUIPMENT:
As of March 31, 2005 and 2004, property, plant, and equipment is
comprised of the following:
2005 2004
---------- -------------
(In thousands)
Land $ 9 $ 9
Buildings 2,368 1,192
Computer Equipment & Software 10,337 10,248
Furniture and fixtures 1,631 1,218
Machinery and equipment 2,548 2,228
Leasehold improvements 393 369
----------- -----------
17,286 15,264
Less accumulated depreciation and amortization (9,011) (7,442)
----------- -----------
$ 8,275 $ 7,822
=========== ===========
Depreciation and amortization of property, plant, and equipment from
continuing operations amounted to $1,841,000, $2,007,000, and $2,021,000 for the
years ended March 31, 2005, 2004 and 2003, respectively.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued 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. The Company adopted SFAS 142 effective April 1, 2002
and ceased amortizing goodwill on that date.
Goodwill was required to be tested for impairment in a transitional
test upon adoption of SFAS 142 and then at least annually by reporting unit.
Goodwill impairment testing must also be performed more frequently if events or
other changes in circumstances indicate that goodwill might be impaired. Under
the provisions of SFAS 142, a two step process is used to evaluate goodwill
impairment. Under step one of the evaluation process, the carrying value of a
reporting unit is compared to its fair value to determine if potential goodwill
impairment exists. If potential goodwill impairment is identified during step
one, then the amount of goodwill impairment, if any, is measured using a
hypothetical purchase price allocation approach under step two of the evaluation
process.
The results of our transitional step one analysis indicated that we had
a potential impairment of goodwill. In our step two analysis, the fair value of
the goodwill was determined through a fair evaluation. Through this evaluation,
we determined the fair value of the assets and liabilities to be the price that
they could be sold for in a current arms-length transaction between willing
parties. As a result of our transitional impairment testing as of April 1, 2002,
we recorded a non-cash charge of $5,546,000 as a "cumulative effect of
accounting change" which brought the carrying value of goodwill to $0.
65
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other intangible assets as of March 31, 2005 and related amortization
expense for the year then ended, consist of the amounts shown below (in
thousands). Trademarks relate to costs incurred in connection with the licensing
agreements for the use of certain trademarks and service marks in conjunction
with the sale of our products. The cost of intangible assets and related
accumulated amortization are removed from our accounts during the year in which
they become fully amortized.
FISCAL YEAR ENDED WEIGHTED AVERAGE
MARCH 31, 2005 GROSS CARRYING AMORTIZATION ACCUMULATED AMORTIZATION AMORTIZATION
AMOUNT EXPENSE AMORTIZATION PERIOD PERIOD
---------------- ------------- --------------- --------------- ----------------
Amortizable Intangible
Assets
Trademarks $ 7,224 $ 285 $ 3,574 10-40 years 17 years
Trade names 1,130 56 227 20 years 20 years
Patents 685 98 392 7 years 7 years
Other 350 22 118 10 years 10 years
------------ ------------ ----------
Total $ 9,389 $ 461 $ 4,311
============ ============ ==========
FISCAL YEAR ENDED WEIGHTED AVERAGE
MARCH 31, 2004 GROSS CARRYING AMORTIZATION ACCUMULATED AMORTIZATION AMORTIZATION
AMOUNT EXPENSE AMORTIZATION PERIOD PERIOD
------------------- -------------------------------------------------- ---------------------
Amortizable Intangible
Assets
Trademarks $ 6,848 $ 267 $ 3,285 10-40 years 17 years
Trade names 1,130 57 171 20 years 20 years
Patents 685 98 294 7 years 7 years
Other 350 23 95 10 years 10 years
------------ ------------ -----------
Total $ 9,013 $ 445 $ 3,845
============ ============ ===========
Amortization expense for the year ended March 31, 2003 was $516,000.
66
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of March 31, 2005, estimated amortization expense of other
intangible assets for each of the next five years, and thereafter, is as follows
(in thousands):
2006 $ 477
2007 434
2008 329
2009 231
2010 231
Thereafter 3,376
---------
$ 5,078
=========
NOTE 6 -- BORROWINGS:
SHORT-TERM BORROWINGS
As of March 31, 2005 and 2004, short-term borrowings consisted of
amounts outstanding under the Company's foreign bank facilities held by its
foreign subsidiaries. Availability under this facility totals $21.0 million and
is maintained by the pledge of bank deposits of approximately $5.6 million and
$3.0 million as of March 31, 2005 and March 31, 2004, respectively.
2005 2004
--------------- --------------
(In thousands)
Foreign bank loan $ 13,044 $ 4,762
--------------- --------------
LONG -TERM BORROWINGS
As of March 31, 2005 and 2004, long-term borrowings consisted of the
following:
2005 2004
--------------- --------------
(In thousands)
Emerson revolver $ 11,300 $ 8,000
Sport Supply revolver 3,010 6,972
Mortgage payable 715 -
Equipment notes and other 55 113
--------------- --------------
15,080 15,085
Less current maturities 110 58
--------------- --------------
Long-term debt and notes payable $ 14,970 $ 15,027
=============== ==============
67
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Emerson Credit Facility - At March 31, 2005, Emerson had borrowings of
$11,300,000 under a $25 million line of credit which was due to expire on June
30, 2005, and the Company was in compliance with the covenants of that line of
credit. On June 27, 2005, Emerson entered into a $42.5 million Revolving Credit
and Term Loan Agreement (the "Emerson Loan Agreement") with two U.S. financial
institutions. The Emerson Loan Agreement provides for a three year $35 million
revolving line of credit (the "Emerson Revolver") and a $7.5 million term loan
which is to be amortized over a three year period or repaid in full from the
proceeds of a sale of significant assets. The $35 million revolving line of
credit replaces Emerson's prior revolver of $25 million and is due to expire on
June 30, 2008. The new revolver provides for revolving loans, subject to
individual maximums which, in the aggregate, are not to exceed the lesser of $35
million or a "Borrowing Base" as defined in the Emerson Loan Agreement. The
Borrowing Base amount is established by specified percentages of eligible
accounts receivables and inventories. The revolver and the term loan bear
interest ranging from Prime plus 0.00% to 1.50% or, at Emerson's election, LIBOR
plus 1.50% to 3.00% depending on certain financial covenants. Pursuant to the
Emerson Loan Agreement, Emerson is restricted from, among other things, paying
certain cash dividends, and entering into certain transactions without the
lender's prior consent and is subject to certain net worth and leverage
financial covenants. Amounts outstanding under the Emerson Revolver, similar to
the prior agreement, are secured by substantially all of Emerson's tangible
assets and amounts outstanding under the Term Loan are secured by Emerson's
trademarks.
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.
Maturities of long-term borrowings as of March 31, 2005, by fiscal year
and in the aggregate are as follows (in thousands):
68
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2006 $ 110
2007 93
2008 3,084
2009 11,374
2010 74
Thereafter 345
-----------
Total 15,080
Less current portion (110)
-----------
Total long term portion $ 14,970
===========
NOTE 7 - INCOME TAXES:
2005 2004 2003
------------ -------------- -----------
Current: (In thousands)
Federal $ -- $ -- $ --
Foreign, state and other 131 667 2,018
Deferred:
Federal 2,637 1,843 (11,300)
Foreign, state and other 215 (360) --
------------ ------------- -----------
$ 2,983 $ 2,150 $ (9,282)
============ ============= ===========
Emerson files a consolidated federal return and certain state and local
income tax returns.
The difference between the effective rate reflected in the provision for
income taxes and the amounts determined by applying the statutory U.S. rate of
34% to income before income taxes from continuing operations for the years ended
March 31, 2005, 2004, and 2003 are analyzed below:
2005 2004 2003
----------- --------------- ----------
(In thousands)
Statutory provision (recovery) $ 3,004 $ (539) $ 5,389
Increase (decrease) in
valuation allowance (795) 1,981 (13,069)
Foreign income taxes (223) 434 (1,192)
State taxes 382 662 559
Minority interest 307 (268) (706)
Other, net 308 (120) (263)
----------- ------------ ----------
Total income tax (benefit) $ 2,983 $ 2,150 $ (9,282)
=========== ============ ==========
69
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of March 31, 2005 and 2004, the significant components of the Company's
deferred tax assets and liabilities are as follows:
2005 2004
---------------- ---------------
(In thousands)
Deferred tax assets:
Accounts receivable reserves $ 2,417 $ 2,455
Inventory reserves 2,070 2,179
Intangible assets 864 1,060
Net operating loss carryforwards 18,363 21,977
Other 949 1,017
------------ -----------
Total deferred tax assets 24,663 28,688
Valuation allowance (5,386) (6,181)
------------ -----------
Net deferred tax assets 19,277 22,507
Deferred tax liabilities:
Property, Plant and Equipment (979) (1,357)
------------ -----------
Net deferred taxes $ 18,298 $ 21,150
============ ===========
Total deferred tax assets for the consumer electronics segment at March
31, 2005 and 2004 include the tax benefit on $90 million of net operating loss
carryforwards as of March 31, 2005, are subject to limitations under IRC
section 382 and expire in the years 2006 through 2019. The tax benefits related
to these operating loss carryforwards and future deductible temporary
differences are recorded to the extent management believes it is more likely
than not that such benefits will be realized.
Total deferred tax assets for the sporting goods segment at March 31,
2005 and 2004 include the tax benefit of net operating loss carryforwards which
total approximately $19.8 million of March 31, 2005, which expire in the years
2011 through 2023. The tax benefits related to these net operating loss carry
forwards are recorded net of a valuation allowance of $5.4 million to reflect
the extent to which management believes it is more likely than not that such tax
benefits will be realized.
Income (loss) of foreign subsidiaries before taxes was $526,000,
$(2,872,000), and $6,198,000 for the years ended March 31, 2005, 2004, and 2003,
respectively.
No provision was made for U.S. or additional foreign taxes on undistributed
earnings of foreign subsidiaries. Such earnings have been and will continue to
be reinvested but could become subject to additional tax if they were remitted
as dividends, or were loaned to the Company or a U.S. affiliate, or if the
Company should sell its stock in the foreign subsidiaries. It is not practicable
to determine the amount of additional tax, if any, that might be payable on the
undistributed foreign earnings.
70
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases warehouse and office space with annual commitments
as follows (in thousands):
FISCAL YEARS AMOUNT
2006 $ 2,663
2007 1,884
2008 1,556
2009 511
2010 256
Rent expense from continuing operations, which includes month-to-month
leases, aggregated $3,005,000, $3,228,000, and $3,051,000 for fiscal 2005, 2004,
and 2003, respectively.
LETTERS OF CREDIT:
There were no letters of credit outstanding under the Emerson Loan
Agreement (see Note 6) as of either March 31, 2005 or 2004. The Company's
foreign subsidiaries also currently maintain various credit facilities
aggregating $76.0 million with foreign banks subject to annual review consisting
of the following: (i) four letter of credit facilities totaling $21.0 and (ii)
four back-to-back credit facilities totaling $55.0 million. These facilities are
used for inventory purchases and require the Company to pledge approximately
$5.6 million of cash for such availability and for the benefit of its' foreign
subsidiaries, who establish back-to-back letters of credit with the Company's
customers. At March 31, 2005, there were $15.7 million of letters of credit
outstanding under these credit facilities. These credit facilities require net
worth covenants of the foreign subsidiaries, for which they were in compliance
at March 31, 2005.
CAPITAL EXPENDITURE AND OTHER COMMITMENTS:
As of March 31, 2005, there were no material capital expenditure
commitments and there were no substantial commitments for purchase orders
outside the normal purchase orders used to secure product for either segment.
71
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EMPLOYEE BENEFIT PLAN:
The Company currently sponsors defined contribution 401(k) retirement
plans which are subject to the provisions of the Employee Retirement Income
Security Act (ERISA). Under the consumer electronics segment plan, Emerson
matches a percentage of the participants' contributions up to a specified
amount. Under the sporting goods segment plan, SSG has not matched a percentage
of the participant's contributions for the last three fiscal years. The
consolidated contributions to the plans for fiscal 2005, 2004 and 2003 were
$94,000, $103,000, and $72,000, respectively.
SHAREHOLDER TRANSACTION:
In January 2005, Geoffrey P. Jurick, the Chairman, Chief Executive
Officer and President of Emerson Radio Corp., obtained a $16 million loan from a
foreign financial institution. The loan (which, prior to extension, came due on
April 20, 2005) currently matures on July 20, 2005, is guaranteed by a third
party unaffiliated with Emerson and is secured by a pledge by Mr. Jurick of
approximately 10 million shares of his Emerson common stock (approximately 38%
of Emerson's common stock). If the loan term is not further extended and the
loan is not repaid at maturity, the stock could be utilized to satisfy Mr.
Jurick's obligations.
NOTE 9 -- STOCK BASED COMPENSATION:
CONSUMER ELECTRONICS SEGMENT:
In July 1994, Emerson adopted a Stock Compensation Program ("Program").
The maximum aggregate number of shares of common stock available pursuant to the
Program is 2,000,000 shares and the Program is comprised of four parts--the
Incentive Stock Option Plan, the Supplemental Stock Option Plan, the Stock
Appreciation Rights Plan and the Stock Bonus Plan. In 2004 Emerson adopted the
2004 Employee Stock Options Plan. The provisions for exercise price, term and
vesting schedule are, for the most part, the same as the previous Incentive
Stock Option Plan. A summary of transactions during the last three years is as
follows:
NUMBER OF WEIGHTED AVERAGE
Options Exercise Price
--------------- ----------------
Outstanding - March 31, 2002 1,501,000 $ 1.05
Exercised (366,397) 1.00
Cancelled (75,000) 1.00
--------------- ----------------
Outstanding - March 31, 2003 1,059,603 1.07
Exercised (277,269) 1.00
--------------- ----------------
Outstanding - March 31, 2004 782,334 1.09
--------------- ----------------
Granted 425,000 3.10
Exercised (700,000) 1.10
--------------- ----------------
Outstanding - March 31, 2005 507,334 $ 2.60
=============== ================
Exercisable at March 31, 2005 82,334 $ 1.01
=============== ================
72
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table provides additional information as to the options
outstanding under the Stock Compensation Program and the 2004 Employee Stock
Option Plan as of March 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------- ---------------------- ------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
RANGE OF AMOUNT REMAINING EXERCISE AMOUNT AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- --------------- ---------------------- ------------- ------------ ---------------
$1.00 81,334 4.9 $ 1.00 81,334 $ 1.00
$1.50 1,000 6.0 1.50 1,000 1.50
$2.96 - $2.97 225,000 9.6 2.96 -- --
$3.26 200,000 9.6 3.26 -- --
--------------- ---------------------- ------------- ------------ ---------------
507,334 7.9 $ 2.60 82,334 $ 1.01
=============== ====================== ============= ============ ===============
Subject to the terms set forth in each option agreement, generally, the
term of each option is ten years, except for incentive stock options issued to
any person who owns more than 10% of the voting power of all classes of capital
stock, for which the term is five years. Unless otherwise provided, options may
not be exercised during the first year after the date of the grant. Thereafter,
each option becomes exercisable on a pro rata basis on each of the first through
third anniversaries of the date of the grant. The exercise price of options
granted must be equal to or greater than the fair value of the shares on the
date of the grant, except that the option price with respect to an option
granted to any person who owns more than 10% of the voting power of all classes
of capital stock shall not be less than 110% of the fair value of the shares on
the date of the grant. As of March 31, 2005, there were a total of 507,334
options outstanding with exercise prices ranging from $1.00 per share to $3.26
per share. As of March 31, 2005, 82,334 of the total options outstanding were
fully vested with 425,000 options vesting through October 2007. At March 31,
2005, 2004 and 2003, the weighted average exercise price of exercisable options
under the Program was $2.60, $1.09 and $1.07, respectively.
In October 1994, Emerson's Board of Directors adopted, and the
stockholders subsequently approved, the 1994 Non-Employee Director Stock Option
Plan. The maximum number of shares of Common Stock available under such plan was
300,000 shares. In 2004, Emerson's Board of Directors, and the stockholders
subsequently approved the 2004 Non-Employee Director Stock Option Plan, the
provisions for exercise price, term and vesting schedule being, for the most
part, the same as the 1994 Non-Employee Director Stock Option Plan. A summary of
transactions under the plan for the three years ended March 31, 2005 is as
follows:
73
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------------- -----------------
Outstanding: March 31, 2002 175,000 $ 1.00
Exercised (41,667) 1.00
--------------- -----------------
Outstanding: March 31, 2003 133,333 1.00
Exercised (8,333) 1.00
--------------- -----------------
Outstanding - March 31, 2004 125,000 1.00
Granted 125,000 3.00
Exercised (125,000) 1.00
--------------- -----------------
Outstanding - March 31, 2005 125,000 3.00
=============== =================
Exercisable at March 31, 2005 -- $ --
=============== =================
The following table provides additional information as to the options
outstanding under the Non-Employee Director Stock Option Plan as of March 31,
2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
AMOUNT REMAINING EXERCISE AMOUNT AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------------------ --------------------- ------------- --------------- ----------------
$3.00 125,000 9.4 $ 3.00 -- --
================ ===================== ============= =============== ================
All options granted under the Non-Employee Director Stock Option Plan
during the fiscal years ending March 31, 2003, 2004 and 2005 were at exercise
prices equal to or greater than the fair value of Emerson's stock on the date of
the grant, which was accounted for by using APB25 for fiscal 2003 and 2004..
SPORTING GOODS SEGMENT:
SSG has a stock option plan that provides up to 2,000,000 shares of common
stock for awards of incentive and non-qualified stock options to directors and
employees (the "SSG Plan"). Under the SSG Plan, the exercise price of options
will not be less than: the fair value of the common stock at the date of grant;
or not less than 110% of the fair value for incentive stock options granted to
certain employees, as more fully described in the Amended and Restated Stock
Option Plan. Options expire ten years from the grant date, or five years from
the grant date for incentive stock options granted to
74
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
certain employees, or such earlier date as determined by the Board of Directors
of SSG (or a Stock Option Committee comprised of members of the Board of
Directors).
A summary of transactions under the SSG Plan for the fiscal year ending March
31, 2005 is as follows:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------------- ----------------
Outstanding - March 31, 2002 926,179 $ 7.45
Granted 19,375 1.69
Canceled (637,112) 7.64
--------------- ----------------
Outstanding - March 31, 2003 308,442 6.70
Granted 11,250 1.73
Canceled (77,875) 6.38
--------------- ----------------
Outstanding - March 31, 2004 241,817 6.57
Granted 391,250 1.08
Canceled (71,825) 4.33
--------------- ----------------
Outstanding - March 31, 2005 561,242 $ 3.02
=============== ================
Exercisable at March 31, 2005 452,909 $ 3.48
=============== ================
The following table provides additional information as to the options
outstanding under the SSG Plan as of March 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
AMOUNT REMAINING EXERCISE AMOUNT AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------ --------------- ----------------- ------------- -------------- ---------------
$0.95 - $2.75 406,250 9.16 $ 1.13 297,917 $ 1.15
$6.13 - $7.50 57,617 3.81 7.19 57,617 7.19
$7.13 - $9.44 97,375 4.23 8.41 97,375 8.41
--------------- ----------------- ------------- -------------- --------------
561,242 7.75 $ 3.02 452,909 $ 3.48
================ ================== ============= ============== =============
All options granted under the SSG Plan during the fiscal year ending
March 31, 2005 were at exercise prices equal to or greater than the fair value
of SSG's stock on the date of the grant.
75
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 -- SHAREHOLDER'S EQUITY:
COMMON SHARES:
Authorized common shares consists of 75,000,000 shares of common
shares, par value $.01 per share, of which, 27,203,164 and 26,630,383 shares
were issued and outstanding as of March 31, 2005 and 2004, respectively. Shares
held in treasury at March 31, 2005 and 2004 were 25,679,967.
COMMON STOCK REPURCHASE PROGRAM:
In January 2000, September 2001 and September 2003, Emerson's Board
authorized share repurchase programs for 5,000,000 shares, 1,000,000 shares, and
2,000,000 shares, respectively. In fiscal 2005 no shares were repurchased under
these programs. In fiscal 2004, the Company repurchased 1,111,625 shares for
$4,157,000, and in fiscal 2003, the Company repurchased 159,300 shares for
$197,000, pursuant to the programs. The shares were repurchased in open market
transactions within guidelines set forth by Rule 10b-18 of the Securities and
Exchange Act of 1934 and were funded by working capital. As of March 31, 2005,
888,375 shares remain available for repurchase under the program established in
September 2003.
SERIES A PREFERRED STOCK:
The Company has issued and outstanding 3,677 shares of Series A
Preferred Stock, ("Preferred Stock") $.01 par value, with a face value of
$3,677,000, which had no market value as of March 31, 2005. Effective March 31,
2002, the previously existing conversion feature of the Preferred Stock expired.
Effective March 31, 2001, dividends are no longer accrued on these shares.
WARRANTS:
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. The warrants were valued using the Black-Scholes option valuation
model and were charged to earnings over the related service period of the
consulting agreement with approximately $420,000 and $49,000 being charged to
operations for fiscal 2004 and 2003, respectively. During February 2003, 100,000
of these warrants were exercised, and accordingly the Company issued 100,000
shares of common stock. 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.
On October 7, 2003, in connection with a consulting arrangement,
Emerson granted 50,000 warrants with an exercise price of $5.00 per share. These
warrants were valued using the Black-Scholes option valuation model, which
resulted in $90,500 being charged to earnings during fiscal 2004. As of March
31, 2005, these warrants had not been exercised.
76
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 fiscal year ended March 31, 2005. As of March 31, 2005,
these warrants had not been exercised.
NOTE 11 -- NET EARNINGS (LOSS) PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share for the years ended March 31, 2005, March 31, 2004, and March
31, 2003:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
2005 2004 2003
----------- ------------ ------------
NUMERATOR:
Net earnings (loss) before discontinued
operations and cumulative effect of
change in accounting principle -
for basic and diluted
earnings per share $ 5,855 $ (3,735) $ 26,206
=========== ============ ============
DENOMINATOR:
Denominator for basic earnings per share -
weighted average shares 26,991 27,227 27,716
Effect of dilutive securities:
Options and warrants 273 -- 924
----------- ------------ ------------
Denominator for diluted earnings per share -
weighted average shares and assumed conversions 27,264 27,227 28,640
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations $ .22 $ (.14) $ .95
Discontinued operations -- .10 .03
Cumulative effect of change in accounting principle -- -- (.20)
----------- ------------ ------------
Basic earnings (loss) per share $ .22 $ (.04) $ .78
=========== ============ ============
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations $ .22 $ (.14) $ .91
Discontinued operations -- .10 .03
Cumulative effect of change in accounting principle -- -- (.19)
----------- ------------ ------------
Diluted earnings (loss) per share $ .22 $ (.04) $ .75
=========== ============ ============
For fiscal 2004, loss per share does not include potentially dilutive
securities assumed outstanding since the effects of such conversion would be
anti-dilutive. For the year ended March 31, 2005, 50,000 shares attributable to
outstanding stock warrants were excluded from the calculation of diluted
earnings per share because the exercise price of the stock warrants exceeded the
average price of the common shares, and therefore their inclusion would have
been antidilutive.
77
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- LICENSE AGREEMENTS:
Emerson has several license agreements that allow licensees to use its
trademarks for the manufacture and/or the sale of consumer electronics and other
products and are referred to as outbound licenses. These license agreements (i)
allow the licensee to use Emerson's trademarks by a specific product category,
or by a specific geographic area that primarily includes some or all of the
countries located in North America, South America, Mexico and parts of Europe,
or by a specific customer base, or by any combination of the above, or any other
category that might be defined in the license agreement, (ii) may be subject to
renewal at the initial expiration of the agreements and are governed by the laws
of the United States and (iii) have expiration dates ranging from March 2006
through February 2010. License revenues recognized and earned in fiscal 2005,
2004, and 2003, including the amounts described in the next paragraph, were
approximately $10,804,000, $10,973,000, and $10,388,000, respectively. Emerson
records licensing revenues as earned over the term of the related agreements.
Effective January 1, 2001, Emerson entered into a license agreement
("Video License Agreement") with Funai Corporation, Inc. ("Funai"), which was
amended to extend the Video License Agreement to December 31, 2006. The Video
License Agreement provides that Funai will manufacture, market, sell and
distribute specified products bearing the "[OBJECT OMITTED]" trademark to
customers in the U.S., and Canadian markets. Under the terms of the agreement,
Emerson will receive non-refundable minimum annual royalty payments of $4.3
million each calendar year and a license fee on sales of product subject to the
Video License Agreement in excess of the minimum annual royalties. During fiscal
2005, 2004 and 2003, revenues of $8,555,000, $8,759,000 and $8,520,000
respectively, were recorded under this agreement.
NOTE 13-- 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.
78
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED
Generally, the Amended Complaint alleges that Emerson and the
Individual Defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and Rule 10b-5 promulgated there under, by (i) issuing
certain positive statements during the Class Period regarding our ability to
replace lost revenues attributable to the Hello Kitty(R) license and (ii)
omitting to disclose that Emerson suffered allegedly soured relationships with
its largest retail customers. The Amended Complaint further alleges that these
statements were materially false and misleading when made because Emerson
allegedly misrepresented and omitted certain adverse facts which then existed
and disclosure of which was necessary to make the statements not false and
misleading. Emerson and the Individual Defendants deny all allegations and have
moved to dismiss the Complaint in its entirety for failure to state a claim. The
motion to dismiss was fully briefed and was submitted to the Court on October
15, 2004. The Court's decision on the motion is pending. Emerson and the
Individual Defendants intend to defend the lawsuit vigorously.
Other Matters
We are a party to various other litigation matters, in most cases
involving ordinary and routine claims incidental to our business. We cannot
estimate with certainty our ultimate legal and financial liability with respect
to such pending litigation matters. However, we believe, based on our
examination of such matters, that our ultimate liability will not have a
material adverse effect on our financial position, results or operations or cash
flows.
NOTE 14 --BUSINESS SEGMENT INFORMATION AND MAJOR CUSTOMERS:
The Company has two business segments, the consumer electronics business and
the sporting goods segment. Operations in these business segments are summarized
below by geographic area (in thousands):
YEAR ENDED MARCH 31, 2005
------------------------------------------
U.S. FOREIGN CONSOLIDATED
------------------------------------------
Sales to external customers - consumer
electronics $ 226,551 $ 4,232 $ 230,783
Sales to external customers - sporting goods 89,570 351 89,921
------------------------------------------
Total sales to external customers $ 316,121 $ 4,583 $ 320,704
==========================================
Income (loss) before income taxes -
consumer electronics $ 7,414 $ (221) $ 7,193
79
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED
Income before income taxes - sporting goods 1,645 - 1,645
-----------------------------------------------
Total loss before income taxes $ 9,059 $ (221) $ 8,838
===============================================
Identifiable assets - consumer electronics $ 74,779 $ 11,832 $ 86,611
Identifiable assets - sporting goods 44,557 -- 44,557
-----------------------------------------------
Total identifiable assets $ 119,336 $ 11,832 $ 131,168
===============================================
YEAR ENDED MARCH 31, 2004
-----------------------------------------------
U.S. FOREIGN CONSOLIDATED
-----------------------------------------------
Sales to external customers - consumer
electronics $ 172,765 $ 7,187 $ 179,952
Sales to external customers - sporting goods 83,513 309 83,822
-----------------------------------------------
Total sales to external customers $ 256,278 $ 7,496 $ 263,774
===============================================
Income (loss) before income taxes and
cumulative effect of change in accounting
principle - consumer electronics $ 3,103 $ (104) $ 2,999
Loss before income taxes and cumulative effect of
change in accounting principle - sporting goods (4,584) -- (4,584)
-----------------------------------------------
Total loss before income taxes
and cumulative effect of change in
accounting principle $ (1,481) $ (104) $ (1,585)
==============================================
Identifiable assets - consumer electronics $ 62,288 $ 9,688 $ 71,976
Identifiable assets - sporting goods 46,693 -- 46,693
----------------------------------------------
Total identifiable assets $ 108,981 $ 9,688 $118,669
==============================================
YEAR ENDED MARCH 31, 2003
----------------------------------------------
U.S. FOREIGN CONSOLIDATED
----------------------------------------------
Sales to external customers - consumer
electronics $ 240,629 $ 4,587 $245,216
Sales to external customers - sporting goods 84,842 257 85,099
----------------------------------------------
Total sales to external customers $ 325,471 $ 4,844 $330,315
==============================================
Income (loss) before income taxes and
cumulative effect of change in accounting
principle - consumer electronics $ 19,595 $ (17) $ 19,578
Loss before income taxes and cumulative effect of change
in accounting principle - sporting goods (2,654) -- (2,654)
----------------------------------------------
80
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED
-----------------------------------------------
Total income (loss) before income taxes
and cumulative effect of change in
accounting principle $ 16,941 $ (17) $ 16,924
===============================================
Identifiable assets - consumer electronics $ 60,375 $ 9,504 $ 69,879
Identifiable assets - sporting goods 64,683 -- 64,683
-----------------------------------------------
Total identifiable assets $ 125,058 $ 9,504 $134,562
===============================================
Identifiable assets are those assets used in operations in each
geographic area. In addition to operating assets, at March 31, 2005, 2004, and
2003, there were non-operating assets of $8,798,000, $11,437,000 and $9,492,000,
respectively, located in foreign countries.
The Company's net sales to one customer aggregated approximately 30%,
25% and 25% of consolidated net revenues for the years ended March 31, 2005,
2004, and 2003, respectively. The Company's net sales to another customer
aggregated 12%, 15%, and 17% for the years ended March 31, 2005, 2004, and 2003,
respectively. The Company's net sales to a third customer, a customer that filed
for voluntary bankruptcy protection in fiscal 2002, that has since emerged from
bankruptcy, aggregated 7%, 4%, and 12% for the years ended March 31, 2005, 2004
and 2003. The trade accounts receivable balance for these three customers, net
of specific reserves, approximated 27%, 1% and 5% of consolidated trade accounts
receivable as of March 31, 2005, respectively, and approximated 0%, 2% and 4% of
consolidated trade accounts receivable as of March 31, 2004, respectively. The
Company has policies and procedures to limit its credit risk related to this and
other customers.
NOTE 15 - - DERIVATIVE FINANCIAL INSTRUMENTS:
As of March 31, 2003, the Company had outstanding an interest swap
agreement that converted $10 million of its variable rate Loan Agreement to a
fixed rate instrument through 2004. This swap agreement was designated as a cash
flow hedge and the change in fair value of the hedge is recorded in other
comprehensive income and reclassified into earnings in the same period during
which the hedged transaction affected earnings. During fiscal 2003, the Company
recorded a charge of approximately $100,000 related to a portion of the cash
flow hedge. Subsequent to March 31, 2003, the Company terminated the interest
rate swap agreement.
NOTE 16 - - QUARTERLY INFORMATION (UNAUDITED):
The following table sets forth certain information regarding the
Company's results of operations for each full quarter within the fiscal years
ended March 31, 2005 and March 31, 2004, with amounts in thousands, except for
per share data. Due to rounding, quarterly amounts may not fully sum to yearly
amounts. (In thousands, except per share data).
81
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FISCAL 2005 FISCAL 2004
- ------------------------------------------------------------------------------ --------------------------------------------
CONSOLIDATED STATEMENT
OF OPERATIONS 1ST QRT 2ND QRT 3RD QRT 4TH QRT 1ST QRT 2ND QRT 3RD QRT 4TH QRT
- ------------------------------------------------------------------------------ ---------------------------------------------
Net revenues $ 72,930 $ 83,129 $ 94,679 $ 69,966 $ 54,171 $ 78,873 $ 76,345 $ 54,385
Operating income (loss) 3,650 3,972 3,156 525 (31) 2,087 907 (3,995)
Income (loss ) before
income taxes 2,750 3,174 3,537 (623) (507) 1,823 313 (3,214)
Income (loss) from
continuing operations 1,805 2,162 1,905 (17) (440) 781 (340) (3,736)
Income (loss) from
discontinued operations -- -- -- 50 (5) (100) 3,153 (387)
-------------------------------------------------- ---------------------------------------------
Net income (loss) 1,805 2,162 1,905 33 (445) 681 2,813 (4,123)
================================================== =============================================
Basic net income (loss)
per share :
Continuing operations $ .07 $ .08 $ .07 $ -- $ (.02) $ .03 $ (.01) $ (.14)
Discontinued operations -- -- -- -- -- (.01) .11 (.01)
-------------------------------------------------- ---------------------------------------------
$ .07 $ .08 $ .07 $ -- $ (.02) $ .02 $ .10 $ (.15)
================================================== =============================================
Diluted net
income
(loss) per share:
Continuing operations $ .07 $ .08 $ .07 $ -- $ (.02) $ .03 $ (.01) $ (.14)
Discontinued operations -- -- -- -- -- (.01) .11 (.01)
-------------------------------------------------- ---------------------------------------------
$ .07 $ .08 $ .07 $ -- $ (.02) $ .02 $ .10 $ (.15)
================================================== =============================================
Weighted average shares
Outstanding - basic 26,630 27,076 27,103 27,154 27,416 27,560 27,189 26,741
Outstanding - diluted 27,261 27,216 27,239 27,154 27,416 28,428 27,189 26,741
As a result of the Company's adoption of SFAS No. 123R, "Share-Based
Payments" in the fourth quarter of fiscal 2005, effective April 1, 2004, the
amounts presented above for the second and third quarters of fiscal 2005 have
increased (decreased) relative to the amounts previously reported for operating
income by approximately $1.3 million and ($68,000), respectively, and for income
from continuing operations as well as net income by $1.2 million and ($68,000),
respectively. In addition, diluted net income per share increased by $.04 for
the second quarter and remained unchanged for the third quarter.
82
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 17 - DISCONTINUED OPERATIONS:
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 ATEC. These closures and sales of assets, and
related discontinued operations resulted in income, net of tax, of approximately
$50,000 and $2.7 million for the fiscal years ended March 31, 2005 and March 31,
2004, respectively. On November 18, 2003, SSG sold all of the issued and
outstanding capital stock of ATEC, resulting in a net gain of approximately $3.8
million, after a related deferred income tax charge of $2.2 million. The results
of these transactions are included in discontinued operations in the
accompanying Consolidated Statement of Operations for all years presented.
The following table summarizes the results of these discontinued
operations, net of related income taxes, as applicable (in thousands).
2005 2004 2003
--------------- --------------- ---------------
Net revenues-ATEC $ -- $ 6,184 $ 10,189
Net revenues-Team Dealers -- 3,043 7,280
--------------- --------------- ---------------
Net revenues - Total -- 9,227 17,469
--------------- --------------- ---------------
Income from operations - ATEC -- 478 1,630
Loss from operations - Team Dealers -- (724) (790)
Loss on sale of Team Dealers -- (885) --
Gain on sale of ATEC, net of tax 50 3,792 --
--------------- --------------- ---------------
Total discontinued operations, net $ 50 $ 2,661 $ 840
=============== =============== ===============
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported in a Form 8-K dated April 2, 2004, on March 31,
2004, we retained the services of BDO Seidman LLP as our independent auditors to
replace our former independent auditors, Ernst & Young LLP. This engagement and
replacement was approved by our Audit Committee. During the fiscal year, and any
subsequent interim period prior to March 31, 2004, we did not consult with BDO
Seidman LLP regarding any matters noted in Items 304(a) of Regulation S-K. BDO
Seidman LLP has provided tax services to us during the fiscal years ending March
31, 2002, 2003 and 2004 and is expected to continue to provide such services to
us.
There have been no "disagreements" within the meaning of Item
304(a)(1)(iv) of Regulation S-K, or any events of the type listed in Item
304(a)(1)(v)(A) through (D) of Regulation S-K, involving Ernst & Young that
occurred within the fiscal year and the interim period prior to March 31, 2004.
Ernst & Young's report on our financial statements for the fiscal year ended
March 31, 2003 did not contain any adverse opinions or disclaimers of opinion,
and were not qualified or modified as to uncertainty, audit scope or accounting
principles.
We provided Ernst & Young with a copy of the disclosures made pursuant
to the Form 8-K (which disclosures are consistent with the disclosures noted
above) and Ernst & Young furnished the Company with a letter addressed to the
Commission stating that it agrees with the statements made by the Company in the
Form 8-K filing, a copy of which was filed as an exhibit to the Form 8-K.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures.
As of the end of the period covered by this Annual Report on Form 10-K, 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 Annual Report on Form
10-K relates that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None
84
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required is incorporated herein by reference to
Emerson's definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or before July 29, 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated herein by reference to
Emerson's definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or before July 29, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required is incorporated herein by reference to
Emerson's definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or before July 29, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated herein by reference to
Emerson's definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or before July 29, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required is incorporated herein by reference to
Emerson's definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or before July 29, 2005.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) Financial Statements and Schedules. See Item 8
(b) Exhibits
85
Exhibit Number
- --------------
3.1 Certificate of Incorporation of Emerson (incorporated by
reference to Exhibit (3) (a) of Emerson's Registration
Statement on Form S-1, Registration No. 33-53621, declared
effective by the SEC on August 9, 1994).
3.2 Amended and Restated Certificate of Incorporation of Sport
Supply Group, Inc. (incorporated by reference to Exhibit 4.1
of Sport Supply's Registration Statement on Form S-8,
Registration No. 33-80028).
3.3 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Sport Supply Group, Inc. (incorporated
by reference to Exhibit 4.1 of Sport Supply's Registration
Statement on Form S-8, Registration No. 33-80028).
3.4 Certificate of Designation for Series A Preferred Stock
(incorporated by reference to Exhibit (3) (b) of Emerson's
Registration Statement on Form S-1, Registration No.
33-53621, declared effective by the SEC on August 9, 1994).
3.5 Amendment dated February 14, 1996 to the Certificate of
Incorporation of Emerson (incorporated by reference to
Exhibit (3) (a) of Emerson's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995).
3.6 By-Laws of Emerson adopted March 1994 (incorporated by
reference to Exhibit (3) (e) of Emerson's Registration
Statement on Form S-1, Registration No. 33-53621, declared
effective by the SEC on August 9, 1994).
3.7 Amendment dated November 28, 1995 to the By-Laws of Emerson
adopted March 1994 (incorporated by reference to Exhibit (3)
(b) of Emerson's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995).
3.8 Amended and Restated Bylaws of Sport Supply Group, Inc.
(incorporated by reference to Exhibit 3.2 of Sport Supply's
Annual Report on Form 10-K for the year ended November 1,
1996).
10.4 Stipulation of Settlement and Order dated June 11, 1996 by
and among the Official Liquidator of Fidenas International
Bank Limited, Petra Stelling, Barclays Bank PLC, the
Official Liquidator of Fidenas Investment Limited, Geoffrey
P. Jurick, Fidenas International Limited, L.L.C., Elision
International, Inc., GSE Multimedia Technologies Corporation
and Emerson (incorporated by reference to Exhibit 10(af) of
Emerson's Annual Report on Form 10-K for the year ended
March 31, 1996).
10.5 Pledge Agreement dated as of February 4, 1997 by Fidenas
International Limited, L.L.C. ("FIN") in favor of TM Capital
Corp. (incorporated by reference to Exhibit (10) (a) of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996).
86
10.6 Registration Rights Agreement dated as of February 4, 1997
by and among Emerson, FIN, the Creditors, FIL and TM Capital
Corp. (incorporated by reference to Exhibit (10) (b) of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996).
10.7 Securities Purchase Agreement dated as of November 27, 1996,
by and between Sport Supply Group, Inc. ("SSG") and Emerson
(incorporated by reference to Exhibit (2)(a) of Emerson's
Current Report on Form 8-K dated November 27, 1996).
10.9 Form of Registration Rights Agreement by and between SSG and
Emerson (incorporated by reference to Exhibit (4)(b) of
Emerson's Current Report on Form 8-K dated November 27,
1996).
10.12 License Agreement effective as of January 1, 2001 by and
between Funai Corporation and Emerson (incorporated by
reference to Exhibit (10) (z) of Emerson's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000).
10.12.1 First Amendment to License Agreement dated February 19, 2002
by and between Funai Corporation and Emerson (incorporated
by reference to Exhibit (10.12.1) of Emerson's Annual Report
on Form 10-K for the year ended March 31, 2002).
10.12.2 Second Amendment to License Agreement effective August 1,
2002 by and between Funai Corporation and Emerson
(incorporated by reference to Exhibit (10.12.2) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
10.12.3 Third Amendment to License Agreement effective February 18,
2004 by and between Funai Corporation and Emerson
(incorporated by reference to Exhibit 10.12.3 of Emerson's
Annual Report on Form 10-K for the year ending March 31,
2004)
10.12.4 Fourth Amendment to License Agreement effective December 3,
2004 by and between Funai Corporation, Inc. and Emerson
(incorporated by reference to Exhibit (10.12.4) of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December
31, 2004).
10.12.5 Fifth Amendment to License Agreement effective May 18, 2005
by and between Funai Corporation, Inc. and Emerson. *
10.13 Second Lease Modification dated as of May 15, 1998 between
Hartz Mountain, Parsippany and Emerson (incorporated by
reference to Exhibit (10) (v) of Emerson's Annual Report on
Form 10-K for the year ended April 3, 1998).
87
10.13.1 Third Lease Modification made the 26 day of October, 1998
between Hartz Mountain Parsippany and Emerson (incorporated
by reference to Exhibit (10) (b) of Emerson's Quarterly
Report on Form 10-Q for the quarter ended October 2, 1998).
10.13.2 Fourth Lease Modification made the 12th day of February,
2003 between Hartz Mountain Parsippany and Emerson
(incorporated by reference to Exhibit (10.13.2) of Emerson's
Annual Report on Form 10-K for the year ended March 31,
2003).
10.13.3 Lease Agreement dated as of October 8, 2004 between Sealy TA
Texas, L.P., a Georgia limited partnership, and Emerson
Radio Corp. (incorporated by reference to Exhibit (10.13.3)
of Emerson's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004).
10.13.4 Fifth Lease Modification Agreement made the 2nd day of
December, 2004 between Hartz Mountain Industries, Inc. and
Emerson (incorporated by reference to Exhibit (10.13.3) of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2004).
10.14.1 Purchasing Agreement, dated March 5, 1999, between
AFG-Elektronik GmbH and Emerson Radio International Ltd.
(incorporated by reference to Exhibit (10) (aa) of
Emerson's Annual Report on Form 10-K for the year ended
April 2, 1999).
10.15 Second Amendment to Lease made the 10th day of June, 2004
between ProLogis and Sport Supply Group, Inc. (incorporated
by reference to Exhibit 10.15 of Emerson's Annual Report on
Form 10-K for the year ended March 31, 2004).
10.16 Letter of Employment for Patrick Murray, dated May 3, 2001
(incorporated by reference to Exhibit 10.16 of Emerson's
Annual Report on Form 10-K for the year ended March 31,
2001).
10.17 Form of Indemnification Agreement entered into between Sport
Supply and each of the directors of Sport Supply and Sport
Supply's General Counsel (incorporated by reference to
Exhibit 10.3 of Sport Supply's Registration Statement on
Form S-1, Registration No. 33-39218).
10.18 Sport Supply Group, Inc. Amended and Restated Stock Option
Plan (incorporated by reference to Exhibit 4.1 of Sport
Supply's Registration Statement on Form S-1, Registration
No. 33-27193).
10.18.1 Emerson Radio Corp. 2004 Employee Stock Incentive Plan
(incorporated by reference to Exhibit 1 of Emerson's 2004
Proxy Statement).
10.18.2 Emerson Radio Corp. 2004 Non-Employee Outside Director Stock
Option Plan (incorporated by reference to Exhibit 2 of
Emerson's 2004 Proxy Statement).
88
10.19 Assignment and Assumption Agreement, dated to be effective
as of February 28, 1992, by and between Aurora and Sport
Supply Group, Inc. (incorporated by reference to Exhibit
10.27 of Sport Supply's Annual Report on Form 10-K for the
year ended 1991).
10.21 License Agreement, dated as of September 23, 1991, by and
between Proacq Corp. and Sport Supply Group, Inc.
(incorporated by reference to Exhibit 10.17 of Sport
Supply's Annual Report on Form 10-K for the year ended
1991).
10.22 Sport Supply Group Employees' Savings Plan dated June 1,
1993 (incorporated by reference to Exhibit 10.27 of Sport
Supply's Annual Report on Form 10-K for the year ended
1993).
10.23 Management Services Agreement dated July 1, 1997 to be
effective as of March 7, 1997 by and between Sport Supply
Group, Inc. and Emerson (incorporated by reference to
Exhibit 10.2 of Sport Supply's Quarterly Report on Form 10-Q
for the quarter ended August 1, 1997 ).
10.26 Employment Agreement between Emerson Radio Corp. and John J.
Raab, effective as of September 1, 2001 (incorporated by
reference to Exhibit 10.26 of Emerson's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001).
10.26.1 Employment Agreement between Emerson Radio Corp. and
Elizabeth J. Calianese McPartland, effective as of September
1, 2001 (incorporated by reference to Exhibit 10.26.1 of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001).
10.26.2 Letter re Employment Agreement between Emerson Radio Corp.,
Emerson Radio International Ltd., Emerson Radio (Hong Kong)
Limited and Geoffrey P. Jurick, effective as of September 1,
2001 (incorporated by reference to Exhibit 10.26.2 of
Emerson's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001).
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 (incorporated by reference to Exhibit
10.26.3 of Emerson's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2004).
10.26.4 Employment Agreement extension letter between Emerson Radio
Corp. and John J. Raab effective as of September 1, 2004
(incorporated by reference to Exhibit 10.26.4 of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December
31, 2004).
89
10.26.5 Employment Agreement extension letter between Emerson Radio
Corp. and Elizabeth J. Calianese McPartland effective as of
September 1, 2004 (incorporated by reference to Exhibit
10.26.5 of Emerson's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2004).
10.27 Revolving Credit and Term Loan Agreement dated June 28, 2002
among Emerson Radio Corp., Majexco Imports, Inc., Emerson
Radio (Hong Kong) Ltd., and Emerson Radio International Ltd.
Jointly and Severally, and PNC Bank, National Association
(incorporated by reference to Exhibit 10.27 of Emerson's
Quarterly Report on Form 10-Q for the quarter ended December
31, 2002).
10.27.1 Amendment to Revolving Credit and Term Loan Agreement
(Number One) dated November 7, 2003 among Emerson Radio
Corp., Majexco Imports, Inc., Emerson Radio (Hong Kong)
Ltd., and Emerson Radio International Ltd. Jointly and
Severally, and PNC Bank, National Association (incorporated
by reference to Exhibit 10.27.1 of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31,
2003).
10.27.2 Amendment to Revolving Credit and Term Loan Agreement
(Number Two) dated December 31, 2003 among Emerson Radio
Corp., Majexco Imports, Inc., Emerson Radio (Hong Kong)
Ltd., and Emerson Radio International Ltd. Jointly and
Severally, and PNC Bank, National Association (incorporated
by reference to Exhibit 10.27.2 of Emerson's Quarterly
Report on Form 10-Q for the quarter ended December 31,
2003).
10.27.3 Amendment to Revolving Credit and Term Loan Agreement
(Number Three) and Waiver dated June 28, 2004, among Emerson
Radio Corp., Majexco Imports, Inc., Emerson Radio (Hong
Kong) Ltd., and Emerson Radio International Ltd. Jointly and
Severally, and PNC Bank, National Association (incorporated
by reference to Exhibit 10.27.3 of Emerson's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
10.27.4 Amendment and Restated Revolving Credit and Term Loan
Agreement dated as of June 27, 2005, among Emerson Radio
Corp., Emerson Radio Macao Commercial Offshore Limited,
Majexco Imports, Inc., Emerson Radio (Hong Kong) Ltd., and
Emerson Radio International Ltd., and PNC Bank, National
Association. *
10.28 Common Stock Purchase Warrant Agreement entered into on
August 1, 2002 by and between Emerson Radio Corp. and
Further Lane Asset Management LP (incorporated by reference
to Exhibit 10.28 of Emerson's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
90
10.28.1 Form of Common Stock Warrant Agreement entered into on
October 7, 2003 by and between Emerson Radio Corp. and
Ladenburg Thalmann & Co., Inc. (incorporated by reference to
Exhibit 10.28.1 of Emerson's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2003).
10.28.2 Common Stock Purchase Warrant Agreement entered into on
August 1, 2004 by and between Emerson Radio Corp. and EPOCH
Financial Services, Inc. (incorporated by reference to
Exhibit 10.28.2 of Emerson's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004).
10.29 Separation Agreement dated September 15, 2003 between SSG
and John P. Walker (incorporated by reference to Exhibit
10.1 of Sport Supply's Quarterly Report on Form 10-Q for the
quarter ended September 26, 2003).
10.35 Loan and Security Agreement dated March 27, 2001 by and
between Sport Supply Group, Inc. and Congress Financial
Corporation (incorporated by reference to Exhibit 10.29 of
Sport Supply's Annual Report on Form 10-K for the year ended
March 30, 2001).
10.35.1 First Amendment to the Loan and Security Agreement dated
October 1, 2002 by and between Sport Supply Group, Inc. and
Congress Financial Corporation (incorporated by reference to
Exhibit 10.2 of Sport Supply's Quarterly Report on Form 10-Q
for the quarter ended December 27, 2002).
10.35.2 Second Amendment to Loan and Security Agreement dated June
27, 2003 by and between Sport Supply Group, Inc. and
Congress Financial Corporation (incorporated by reference to
Exhibit 10.1 of Sport Supply's Quarterly Report on Form 10-Q
for the quarter ended June 27, 2003).
10.35.3 Third Amendment to Loan and Security Agreement dated
November 6, 2003 by and between Sport Supply Group, Inc. and
Congress Financial Corporation (incorporated by reference to
Exhibit 10.4 of Sport Supply's Quarterly Report on Form 10-Q
for the quarter ended September 26, 2003).
10.35.4 Fourth Amendment to Loan and Security Agreement dated
December 29, 2003 by and between Sport Supply Group, Inc.
and Congress Financial Corporation (incorporated by
reference to Exhibit 10.1 of Sport Supply's Quarterly Report
on Form 10-Q for the quarter ended December 26, 2003).
10.35.5 Fifth Amendment to Loan and Security Agreement dated
February 19, 2004 by and between Sport Supply Group, Inc.
and Congress Financial Corporation (incorporated by
reference to Exhibit 10.35.5 of Emerson's Annual Report on
Form 10-K for the year ended March 31, 2004).
91
14.1 Code of Ethics for Senior Financial Officers (incorporated
by reference to Exhibit 14.1 of Emerson's Annual Report on
Form 10-K for the year ended March 31, 2004).
21.1 Subsidiaries of the Company as of March 31, 2005. *
23.1 Consent of Independent Registered Public Accounting Firm -
BDO Seidman, LLP. *
23.2 Consent of Independent Registered Public Accounting Firm -
Ernst & Young, LLP. *
31.1 Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
32 Certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.*
- -------------------
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EMERSON RADIO CORP.
By: /s/ Geoffrey P. JURICK
Geoffrey P. Jurick
Chairman of the Board
Dated: June 29, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Geoffrey P. Jurick Chairman of the Board, June 29, 2005
Geoffrey P. Jurick Chief Executive Officer and
President
(Principal Executive Officer)
/s/ Guy A. Paglinco Vice President, June 29, 2005
Guy A. Paglinco Chief Financial Officer
(Principal Finance and
Accounting Officer)
/s/ Robert H. Brown, Jr. Director June 29, 2005
Robert H. Brown, Jr.
/s/ Peter G. Bunger Director June 29, 2005
Peter G. Bunger
/s/ Jerome H. Farnum Director June 29, 2005
Jerome H. Farnum
/s/ Herbert A. Morey Director June 29, 2005
Herbert A. Morey
93