SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2003June 30, 2004
or
[] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number 0-25226
EMERSON RADIO CORP.
DELAWARE | 22-3285224 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. Employer Identification No.) |
9 Entin Road Parsippany, New Jersey | 07054 | |||
(Address of principal executive offices) | (Zip code) |
(973) 884-5800
(973) 884-5800 | ||
(Registrant’s telephone number, including area code) | ||
(Former name, former address, and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated Filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of common stock as of February 9,July 23, 2004: 26,723,983.27,037,608.
PART I –— FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except earnings per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||||
December | December | December | December 31, | |||||||||||||||
31, 2003 | 31, 2002 | 31, 2003 | 2002 | |||||||||||||||
Net revenues | $ | 76,345 | $ | 86,553 | $ | 209,389 | $ | 276,488 | ||||||||||
Costs and expenses: | ||||||||||||||||||
Cost of sales | 62,992 | 70,832 | 171,381 | 222,224 | ||||||||||||||
Other operating costs and Expenses | 1,414 | 1,058 | 3,963 | 3,251 | ||||||||||||||
Selling, general & administrative expenses | 10,545 | 10,226 | 30,571 | 32,696 | ||||||||||||||
Stock based costs | 487 | 19 | 511 | 31 | ||||||||||||||
75,438 | 82,135 | 206,426 | 258,202 | |||||||||||||||
Operating income | 907 | 4,418 | 2,963 | 18,286 | ||||||||||||||
Interest expense, net | (322 | ) | (405 | ) | (1,144 | ) | (1,977 | ) | ||||||||||
Minority interest in net income (loss) of consolidated subsidiary | (272 | ) | 1,104 | (190 | ) | 996 | ||||||||||||
Income before income taxes, discontinued operations and cumulative effect of change in accounting principle | 313 | 5,117 | 1,629 | 17,305 | ||||||||||||||
Provision for income taxes | 653 | 1,931 | 1,628 | 5,999 | ||||||||||||||
Income (loss) from continuing Operations | (340 | ) | 3,186 | 1 | 11,306 | |||||||||||||
Income from discontinued operations, net of tax | 3,153 | 92 | 3,048 | 584 | ||||||||||||||
Cumulative effect of change in accounting principle | — | — | — | (5,546 | ) | |||||||||||||
Net income | $ | 2,813 | $ | 3,278 | $ | 3,049 | $ | 6,344 | ||||||||||
Basic net income per share: | ||||||||||||||||||
Income (loss) from continuing operations | $ | (0.01 | ) | $ | 0.12 | $ | — | $ | 0.41 | |||||||||
Discontinued operations | 0.11 | — | 0.11 | 0.02 | ||||||||||||||
Cumulative effect of change In accounting principle | — | — | — | (0.20 | ) | |||||||||||||
$ | 0.10 | $ | 0.12 | $ | 0.11 | $ | 0.23 | |||||||||||
Diluted net income per share: | ||||||||||||||||||
Income (loss) from continuing operations | $ | (0.01 | ) | $ | 0.12 | $ | — | $ | 0.39 | |||||||||
Discontinued operations | 0.11 | — | 0.11 | 0.02 | ||||||||||||||
Cumulative effect of change In accounting principle | — | — | — | (0.19 | ) | |||||||||||||
0.10 | $ | 0.12 | $ | 0.11 | $ | 0.22 | ||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||
Basic | 27,189 | 27,134 | 27,388 | 27,837 | ||||||||||||||
Diluted | 27,189 | 28,274 | 28,259 | 28,678 |
Three Months Ended | ||||||||
June 30, 2004 | June 30, 2003 | |||||||
Net revenues | $ | 72,930 | $ | 54,171 | ||||
Costs and expenses: | ||||||||
Cost of sales | 57,034 | 42,967 | ||||||
Other operating costs and expenses | 1,553 | 1,256 | ||||||
Selling, general & administrative expenses | 10,763 | 9,318 | ||||||
Acquisition costs | (71 | ) | 643 | |||||
Stock based costs | — | 18 | ||||||
69,279 | 54,202 | |||||||
Operating income (loss) | 3,651 | (31 | ) | |||||
Interest expense, net | 294 | 422 | ||||||
Minority interest in net income of consolidated subsidiary | (606 | ) | (54 | ) | ||||
Income (loss) before income taxes and discontinued operations | 2,751 | (507 | ) | |||||
Provision (benefit) for income taxes | 946 | (67 | ) | |||||
Income (loss) from continuing operations | 1,805 | (440 | ) | |||||
Loss from discontinued operations, net of tax | — | (5 | ) | |||||
Net income (loss) | $ | 1,805 | $ | (445 | ) | |||
Basic net income (loss) per share: | ||||||||
Continuing operations | $ | 0.07 | $ | (0.02 | ) | |||
Discontinued operations | — | — | ||||||
$ | 0.07 | $ | (0.02 | ) | ||||
Diluted net income (loss) per share: | ||||||||
Continuing operations | $ | 0.07 | $ | (0.02 | ) | |||
Discontinued operations | — | — | ||||||
$ | 0.07 | $ | (0.02 | ) | ||||
Weighted average shares outstanding: | ||||||||
Basic | 26,630 | 27,416 | ||||||
Diluted | 27,261 | 27,416 |
The accompanying notes are an integral part of the interim
consolidated financial statements.
2
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, 2003 | March 31, 2003 | |||||||||
(Unaudited) | ||||||||||
ASSETS | ||||||||||
Current Assets: | ||||||||||
Cash and cash equivalents | $ | 6,940 | $ | 11,413 | ||||||
Accounts receivable (less allowances of $4,749 and $3,938, respectively) | 26,233 | 24,593 | ||||||||
Other receivables | 1,873 | 2,954 | ||||||||
Inventories | 37,920 | 45,177 | ||||||||
Prepaid expenses and other current assets | 5,030 | 6,871 | ||||||||
Net assets related to discontinued operations | 522 | — | ||||||||
Deferred tax assets | 6,297 | 6,761 | ||||||||
Total current assets | 84,815 | 97,769 | ||||||||
Property and equipment - (net of accumulated depreciation and amortization of $7,225 and $6,628, respectively) | 8,239 | 9,823 | ||||||||
Deferred catalog expenses | 1,341 | 1,912 | ||||||||
Trademarks and other intangible assets (net of accumulated amortization of $3,739 and $3,403,respectively) | 5,277 | 5,613 | ||||||||
Deferred tax assets | 14,184 | 17,595 | ||||||||
Other assets | 1,446 | 1,850 | ||||||||
Total Assets | $ | 115,302 | $ | 134,562 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
Current Liabilities: | ||||||||||
Current maturities of long-term borrowings | $ | 71 | $ | 11,634 | ||||||
Short-term borrowings | 4,050 | 1,918 | ||||||||
Accounts payable and other current liabilities | 30,019 | 30,596 | ||||||||
Accrued sales returns | 2,855 | 3,768 | ||||||||
Income taxes payable | 12 | 752 | ||||||||
Total current liabilities | 37,007 | 48,668 | ||||||||
Long-term borrowings | 9,383 | 18,079 | ||||||||
Minority interest | 16,772 | 16,578 | ||||||||
Shareholders’ Equity: | ||||||||||
Preferred shares - 10,000,000 shares authorized, 3,677 shares issued and outstanding | 3,310 | 3,310 | ||||||||
Common shares - $.01 par value, 75,000,000 shares authorized; 52,310,350 and 51,981,431 shares issued; 26,956,683 and 27,413,089 shares outstanding, respectively | 523 | 520 | ||||||||
Capital in excess of par value | 115,912 | 115,122 | ||||||||
Accumulated other comprehensive losses | (100 | ) | (104 | ) | ||||||
Accumulated deficit | (44,887 | ) | (47,936 | ) | ||||||
Treasury stock, at cost 25,353,667 and 24,568,342 shares, respectively | (22,618 | ) | (19,675 | ) | ||||||
Total shareholders’ equity | 52,140 | 51,237 | ||||||||
Total Liabilities and Shareholders’ Equity | $ | 115,302 | $ | 134,562 | ||||||
June 30, 2004 | March 31, 2004 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 4,073 | $ | 6,369 | ||||
Accounts receivable (less allowances of $3,747 and $3,653, respectively) | 23,921 | 19,948 | ||||||
Other receivables | 3,860 | 2,821 | ||||||
Inventories | 54,905 | 46,997 | ||||||
Prepaid expenses and other current assets | 5,916 | 5,344 | ||||||
Deferred tax assets | 5,660 | 5,887 | ||||||
Total current assets | 98,335 | 87,366 | ||||||
Property and equipment — (net of accumulated depreciation and amortization of $7,892 and $7,442, respectively) | 7,512 | 7,822 | ||||||
Deferred catalog expenses | 1,078 | 1,695 | ||||||
Trademarks and other intangible assets (net of accumulated amortization of $3,961 and $3,845, respectively) | 5,052 | 5,168 | ||||||
Deferred tax assets | 14,732 | 15,263 | ||||||
Other assets | 1,225 | 1,355 | ||||||
Total Assets | $ | 127,934 | $ | 118,669 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term borrowings | $ | 35 | $ | 58 | ||||
Short-term borrowings | 3,431 | 4,762 | ||||||
Accounts payable and other current liabilities | 34,026 | 32,787 | ||||||
Accrued sales returns | 2,631 | 2,521 | ||||||
Income taxes payable | 671 | 509 | ||||||
Total current liabilities | 40,794 | 40,637 | ||||||
Long-term borrowings | 21,728 | 15,027 | ||||||
Minority interest | 16,399 | 15,793 | ||||||
Shareholders’ Equity: | ||||||||
Preferred shares - 10,000,000 shares authorized, 3,677 shares issued and outstanding | 3,310 | 3,310 | ||||||
Common shares — $.01 par value, 75,000,000 shares authorized; 52,310,350 shares issued and 26,630,383 shares outstanding | 523 | 523 | ||||||
Capital in excess of par value | 116,304 | 116,304 | ||||||
Accumulated other comprehensive losses | (87 | ) | (83 | ) | ||||
Accumulated deficit | (47,205 | ) | (49,010 | ) | ||||
Treasury stock, at cost, 25,679,967 shares | (23,832 | ) | (23,832 | ) | ||||
Total shareholders’ equity | 49,013 | 47,212 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 127,934 | $ | 118,669 | ||||
The accompanying notes are an integral part of the interim
consolidated financial statements.
3
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended | |||||||||||
December | December | ||||||||||
31, 2003 | 31, 2002 | ||||||||||
Cash Flows from Operating Activities: | |||||||||||
Income from continuing operations | $ | 1 | $ | 5,760 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Minority interest | 190 | (996 | ) | ||||||||
Depreciation and amortization | 2,769 | 2,394 | |||||||||
Deferred tax assets | 3,875 | 4,093 | |||||||||
Cumulative effect of accounting change | — | 5,546 | |||||||||
Asset allowances, reserves and other | 628 | 4,438 | |||||||||
Changes in assets and liabilities: | |||||||||||
Accounts receivable | (7,580 | ) | 3,017 | ||||||||
Other receivables | 1,072 | 680 | |||||||||
Inventories | 2,367 | (4,851 | ) | ||||||||
Prepaid expenses and other current assets | 2,341 | 548 | |||||||||
Other assets | (21 | ) | (1,185 | ) | |||||||
Accounts payable and other current liabilities | 1,235 | 467 | |||||||||
Income taxes payable | (740 | ) | 1,125 | ||||||||
Operating cash flow provided by continuing operations | 6,137 | 21,036 | |||||||||
Operating cash flow provided by discontinued operations | 469 | 584 | |||||||||
Net cash provided by operating activities | 6,606 | 21,620 | |||||||||
Cash Flows from Investing Activities: | |||||||||||
Additions of property and equipment | (323 | ) | (495 | ) | |||||||
Proceeds from sale of discontinued operations | 10,517 | — | |||||||||
Net cash (used) provided by investing activities | 10,194 | (495 | ) | ||||||||
Cash Flows from Financing Activities: | |||||||||||
Net borrowings (repayments) under line of Credit facility | 2,132 | (6,142 | ) | ||||||||
Purchase of common stock | (2,943 | ) | (5,697 | ) | |||||||
Exercise of stock options and warrants | 281 | 343 | |||||||||
Long-term borrowings | 114,010 | 137,024 | |||||||||
Repayments of long-term borrowings | (134,753 | ) | (142,921 | ) | |||||||
Net cash used by financing activities | (21,273 | ) | (17,393 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (4,473 | ) | 3,732 | ||||||||
Cash and cash equivalents at beginning of year | 11,413 | 19,228 | |||||||||
Cash and cash equivalents at end of period | $ | 6,940 | $ | 22,960 | |||||||
Three Months Ended | ||||||||
June 30, 2004 | June 30, 2003 | |||||||
Cash Flows from Operating Activities: | ||||||||
Income (loss) from continuing operations | $ | 1,805 | $ | (440 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Minority interest | 606 | 54 | ||||||
Depreciation and amortization | 711 | 775 | ||||||
Deferred tax expenses (benefits) | 758 | 32 | ||||||
Asset allowances, reserves and other | 66 | 499 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (3,205 | ) | (7,709 | ) | ||||
Other receivables | (1,185 | ) | (457 | ) | ||||
Inventories | (7,781 | ) | (10,024 | ) | ||||
Prepaid expenses and other current assets | (22 | ) | 3,332 | |||||
Other assets | 12 | — | ||||||
Accounts payable and other current liabilities | 568 | 822 | ||||||
Income taxes payable | 162 | (202 | ) | |||||
Net cash used by continuing operations | (7,505 | ) | (13,318 | ) | ||||
Net cash provided by discontinued operations | 30 | 2,525 | ||||||
Net cash used by operating activities | (7,475 | ) | (10,793 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Additions to property and equipment (continuing operations) | (167 | ) | (77 | ) | ||||
Other investing activity of discontinued operations | — | (3 | ) | |||||
Net cash used by investing activities | (167 | ) | (80 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Borrowings (repayments) of short-term borrowings | (1,331 | ) | 2,696 | |||||
Proceeds from exercise of stock options and warrants | — | 12 | ||||||
Long-term borrowings | 34,450 | 38,830 | ||||||
Repayments of long-term borrowings | (27,773 | ) | (38,380 | ) | ||||
Net cash provided by financing activities | 5,346 | 3,158 | ||||||
Net decrease in cash and cash equivalents | (2,296 | ) | (7,715 | ) | ||||
Cash and cash equivalents at beginning of year | 6,369 | 11,413 | ||||||
Cash and cash equivalents at end of period | $ | 4,073 | $ | 3,698 | ||||
The accompanying notes are an integral part of the interim
consolidated financial statements.
4
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 –— BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Emerson Radio Corp. (“Emerson”, consolidated - “Us”, “We”, “Our”— the “Company”) and its majority-owned subsidiaries, including Sport Supply Group, Inc. (“SSG”). We operate, which has been 53.2% owned since February 2002.
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 “” trademark for a variety of products domestically and internationally to certain licensees. The sporting goods segment, which is operated through Emerson’s 53.2% ownership of SSG, manufactures markets, and distributesmarkets sports related equipment and leisure products to institutional customers in the United States.
From July 2003 through October 2003, certain of SSG’s team dealer locations were discontinued. In November 2003, SSG sold all of the issued and outstanding capital stock of its wholly-owned subsidiary, Athletic Training Equipment Company, Inc. (“ATEC”). Collectively, SSG refers to these operations as “Discontinued Operations” and accordingly, the accompanying financial statements reflect these as discontinued operations. (See Note 12)
The unaudited interim consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of our consolidated financial position as of December 31, 2003June 30, 2004 and the results of operations for the threequarters ended June 30, 2004 and nine month periods ended December 31, 2003 and 2002.2003. The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and accordingly do not include all of the disclosures normally made in our annual consolidated financial statements. It is suggested that these unaudited interim consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended March 31, 20032004 (“fiscal 2003”2004”), included in our annual report on Form 10-K.10-K for fiscal 2004.
Certain reclassifications were made to conform the prior year’s financial statements to the current presentation.
The consolidated financial statements include our accounts and all of our majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of the unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes; actual results could materially differ from those estimates.
From July 2003 through October 2003 certain of SSG’s team dealers located in Little Rock, Arkansas, Enid, Oklahoma and Wichita, Kansas 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, SSG refers to these as “Discontinued Operations” and accordingly, the accompanying financial statements reflect these as discontinued operations. See Note 12 Discontinued Operations.5
5
Due to the seasonal nature of both segments, the results of operations for the three and nine month periodsquarter ended December 31, 2003June 30, 2004 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the full year ending March 31, 20042005 (“fiscal 2004”2005”).
Emerson and SSG have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees: (“APB 25”) and related Interpretations in accounting for its employee stock options. Under APB 25, becauseif the exercise price of our employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Emerson and SSG have adopted the disclosure-only provisions under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). For the purposes of SFAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. Our pro forma information for the threequarter ended June 30, 2004 and nine month periods ended December 31, 2003 and 2002is as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||
December | December | December | December | ||||||||||||||
31, 2003 | 31, 2002 | 31, 2003 | 31, 2002 | ||||||||||||||
Income (loss) from continuing operations (in thousands) | |||||||||||||||||
As reported | $ | (340 | ) | $ | 3,186 | $ | 1 | $ | 11,306 | ||||||||
Less: Employee stock- based compensation expense | (10 | ) | (29 | ) | (24 | ) | (83 | ) | |||||||||
Pro forma | $ | (350 | ) | $ | 3,157 | $ | (23 | ) | $ | 11,223 | |||||||
Income (loss) from continuing operations per common share: | |||||||||||||||||
Basic - as reported | $ | (0.01 | ) | $ | 0.12 | $ | — | $ | 0.41 | ||||||||
Basic - pro forma | $ | (0.01 | ) | $ | 0.12 | $ | — | $ | 0.40 | ||||||||
Diluted - as reported | $ | (0.01 | ) | $ | 0.12 | $ | — | $ | 0.39 | ||||||||
Diluted - pro forma | $ | (0.01 | ) | $ | 0.11 | $ | — | $ | 0.39 |
Three Months Ended | Nine Months Ended | ||||||||||||||||
December | December | December | December | ||||||||||||||
31, 2003 | 31, 2002 | 31, 2003 | 31, 2002 | ||||||||||||||
Net income:(in thousands) | |||||||||||||||||
As reported | $ | 2,813 | $ | 3,278 | $ | 3,049 | $ | 6,344 | |||||||||
Less: Employee stock- based compensation expense | (10 | ) | (29 | ) | (24 | ) | (83 | ) | |||||||||
Pro forma | $ | 2,803 | $ | 3,249 | $ | 3,025 | $ | 6,261 | |||||||||
Three Months Ended | ||||||||
June 30, 2004 | June 30, 2003 | |||||||
(Unaudited) | ||||||||
Income (loss) from continuing operations (in thousands): | ||||||||
As reported | $ | 1,805 | $ | (440 | ) | |||
Less: Employee stock-based compensation expense | (2 | ) | (7 | ) | ||||
Pro forma | $ | 1,803 | $ | (447 | ) | |||
Income (loss) from continuing operations per common share: | ||||||||
Basic — as reported | $ | 0.07 | $ | (0.02 | ) | |||
Basic — pro forma | $ | 0.07 | $ | (0.02 | ) | |||
Diluted — as reported | $ | 0.07 | $ | (0.02 | ) | |||
Diluted — pro forma | $ | 0.07 | $ | (0.02 | ) |
Three Months Ended | ||||||||
June 30, 2004 | June 30, 2003 | |||||||
(Unaudited) | ||||||||
Net income (loss)(in thousands): | ||||||||
As reported | $ | 1,805 | $ | (445 | ) | |||
Less: Employee stock-based compensation expense | (2 | ) | (7 | ) | ||||
Pro forma | $ | 1,803 | $ | (452 | ) | |||
Net income (loss) per common share: | ||||||||
Basic — as reported | $ | 0.07 | $ | (0.02 | ) | |||
Basic — pro forma | $ | 0.07 | $ | (0.02 | ) | |||
Diluted — as reported | $ | 0.07 | $ | (0.02 | ) | |||
Diluted — pro forma | $ | 0.07 | $ | (0.02 | ) |
6
\
Three Months Ended | Nine Months Ended | ||||||||||||||||
December | December | December | December | ||||||||||||||
31, 2003 | 31, 2002 | 31, 2003 | 31, 2002 | ||||||||||||||
Net income per common share: | |||||||||||||||||
Basic - as reported | $ | 0.10 | $ | 0.12 | $ | 0.11 | $ | 0.23 | |||||||||
Basic - pro forma | $ | 0.10 | $ | 0.12 | $ | 0.11 | $ | 0.22 | |||||||||
Diluted - as reported | $ | 0.10 | $ | 0.12 | $ | 0.11 | $ | 0.22 | |||||||||
Diluted - pro forma | $ | 0.10 | $ | 0.11 | $ | 0.11 | $ | 0.22 |
Certain reclassifications were made to conform prior years financial Statements to the current presentation.
NOTE 2 -— COMPREHENSIVE INCOME
Our comprehensive income (loss) for the three months ended June 30, 2004 and nine month periods ended December 31, 2003 and 2002 is as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
December | December | December | December | |||||||||||||
31, 2003 | 31, 2002 | 31, 2003 | 31,2002 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net income | $ | 2,813 | $ | 3,278 | $ | 3,049 | $ | 6,344 | ||||||||
Currency translation adjustment | — | (1 | ) | — | — | |||||||||||
Interest rate swap | (4 | ) | (7 | ) | (12 | ) | (44 | ) | ||||||||
Cumulative effect on equity of SFAS 133, net of taxes | — | — | — | (40 | ) | |||||||||||
Unrealized loss on securities, net | (23 | ) | — | (26 | ) | (2 | ) | |||||||||
Recognition of unrealized losses related to investments included in net income | — | — | 42 | — | ||||||||||||
Comprehensive income | $ | 2,786 | $ | 3,270 | $ | 3,053 | $ | 6,258 | ||||||||
Three Months Ended | ||||||||
June 30, 2004 | June 30, 2003 | |||||||
(Unaudited) | ||||||||
Net income (loss) | $ | 1,805 | $ | (445 | ) | |||
Interest rate swap | (4 | ) | (4 | ) | ||||
Unrealized loss on securities, net | — | (4 | ) | |||||
Recognition of realized losses related to investments included in net losses | — | 42 | ||||||
Comprehensive income (loss) | $ | 1,801 | $ | (411 | ) | |||
NOTE 3 -— NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | ||||||||||||||||
December | December | December | December | ||||||||||||||
31, 2003 | 31,2002 | 31, 2003 | 31,2002 | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||
Numerator: | |||||||||||||||||
Net earnings (loss) before discontinued operations and cumulative effect of change in accounting principle and for basic and diluted earnings per share | $ | (340 | ) | $ | 3,186 | $ | 1 | $ | 11,306 | ||||||||
Three Months Ended | ||||||||
June 30, 2004 | June 30, 2003 | |||||||
(Unaudited) | ||||||||
Numerator: | ||||||||
Net earnings (loss) before discontinued operations for basic and diluted earnings (loss) per share | $ | 1,805 | $ | (440 | ) | |||
Denominator: | ||||||||
Denominator for basic earnings(loss) per share - weighted average shares | 26,630 | 27,416 | ||||||
Effect of dilutive securities: | ||||||||
Options and warrants | 631 | — | ||||||
Denominator for diluted earnings per share - weighted average shares and assumed conversions | 27,261 | 27,416 | ||||||
Basic earnings (loss) per share: | ||||||||
Continuing operations | $ | 0.07 | $ | (0.02 | ) | |||
Discontinued operations | — | — | ||||||
Basic earnings (loss) per share | $ | 0.07 | $ | (0.02 | ) | |||
Diluted earnings (loss) per share: | ||||||||
Continuing operations | $ | 0.07 | $ | (0.02 | ) | |||
Discontinued operations | — | — | ||||||
Diluted earnings (loss) per share | $ | 0.07 | $ | (0.02 | ) | |||
7
Three Months Ended | Nine Months Ended | ||||||||||||||||
December | December | December | December | ||||||||||||||
31, 2003 | 31,2002 | 31, 2003 | 31,2002 | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||
Denominator: | |||||||||||||||||
Denominator for basic earnings per share - weighted average shares | 27,189 | 27,134 | 27,388 | 27,837 | |||||||||||||
Effect of dilutive securities: | |||||||||||||||||
Options and warrants | — | 1,140 | 871 | 841 | |||||||||||||
Denominator for diluted earnings per share - weighted average shares and assumed conversions | 27,189 | 28,274 | 28,259 | 28,678 | |||||||||||||
Basic earnings (loss) per share, from continuing operations | $ | (0.01 | ) | $ | 0.12 | $ | — | $ | 0.41 | ||||||||
Discontinued operations | 0.11 | — | 0.11 | 0.02 | |||||||||||||
Cumulative effect of change in accounting principle | — | — | — | (0.20 | ) | ||||||||||||
Basic earnings per share | $ | 0.10 | $ | 0.12 | $ | 0.11 | $ | 0.23 | |||||||||
Diluted earnings(loss) per share, from continuing operations | $ | (0.01 | ) | $ | 0.12 | $ | — | $ | 0.39 | ||||||||
Discontinued operations | 0.11 | — | 0.11 | 0.02 | |||||||||||||
Cumulative effect of change in accounting principle | — | — | — | (0.19 | ) | ||||||||||||
Diluted earnings per share | $ | 0.10 | $ | 0.12 | $ | 0.11 | $ | 0.22 | |||||||||
NOTE 4-4 - CAPITAL STRUCTURE
Our outstanding capital stock at December 31, 2003June 30, 2004 consisted of common stock and Series A convertible preferred stock in which the conversion feature expired effective March 31, 2002.
7
At December 31, 2003,June 30, 2004, Emerson had outstanding approximately 907,000 options with exercise prices ranging from $1.00 to $1.50 and SSG had outstanding approximately 239,000208,000 options with exercise prices ranging from $0.95 to $9.44. Subsequent to June 30, 2004, 675,000 of the Emerson options were exercised in cashless exchanges resulting in 438,910 shares being issued.
On August 1, 2002, in connection with a consulting agreement, Emerson granted 200,000 warrants with an exercise price of $2.20, vesting 50% inof which 100,000 warrants vested after six months and 50%100,000 warrants vested one year from date of grant in conjunction with a consulting agreement.grant. The warrants were valued using the Black-Scholes option valuation model and arewere charged to earnings over the related service period of the consulting agreement with $396,000 and $420,664approximately $18,000 being charged to operations for the three and nine month periods ending December 31, 2003, and $18,501 and $30,835 for the three and nine month periods ending December 31, 2002.months ended June 30, 2003. In February 2003, 100,000 of these warrants were exercised. In November 2003, the remaining 100,000 of these warrants were exercised under a cashless exercise and 45,544 shares of common stock were issued.
On October 7, 2003, in conjunction with a consulting agreement, Emerson granted 50,000 warrants with immediate vesting and 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. For the three and nine month periodsmonths ending December 31, 2003.June 30, 2004, no expense was charged to operations for these warrants. As of December 31, 2003June 30, 2004, these warrants had not been exercised.
8
NOTE 5 -— INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for the consumer electronics segment and the average cost method is used for the sporting goods segment, standard cost method for items manufactured and weighted average cost for items purchased for resale.segment. As of December 31, 2003June 30, 2004 and March 31, 2003,2004, inventories consisted of the following (in thousands):
December 31, | March 31, | |||||||
2003 | 2003 | |||||||
(Unaudited) | ||||||||
Raw materials | $ | 1,135 | $ | 2,095 | ||||
Work-in-process | 37 | 318 | ||||||
Finished | 38,788 | 45,387 | ||||||
39,960 | 47,800 | |||||||
Less inventory allowances | (2,040 | ) | (2,623 | ) | ||||
$ | 37,920 | $ | 45,177 | |||||
June 30, 2004 | March 31, 2004 | |||||||
(Unaudited) | ||||||||
Raw materials | $ | 1,196 | $ | 1,138 | ||||
Work-in-process | 81 | 67 | ||||||
Finished | 56,690 | 48,878 | ||||||
57,967 | 50,083 | |||||||
Less inventory allowances | (3,062 | ) | (3,086 | ) | ||||
$ | 54,905 | $ | 46,997 | |||||
NOTE 6 -— INCOME TAXES
We have tax net operating loss carry forwards included in net deferred tax assets that are available to offset future taxable income and can be carried forward for 15 to 20 years. Although realization is not assured, we believe it is more likely than not that all of the net deferred tax assets will be realized through tax planning strategies
8
available in future periods and through future profitable operating results. The amount of the deferred tax asset considered realizable, however, could be reduced or eliminated if certain tax planning strategies are not successfully executed or estimates of future taxable income during the carryforward period are reduced. If we determine 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.
Tax benefits resulting from operating losses and discontinued operations losses for the nine months ended December 31, 2003 have been fully reserved in our tax allowance and, accordingly, a tax benefit was not recorded in our consolidated Statement of Operations. Income taxes from the gain on the sale of ATEC are reflected as a reduction to our net deferred tax asset. The high effective tax rate reflected in the consolidated statement of operations for the three and nine months ended December 31, 2003 was the result of our multinational tax structure, which yields varying tax effective rates. See Note 1 - Background and Basis of Presentation and Note 12 - Discontinued Operations.
9
At December 31, 2003,June 30, 2004, approximately $20.5$20.4 million of deferred tax assets were reported on our balance sheet.
NOTE 7 - INVESTMENT IN SPORT SUPPLY GROUP, INC.
As of December 31, 2003 and March 31, 2003, Emerson owned 4,746,023 (approximately 53.2% of the issued and outstanding) shares of common stock of SSG. SSG’s results of operations and the minority interest related to those results have been included in our quarterly and year-to-date results of operations.— 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 a feefees at terms reflected in an arms-length transaction.which reflect arms length transactions. These charges have been eliminated in consolidation.consolidation, but are reflected in the segment information presented in Note 10.
NOTE 8 -— 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. As a result of adopting SFAS 142, we ceased recording amortization of goodwill on April 1, 2002 and, recorded a non-cash “cumulative effect of change in accounting principle” of approximately $5.5 million ($0.19 per diluted share for the nine month period ended December 31, 2002), associated with the write-off of all of the goodwill attributed to the sporting goods segment.2002.
As of December 31, 2003,June 30, 2004, estimated amortization expense of other intangible assets for each of the next five years is as follows (in thousands):
2004 | $ | 504 | ||
2005 | 504 | |||
2006 | 466 | |||
2007 | 406 | |||
2008 | 337 | |||
Thereafter | 3,060 | |||
$ | 5,277 | |||
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2005 | $ | 445 | ||
2006 | 445 | |||
2007 | 374 | |||
2008 | 280 | |||
2009 | 207 | |||
Thereafter | 3,301 | |||
$ | 5,052 | |||
NOTE 9 -— BORROWINGS
As of December 31, 2003June 30, 2004 and March 31, 2003,2004, short-term borrowings consisted of the following (in thousands):
December 31, | March 31, | |||||||
2003 | 2003 | |||||||
(Unaudited) | ||||||||
Foreign bank loan | $ | 4,050 | $ | 1,918 | ||||
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June 30, 2004 | March 31, 2004 | |||||||
(Unaudited) | ||||||||
Foreign bank loan | $ | 3,431 | $ | 4,762 | ||||
As of December 31, 2003June 30, 2004 and March 31, 2003,2004, long-term borrowings consisted of the following (in thousands):
December 31, | March 31, | ||||||||
2003 | 2003 | ||||||||
(Unaudited) | |||||||||
Revolver(Revolver A) | $ | 2,450 | $ | — | |||||
Term loan(Term Loan) | — | 12,000 | |||||||
Revolving line of credit(Revolver B) | 6,876 | 17,522 | |||||||
Equipment notes and other | 128 | 191 | |||||||
9,454 | 29,713 | ||||||||
Less current maturities | 71 | 11,634 | |||||||
Long term debt and notes payable | $ | 9,383 | $ | 18,079 | |||||
June 30, 2004 | March 31, 2004 | |||||||
(Unaudited) | ||||||||
Consumer Electronics Segment Revolver(Revolver A) | $ | 17,500 | $ | 8,000 | ||||
Sporting Goods Segment Revolving line of credit(Revolver B) | 4,201 | 6,972 | ||||||
Equipment notes and other | 62 | 113 | ||||||
21,763 | 15,085 | |||||||
Less current maturities | 35 | 58 | ||||||
Long term debt and notes payable | $ | 21,728 | $ | 15,027 | ||||
Refinancing Transaction in Fiscal 2003- On June 28, 2002, Emerson entered into a $40 million Revolving Credit and Term Loan Agreement (“Loan Agreement”) with several U.S. financial institutions. The Loan Agreement provides for a $25 million revolving line of credit(Revolver A)and a $15 million term loan(Term Loan). The $25 million revolving line of credit replaced Emerson’s $15 million senior secured facility and provides for revolving loans, subject to individual maximums which, in the aggregate, are not to exceed the lesser of $25 million or a “Borrowing Base” as defined in the Loan Agreement.
Revolver A and Term Loan- The Borrowing Base amount on Revolver A loan is established by specified percentages of eligible accounts receivables and inventories and bears interest ranging from Prime plus 0.50% to 1.25% or, at Emerson’s election, LIBOR plus 2.00% to 2.75% depending on certain financial covenants. The interest rate charged onThis agreement provides for revolving loans which cannot exceed the Term Loan ranged from Prime plus 1.00% to 1.75%lesser of $25 million or at Emerson’s election, LIBOR plus 2.50%a “Borrowing Base” amount based upon specified percentages of eligible accounts receivables and 3.25% depending on certain financial covenants and amortizes over a three-year period.inventories. Pursuant to the Loan Agreement as amended, Emerson is restricted from, among other things, paying certain cash dividends, repurchasing Emerson’sits common stock and entering into certain transactions without the lender’s prior consent and are subject to certain net worth and leverage financial covenants. Amounts outstanding under the Loan Agreement are secured by substantially all of Emerson’s tangible assets.
11
As of December 31, 2003,June 30, 2004 Emerson repaid in full ahead of schedule the Term Loan, and had approximately $2.5 million outstanding under Revolver A and was in compliance with the covenants contained in the Loan Agreement, as amended during the three months ended December 31, 2003.Agreement.
Revolver B- During the quarter ending December 31, 2003, SSG amended its Loan and Security 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 LIBOR borrowing rates were reduced from 2.5% to 2.25%; and its inventory and accounts receivable borrowing advance rates were increased. This 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 receivables and inventories. Amounts outstanding under the senior credit facility are secured by substantially all the assets of SSG and its subsidiaries. Pursuant to the loan documents governing this line of credit, SSG is restricted from, among other things, paying cash dividends
10
and entering into certain transactions without the lender’s prior consent and it is required to maintain certain net worth levels.
SSG’s Loan and Security Agreement allows its lender to accelerate payment upon the occurrence of an event that has a material adverse effect upon the business, operations, properties, assets, goodwill, or condition (financial or otherwise) of SSG on a consolidated basis. Additionally, the Loan and Security Agreement requires SSG to maintain a depository account in favor of our lender. SSG’s lender has agreed to modify the Loan and Security Agreement to make the material adverse change clause provision an event of default only if availability levels, net of borrowings, fall below certain levels. As of December 31, 2003,June 30, 2004, SSG was in compliance with the covenants in the Loan Agreement, as amended.covenants.
As of December 31, 2003,June 30, 2004, the carrying value of these credit facilities approximated fair value.
NOTE 10 -— SEGMENT INFORMATION
The following table presents certain operating segment information for each of the three months ended June 30, 2004 and nine month periods ended December 31, 2003 and 2002 (in thousands):
Three Months Ended | Three Months Ended | |||||||||||||||
December 31, 2003 | December 31, 2002 | |||||||||||||||
Consumer | Consumer | |||||||||||||||
Electronics | Sporting Goods | Electronics | Sporting Goods | |||||||||||||
Net revenues from external customers | $61,619 | $ | 14,726 | $ | 71,427 | $ | 15,126 | |||||||||
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Three Months Ended | Three Months Ended | |||||||||||||||
December 31, 2003 | December 31, 2002 | |||||||||||||||
Consumer | Consumer | |||||||||||||||
Electronics | Sporting Goods | Electronics | Sporting Goods | |||||||||||||
Income (loss) before income taxes, discontinued operations and cumulative effect of change in accounting principle | $ | 2,885 | $ | (2,572 | ) | $ | 7,456 | $ | (2,339 | ) | ||||||
Segment assets | $ | 70,260 | $ | 45,042 | $ | 69,794 | $ | 55,594 | ||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
December 31, 2003 | December 31, 2002 | |||||||||||||||
Consumer | Consumer | |||||||||||||||
Electronics | Sporting Goods | Electronics | Sporting Goods | |||||||||||||
Net revenues from external customers | $ | 149,684 | $ | 59,705 | $ | 217,776 | $ | 58,712 | ||||||||
Income (loss) before income taxes, discontinued operations and cumulative effect of change in accounting principle | $ | 4,271 | $ | (2,642 | ) | $ | 20,016 | $ | (2,711 | ) | ||||||
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2004 | June 30, 2003 | |||||||||||||||
Consumer | Consumer | |||||||||||||||
Electronics | Sporting Goods | Electronics | Sporting Goods | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net revenues from external customers | $ | 47,826 | $ | 25,104 | $ | 31,650 | $ | 22,521 | ||||||||
Income (loss) before income taxes and discontinued operations | $ | 1,514 | $ | 1,237 | $ | (637 | ) | $ | 130 | |||||||
Segment assets | $ | 85,359 | $ | 42,575 | $ | 84,346 | $ | 53,368 | ||||||||
NOTE 11 -— 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 usEmerson and Mssrs.Messrs. Geoffrey Jurick, Kenneth Corby and John Raab (the “Individual Defendants”) on behalf of purchasers of our publicly traded securities who bought shares 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 a defendant in the litigation.
Generally, the original complaints allegeAmended Complaint alleges that weEmerson and the Individual Defendants violated Sections 10(b) and 20(a) of the Securities
11
Exchange Act of 1934, and Rule 10b-5 promulgated thereunder,there under, by (i) issuing certain positive statements during the Class Period regarding our growthability to replace lost revenues attributable to our Hello Kitty® license and demand for our products.(ii) omitting to disclose that Emerson suffered allegedly soured relationships with its largest retail customers. The complaintsAmended Complaint further allegealleges that these statements were each materially false and misleading when made because weEmerson allegedly misrepresented and omitted certain adverse facts which then existed and disclosure of which was necessary to make the statements not false and misleading.
13
The lead plaintiff in the Consolidated Action is currently scheduled to file an Amended and Consolidated Complaint on or about March 15, 2004, which may contain additional allegations. We Emerson, and the Individual Defendants intend to defend these lawsuitsthe lawsuit vigorously.
We are also involved in legal proceedings and claims of various types in the ordinary course of our business. While any such litigation to which we areOther Matters
The Company is a party contains an elementto various other litigation matters, in most cases involving ordinary and routine claims incidental to its business. The Company cannot estimate with certainty its ultimate legal and financial liability with respect to such pending litigation matters. However, the Company believes, based on its examination of uncertainty, we presently believesuch matters, that the outcome of each such proceeding or claim which is pending or known to be threatened, or all of them combined,its ultimate liability will not have a material adverse effect on our consolidatedits financial position.position, results of operations or cash flows.
NOTE 12 -— DISCONTINUED OPERATIONS
InFrom July 2003 SSG discontinued operations at itsthrough October 2003, certain of SSG’s team dealer located in Little Rock, Arkansas and in October 2003, sold substantially all of the assets at that location (other than cash and accounts receivable).locations were closed. In October 2003, SSG discontinued operations at its team dealer located in Enid, Oklahoma and in November 2003, sold substantially all the assets (other than cash and accounts receivable) of its team dealer located in Wichita, Kansas. These closures and sales of assets, and related discontinued operations resulted in a loss of approximately $780,000 for the three months ended December 31, 2003, which combined with the previously recorded loss recognized totaled $1.2 million for the nine months ended December 31, 2003. On November 18, 2003, SSG sold all of the issued and outstanding capital stock of ATEC, resultingits wholly owned subsidiary, ATEC. These closures and sale of stock, and related discontinued operations resulted in a net gainloss of approximately $3.8 million.$5,000 for the three months ended June 30, 2003. The results of these transactions are included in discontinued operations in the accompanying Consolidated Statement of Operations for the three months ended June 30, 2004 and nine month periods ended December 31, 2003. See(See Note 1 - Background and Basis of Presentation.1)
The following table representssummarizes the results of these discontinued operations, net of related income taxes, as applicable (in thousands). See(See Note 6 — Income Taxes.
Three Months Ended | Nine Months Ended | |||||||||||||||
December | December | December | December | |||||||||||||
31, 2003 | 31, 2002 | 31, 2003 | 31, 2002 | |||||||||||||
Net revenues-ATEC | $ | 2,797 | $ | 2,005 | $ | 6,184 | $ | 7,468 | ||||||||
Net revenues-Team Dealers | 368 | 1,387 | 3,043 | 5,200 | ||||||||||||
Earnings from operations - ATEC | 181 | 384 | 477 | 892 | ||||||||||||
Loss from operations - Team Dealers | (148 | ) | (292 | ) | (352 | ) | (308 | ) | ||||||||
Loss on sale of Team Dealers | (632 | ) | — | (829 | ) | — | ||||||||||
Gain on sale of ATEC, net | 3,752 | — | 3,752 | — | ||||||||||||
Total discontinued operations, net | $ | 3,153 | $ | 92 | $ | 3,048 | $ | 584 | ||||||||
Three Months Ended | ||||||||
June 30, 2004 | June 30, 2003 | |||||||
Net revenues-ATEC | $ | — | $ | 2,290 | ||||
Net revenues-Team Dealers | — | 1,393 | ||||||
Net revenues-total | — | 3,683 | ||||||
Income from operations — ATEC | $ | — | $ | 116 | ||||
Loss from operations — Team Dealers | — | (121 | ) | |||||
Total discontinued operations, net of tax | $ | — | $ | (5 | ) | |||
1412
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition |
Management’s Discussion and Analysis of Results of Operation is presented in three parts: consolidated operations, the consumer electronics segment and the sporting goods segment.
The following discussion of our operations and financial condition should be read in conjunction the Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
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 Statements.”
In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result,presentation, accordingly, all figuresamounts are approximations.
Consolidated Operations:
The following table sets forth, for the periods indicated, certain items related to theour consolidated statements of operations as a percentage of net revenues for the three months ended June 30, 2004 and nine month periods ended December 31, 2003 and 2002.2003. A detailed discussion of the material changes in our operating results is set forth under ourthe discussion of our two operating segments: consumer electronics and sporting goods.
Three Months Ended | Nine Months Ended | ||||||||||||||||
December 31 | December 31 | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||
Net revenues (in thousands) | $ | 76,345 | $ | 86,553 | $ | 209,389 | $ | 276,488 | |||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
Cost of sales | 82.5 | % | 81.8 | % | 81.9 | % | 80.4 | % | |||||||||
Other operating costs and Expenses | 1.9 | % | 1.2 | % | 1.9 | % | 1.1 | % | |||||||||
Selling, general and administrative expenses | 13.8 | % | 11.9 | % | 14.6 | % | 11.9 | % | |||||||||
Stock based costs | .6 | % | — | .2 | % | — | |||||||||||
Operating income | 1.2 | % | 5.1 | % | 1.4 | % | 6.6 | % | |||||||||
Interest expense | .4 | % | .5 | % | .5 | % | .7 | % | |||||||||
Minority interest in net income (loss) Of consolidated subsidiary | (.4 | %) | 1.3 | % | (.1 | %) | .4 | % | |||||||||
Provision for income taxes | .8 | % | 2.2 | % | .8 | % | 2.2 | % | |||||||||
Income from discontinued Operations, net of tax | 4.1 | % | .1 | % | 1.5 | % | .2 | % | |||||||||
Cumulative effect of change in accounting principle | — | — | — | (2.0 | %) | ||||||||||||
Net income | 3.7 | % | 3.8 | % | 1.5 | % | 2.3 | % | |||||||||
Three Months Ended | ||||||||
June 30 | ||||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Net revenues (in thousands) | $ | 72,930 | $ | 54,171 | ||||
100.0 | % | 100.0 | % | |||||
Cost of sales | 78.2 | % | 79.3 | % | ||||
Other operating costs and expenses | 2.1 | % | 2.3 | % | ||||
Selling, general and administrative expenses | 14.8 | % | 17.2 | % | ||||
Acquisition costs | (0.1 | %) | 1.2 | % | ||||
Stock based costs | — | 0.1 | % | |||||
Operating income (loss) | 5.0 | % | (0.1 | %) | ||||
Interest expense | 0.4 | % | 0.7 | % | ||||
Minority interest in net income of consolidated subsidiary | (0.8 | %) | (0.1 | %) | ||||
Provision (benefit) for income taxes | 1.3 | % | (0.1 | %) | ||||
Loss from discontinued operations, net of tax | — | — | ||||||
Net income (loss) | 2.5 | % | (0.8 | %) | ||||
13
Net Revenues -— Consolidated net revenues for the three and nine month periodsmonths ended December 31, 2003 decreasedJune 30, 2004 increased $18.8 million, or 34.6%, to $76.3$72.9 million from $86.6$54.1 million ($10.3 million or 11.8%) and to $209.4 million from $276.5 million ($67.1 million or 24.3%) respectively, as compared to the same periodsperiod ended December 31, 2002.June 30, 2003. The decreases for both the three and nine month periods were primarilyincrease is attributable to decreasesa $16.2 million increase in net revenues for the consumer electronics segment.
15
segment, and a $2.6 million increase in net revenues for the sporting goods segment, due primarily to increases in units sold in both segments.
Cost of Sales -— Cost of sales, as a percentage of consolidated net revenues, decreased to 78.2% for the three and nine monthmonths ending June 30, 2004 from 79.3% for the same period ended December 31, 2003 and December 31, 2002 increased to 82.5% and 81.9% from 81.8% and 80.4%, respectively.ending June 30, 2003. The increasedecrease in cost of sales as a percentage of net revenues for the three and nine month periodsperiod was primarily the result of lowerhigher margins in both the consumer electronics and sporting goods segments. In absolute terms, cost of sales decreasedincreased to $63.0$57.0 million from $70.8$43.0 million ($7.814.0 million or 11.0%) and to $171.4 million from $222.2 million ($50.8 million or 22.9%32.7%) for the three and nine month periodsmonths of fiscal 20042005 as compared to the same periodsperiod in fiscal 2003, respectively.2004. The increase is due to a $12.8 million increase in the consumer electronics segment and a $1.2 million increase in the sporting goods segment, due to higher revenues in both segments.
Other Operating Costs and Expenses -— Other operating costs and expenses are associated with the consumer electronics segment. As a percentage of consolidated net revenues, other operating costs and expenses increaseddecreased to 1.9%2.1% from 1.2%2.3% for the three months ended December 31, 2003June 30, 2004 compared to the same period in fiscal 2003. For the nine months ended December 31, 2003, other operating costs, as a percentage of consolidated net revenues, increased to 1.9% from 1.1% compared to the same period in fiscal 2003.2004. In absolute terms, other operating costs and expenses increased to $1.4$1.6 million from $1.1$1.3 million ($356,000297,000 or 33.6%) and to $4.0 million from $3.3 million ($712,000 or 21.9%23.7%) for the three and nine month periodsmonths of fiscal 20042005 as compared to the same periodsperiod in fiscal 2003, respectively.2004.
Selling, General and Administrative Expenses (“S,G&A”) -— S,G&A, as a percentage of consolidated net revenues, were 13.8%14.8% for the three months ended December 31, 2003June 30, 2004 as compared to 11.9%17.2% for the three months ended December 31, 2002. For the nine months ended December 31,June 30, 2003, S,G&A, as a percentagesince certain of consolidated net revenues, were 14.6% as compared to 11.9% for the same period in fiscal 2003.these expenses are fixed and do not vary directly with sales volume. In absolute terms, S,G&A increased to $10.5$10.8 million from $10.2$9.3 million ($319,0001.5 million or 3.1%15.5%) for the three month period ended December 31, 2003 compared to the same period in fiscal 2003, and decreased to $30.6 million from $32.7 million ($2.1 million or 6.5%) for the nine month period ended December 31, 2003June 30, 2004 as compared to the same period in fiscal 2003.2004. The increase for the first quarter of fiscal 2004 quarterly increase2005 is primarily due to a $1.2 million increase in the consumer electronics segment, whileand a $.3 million increase in the sporting goods segment.
Acquisition Costs — Acquisition costs are associated with the consumer electronics segment. Adjustments to acquisitions costs incurred in the fourth quarter of fiscal 2004 were made in the first quarter of fiscal 2005, resulting in a reduction in such costs of $71,000, as compared to $643,000 of costs for (1.2% of consolidated net revenues) the three months ended June 30, 2003, a decrease for the nine month period is due to decreases in both segments.of approximately $714,000.
Stock Based Costs -— Stock Based Costsbased costs are associated with the consumer electronics segment whichand relate to the cost of warrants previously issued
14
in exchange for consulting services. As a percentage of consolidated net revenues, stock based costs increased to 0.6% from 0 % forservices incurred during the three months ended December 31, 2003 compared to the same period in fiscal 2003. For the nine months ended December 31, 2003, stock based costs, as a percentage of consolidated net revenues, increased to 0.2% from 0 % for the same period in fiscal 2003. In absolute terms stock based costs increased by $468,000 and $480,000 for the three and nine month periods of fiscal 2004 as compared to the same periods in fiscal 2003.
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June 30, 2004.
Interest Expense, Net -— Interest expense decreased $83,000 (20.5%$128,000 (30.3%) to $322,000$294,000 (0.4% of consolidated net revenues) for the three months ended December 31, 2003June 30, 2004 from $405,000 (0.5%$422,000 (0.7% of consolidated net revenues) for the three months ended December 31, 2002. For the nine months ended December 31, 2003 interest expense decreased $833,000 (42.1%) to $1.1 million (0.5% of net revenues) from $2.0 million (0.7% of net revenues) for the same period in fiscalJune 30, 2003. The decrease in interest expense was a result of lower average borrowings and lower borrowing costs in both segments.
Minority Interest in Net Income (Loss) of Consolidated Subsidiary -— Minority interest in net income (loss) of consolidated subsidiary represents that portion of the sporting goods segment net income for the three months ended June 30, 2004 and nine month periods ended December 31, 2003 and 2002. See “Note 1 - Background and Basisthat was not included in the consolidated statements of Presentation.”operations. (See Note 1)
Provision for Income Taxes -— The provision for income taxes increased $1.0 million to $946,000 (1.3% of consolidated net revenues) for the three and nine months ended December 31, 2003 and 2002June 30, 2004 from a benefit of $67,000 (less than 0.1% of consolidated net revenues) for the three months ended June 30, 2003. The increase in the provision for income taxes was primarily the result of utilizing previously recognized net operating loss carryforwards fromdue to an increase in pre-tax profit in the consumer electronics segment. The higher effective tax rate for the three and nine months ended December 31, 2003 as compared to the same year ago periods was the result of our multinational tax structure, which yields varying tax effective rates.
IncomeLoss from Discontinued Operations - In— From July through October, and November 2003, SSG ceased operations of several of its Team Dealer locations in Little Rock, Arkansas, Enid, Oklahoma, and Wichita, Kansas, respectively.locations. In addition,November 2003, SSG sold all of the issued and outstanding shares of capital stock of its wholly owned subsidiary — ATEC. SSG hasThere were no amounts recorded gains from discontinuedfor these operations of $3.2 million and $3.0 million(the “discontinued operations”) for the three and nine months ended December 31, 2003June 30, 2004 as compared to $92,000 and $584,000a loss of approximately $5,000 for the three and nine months ended December 31, 2002.
Cumulative Effectsame period of Change in Accounting Principle - On April 1, 2002, we adopted Financial Accounting Standards Board’s Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) that requires that goodwill not be amortized, but instead be tested for impairment at least annually by reporting unit. As a result of our impairment testing, we recorded a non-cash “cumulative effect of accounting change” of approximately $5.5 million for the nine months ended December 31, 2002, due to the impairment of all of the goodwill attributed to the Company’s sporting goods segment. See “Note 8 - Goodwill and Other Intangible Assets.”fiscal 2004.
Net Income -(Loss) — As a result of the foregoing factors, we earned net income of $2.8approximately $1.8 million (3.7%(2.5% of net revenues) and $3.0 million (1.5% ofconsolidated net revenues) for the three and nine months ended December 31, 2003June 30, 2004 as compared to $3.3 million (3.8%a net loss of net revenues) and $6.3 million (2.3%approximately $445,000 (0.8% of consolidated net revenues) for the same periods in fiscalthree months ended June 30, 2003.
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Consumer Electronics Segment:
The following table summarizes certain financial information relating to the consumer electronics segment for the three months ended June 30, 2004 and nine month periods ended December 31, 2003 and 2002 (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||||
December 31 | December 31 | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||
Net revenues | $ | 61,619 | $ | 71,427 | $ | 149,684 | $ | 217,776 | |||||||||
Cost of sales | 52,014 | 59,617 | 127,658 | 180,169 | |||||||||||||
Other operating Costs | 1,414 | 1,058 | 3,963 | 3,251 | |||||||||||||
Selling, general & administrative | 4,340 | 4,090 | 12,356 | 13,758 | |||||||||||||
Stock based Costs | 487 | 19 | 511 | 31 | |||||||||||||
Operating income | 3,364 | 6,643 | 5,196 | 20,567 | |||||||||||||
Interest expense, Net | (207 | ) | (291 | ) | (735 | ) | (1,547 | ) | |||||||||
Income before income taxes | 3,157 | 6,352 | 4,461 | 19,020 | |||||||||||||
Provision for income taxes | 653 | 1,819 | 1,628 | 5,999 | |||||||||||||
Net income | $ | 2,504 | $ | 4,533 | $ | 2,833 | $ | 13,021 | |||||||||
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Three Months Ended | ||||||||
June 30 | ||||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Net revenues | $ | 47,826 | $ | 31,650 | ||||
Cost of sales | 39,409 | 26,615 | ||||||
Other operating costs and expenses | 1,553 | 1,256 | ||||||
Selling, general & administrative | 4,580 | 3,423 | ||||||
Acquisition costs | (71 | ) | 643 | |||||
Stock based costs | — | 18 | ||||||
Operating income (loss) | 2,355 | (305 | ) | |||||
Interest expense, net | 235 | 278 | ||||||
Income (loss) before income taxes | 2,120 | (583 | ) | |||||
Provision (benefit) for income taxes | 946 | (136 | ) | |||||
Net income (loss) | $ | 1,174 | $ | (447 | ) | |||
Net Revenues - Consumer electronics net— Net revenues for the three months ended December 31, 2003 decreased $9.8June 30, 2004 increased $16.2 million, (13.7%)or 51.1%, to $61.6$47.8 million from $71.4$31.6 million for the three months ended December 31, 2002. For the nine months ended December 31, 2003 net revenues decreased $68.1 million (31.3%) to $149.7 million from $217.8 million for the nine months ended December 31, 2002.June 30, 2003. Consumer electronics net revenues are comprised of Emerson branded product sales, themed product sales and licensing revenues. Emerson branded product sales are earned from the sale of products bearing the Emerson or HH Scott brand name; themed product sales represent products sold bearing a certain theme or character; and licensing revenues are derived from licensing the Emerson and HH Scott brand names to licensees for a fee. The decreaseincrease in net revenues for the three and nine month periodmonths ended June 30, 2004 was comprised of:
i) |
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ii) | ||||
iii) | Licensing revenues increased by approximately $900,000, or 26.9%, for the first quarter of fiscal 2005 to |
Cost of Sales -— Cost of sales for the three months ended December 31, 2003 decreased $7.6June 30, 2004 increased $12.8 million (12.8% of consumer electronic net revenues)(48.1%) to $52.0$39.4 million from $59.6$26.6 million for
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the three months ended December 31, 2002. For the nine months ended December 31, 2003 cost of sales decreased $52.5 million (29.1% of consumer electronic net revenues) to $127.7 million from $180.2 million for the nine months ended December 31, 2002.June 30, 2003. In relative terms, cost of sales for the three months ended December 31, 2003 increasedJune 30, 2004 decreased to 84.4% from 83.5%82.4% of consumer electronics net revenue as compared to 84.1% for the three months ended December 31, 2002. For the nine months ended December 31, 2003 cost of sales increased to 85.3% from 82.7% for the nine months ended December 31, 2002. In relative terms, the increasessame period in fiscal 2004. The decrease in cost of sales for the three and nine month periods werein relative terms is primarily due to lower sales of traditionally higher margin themed products, and lower margins on Emerson branded product, primarily attributable to competitive market conditions.increased license revenue.
Gross profit margins continue to be subject to competitive pressures arising from lower pricing of the product categories in the consumer electronics market in which Emerson competes. Emerson’s branded products are generally placed in the low-to-medium priced category of the market.
Other Operating Costs and Expenses -Expenses- Other operating costs and expenses, as a percentage of consumer electronics net revenues, increaseddecreased to 2.3% from 1.5% and to 2.6% from 1.5% for3.3% in the three and nine month periods ended December 31, 2003June quarter of fiscal 2005 as compared to 4.0% for the same periodsperiod in fiscal 2003.2004. In absolute terms, other operating costs and expenses increased to $1.4$1.6 million from $1.1$1.3 million ($356,000297,000 or 33.6%23.7%) and to $4.0 million from $3.3 million ($712,000 or 21.9%)for the three and nine month periodsmonths ended December 31, 2003June 30, 2004 as compared to the same periodsperiod in fiscal 2003, respectively. The2004. This increase for both the three and nine month period in absolute terms was primarily due to increased inventory servicing costs.net revenues.
Selling, General and Administrative Expenses (“S,G&A”) -— S,G&A, increased approximately $250,000$1.2 million, or 6.1%33.8%, to $4.3$4.6 million (7.0%(9.6% of the consumer electronics net revenues) from $4.1$3.4 million (5.7%(10.8% of the consumer electronics net revenues) for the three months ended December 31, 2003June 30, 2004 as compared to the three monthssame period ended December 31, 2002. For the nine months ended December 31, 2003, S,G&A decreased $1.4 million, or 10.2%, to $12.4 million (8.3% of the consumer electronics net revenues) from $13.8 million (6.3% of the consumer electronics net revenues).June 30, 2003. The increasesincrease in
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absolute terms for the three months ended December were primarily due to increased legal fees. The decreases in absolute terms for the nine months ended December 31, 2003,June 30, 2004, resulted from decreases in: i.) payrollincreases in advertising expenses of approximately $250,000; professional fees of approximately $400,000, freight expenses of $142,000, travel related costs of approximately $450,000; ii.) bad debt charges$106,000 and increases in various other S,G&A accounts.
Acquisition Costs — Acquisition costs incurred in the fourth quarter of approximately $1.3 million; and iii.) sales commissionsfiscal 2004 were adjusted in the first quarter of approximately $560,000. These decreasesfiscal 2005, resulting in a reduction of such costs of $71,000, as compared to $643,000 of costs incurred for the nine month periodthree months ended June 30, 2003. These costs were partially offset by increases in legal fees and expenses associated with an unsuccessful acquisition of approximately $375,000 and $643,000, respectively.transactions not completed in fiscal 2004.
Stock Based Costs -— Stock Based Costs, as a percentagewhich relate to the cost of consumer electronics net revenues, increased to 0.8% from 0% and 0.3% from 0%warrants issued in exchange for consulting services, decreased by approximately $18,000 for the three and nine month periods ended December 31, 2003months of fiscal 2005 as compared to the same periodsperiod in fiscal 2003. In absolute terms, stock based costs increased to $487,000 from $19,000, and to $511,000 from $31,000 for the three and nine month periods ended December 31, 2003 as compared to the same periods in fiscal 2003, respectively. The increase for both the three and nine month periods in absolute terms was primarily due to the re-measurement of warrants in the current period that were issued in a prior period, and the issuance of additional warrants in the current period.2004.
Interest Expense, net -— Interest expense decreased $84,000by approximately $43,000, or 28.9%15.5%, to $207,000 (0.3%$235,000 (0.5% of the consumer electronics net revenues) for the three months ended December 31, 2003,June 30, 2004, from $291,000 (0.4%$278,000 (0.9% of the consumer electronics net revenues) for the three months ended December 31, 2002. For the nine months ended December 31, 2003, interest expense decreased $812,000 or 52.5%, to $735,000 (0.5% of the consumer electronics net revenues) from $1.5 million (0.7% of the consumer electronics net revenues) for the same period ended December 31, 2002.June 30, 2003. The decreasesdecrease in interest expense for the three and nine month periods werewas the result of lower average borrowings and lower borrowing costs.borrowings.
Provision for Income Taxes -— The provision for income taxes was $653,000 and $1.6 millionapproximately $946,000 (2.0% of the consumer electronics net revenue) compared to a benefit of approximately $136,000 for the three and ninemonths ended
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June 30, 2003. The increase in the provision for income taxes for the three months ended December 31, 2003, respectively,June 30, 2004 was the result of the pre-tax profit as compared to $1.8 million and $6.0 million fora pre-tax loss during the three and nine month periods ended December 31, 2002, respectively. The decreasessame period in the provisions for the three and nine month periods ended December 31, 2003 were primarily the result of lower taxable income as compared to the same periods inprior fiscal 2003.year.
Net Income -(Loss) — As a result of the foregoing factors, the consumer electronics segment earned net income of $2.5$1.2 million (4.1%(2.5% of net consumer revenues) for the three months ended December 31, 2003June 30, 2004 as compared to $4.5 million (6.3%a net loss of $447,000 (1.4% of net consumer revenues) for the three months ended December 31, 2002. For the nine months ended December 31, 2003 the consumer electronics segment earned $2.8 million (1.9% of net revenues) as compared to $13.0 million (6.0% of net revenues) for the nine months ended December 31, 2002.June 30, 2003.
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Sporting Goods Segment:
The following table summarizes certain financial information relating to the sporting goods segment as reported by SSG for the three months ended June 30, 2004 and nine month periods ended December 31, 2003 and 2002 (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||||
December 31 | December 31 | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||
Net revenues | $ | 14,726 | $ | 15,126 | $ | 59,705 | $ | 58,712 | |||||||||
Cost of sales | 10,978 | 11,215 | 43,723 | 42,055 | |||||||||||||
Selling, general & Administrative | 6,205 | 6,136 | 18,215 | 18,938 | |||||||||||||
Operating loss | (2,457 | ) | (2,225 | ) | (2,233 | ) | (2,281 | ) | |||||||||
Interest expense, net | (115 | ) | (114 | ) | (409 | ) | (430 | ) | |||||||||
Loss before income taxes, discontinued operations and cumulative effect of accounting change | (2,572 | ) | (2,339 | ) | (2,642 | ) | (2,711 | ) | |||||||||
Provision (benefit) for income taxes | — | 112 | — | — | |||||||||||||
Income from discontinued operations | 3,153 | 92 | 3,048 | 584 | |||||||||||||
Cumulative effect of change in accounting principle | — | — | — | (7,442 | ) | ||||||||||||
Net income (loss) | $ | 581 | $ | (2,359 | ) | $ | 406 | $ | (9,569 | ) | |||||||
Three Months Ended June 30 | ||||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Net revenues | $ | 25,104 | $ | 22,521 | ||||
Cost of sales | 17,625 | 16,352 | ||||||
Selling, general & administrative | 6,183 | 5,895 | ||||||
Operating income | 1,296 | 274 | ||||||
Interest expense, net | 59 | 144 | ||||||
Income before income taxes & discontinued operations | 1,237 | 130 | ||||||
Provision for income taxes | — | 69 | ||||||
Loss from discontinued operations | — | (5 | ) | |||||
Net income | $ | 1,237 | $ | 56 | ||||
Net Revenues -— Net revenues decreased $400,000 (2.6%)for the three month period ended June 30, 2004 increased $2.6 million, or 11.5%, to $14.7$25.1 million from $15.1 million and increased $993,000 (1.7%) to $59.7 million from $58.7$22.5 million for the three and nine month periodsperiod ended December 31, 2003 and December 31, 2002, respectively. These variances areJune 30, 2003. The increase in net revenues was primarily associated with increased competition, a decreased sales force, continued restrictions in state, federal and school budgets, and declining participation and fundingthe result of youth sports organizations. SSG is continuing with its implementation ofpreviously implemented sales and marketing programs, which increased unit volume, as well as having three additional shipping days in the current quarter as compared to stabilize revenuesthe same quarter in the previous year due to a very competitive marketplace.change in the fiscal year for the sporting goods segment.
Cost of Sales -— Cost of sales decreased by approximately $237,000 (2.1%)for the three month period ended June 30, 2004 increased $1.3 million, or 7.8%, to $11.0$17.6 million from $11.2 million and increased $1.7 million (4.0%) to $43.7 million from $42.1$16.3 million for the three and nine month periodsperiod ended December 31, 2003, respectively, as compared to same periods last year.June 30, 2003. As a percentage of net revenues, cost of sales increaseddecreased to 74.5% from 74.1%, and to 73.2% from 71.6%70.2% for the three and nine month periodsperiod ended December 31, 2003, respectively,June 30, 2004, as compared to 72.6% for the same periodsperiod in the prior fiscal year.2004. The increasedecrease in cost of sales as a percentage of net revenues for
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the ninethree month period was primarily the result of more aggressive pricing within the markets which SSG competes, increased freightefficiencies gained through improved product procurement and increased importing costs.
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product mix.
Selling, General and Administrative Expenses (“S,G&A”) -— S,G&A expenses for the three month period ended June 30, 2004 increased approximately $69,000 (1.1%)$288,000, or 4.9%, to $6.2 million from $6.1 million and decreased approximately $723,000 (3.8%) to $18.2 million from $18.9$5.9 million for the three and nine month periodsperiod ended December 31, 2003, respectively, as compared to the three and nine month periods ended December 31, 2002.June 30, 2003. As a percentage of sporting goods net revenues, SG&A increased to 42.1% from 40.6% and decreased to 30.5% from 32.3%24.6% for the three and nine month periodsperiod ended December 31, 2003, as compared toJune 30, 2004 from 26.2% for the same periodsperiod in fiscal 2003.2004. The increasesincrease in SG&A for the three month period werewas primarily a result of increases of approximately $216,000 and $152,000 in legal fees and sales and marketing expenses, respectively. These increases were partially offset by a decrease in payroll related expense of approximately $250,000 attributable to a reduced headcount. The decreases in SG&A for the nine month period were primarily the result of decreasesan increase in payroll related expenses of approximately $308,000$174,000 and a decreasean increase in salesselling and marketingpromotional expenses of approximately $379,000. In addition, SSG has elected not to renew its Huffy and AMF license agreements and expects a royalty expense reduction in future fiscal years of approximately $185,000, annually, without an offsetting reduction to revenues.$130,000.
Interest Expense, net -— Interest expense was relatively unchangeddecreased by approximately $85,000, or 59.0%, to $59,000 for the three months ending December 31, 2003month period ended June 30, 2004, as compared to $144,000 for the same period in the prior year, and decreased by $21,000 (4.9%) to $409,000 from $430,000 for the nine month period ended December 31, 2003, as compared to the same periods in fiscal 2003. The cash received from the sale of SSG’s ATEC subsidiary in November 2003 resulted in a reduction of SSG’s debt, and is expected to reduce future interest expense.year.
Provision for Income Taxes -— For the three month period ended June 30, 2004, SSG recorded no income tax provision fordue to the three and nine month periods ended December 31, 2003, respectively, as comparedexistence of prior net operating losses to a tax provision of approximately $112,000offset current income, and no change in managements’ estimate of the extent to which deferred tax provision for the three and nine month periods ended December 31, 2002, respectively. Discontinued operationsassets are reported net of income tax provisions. Seerealizable. (See Note 6 – Income Taxes.6)
IncomeLoss from 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 salesthe sale of SSG’s ATEC subsidiary for the three and nine month periods ended December 31, 2003 and 2002. See Note 12 – Discontinued Operations.
Cumulative Effect of Change in Accounting Principle - On March 30, 2002, SSG adopted Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 142 requires that goodwill not be amortized but instead be tested for impairment at least annually by reporting unit. Goodwill is required to be tested for impairment in a transitional test upon adoption and then at least annually
22
by reporting unit. As a result of its impairment testing, SSG recorded a non-cash “cumulative effect of accounting change” impairment write down of approximately $7.4 million for the nine month period ended December 31, 2002.June 30, 2003. (See Note 12)
Net Income (Loss) -— As a result of the foregoing factors, the sporting goods segment earned net income of approximately $581,000$1,237,000 for the three months ended December 31, 2003June 30, 2004 as compared to net lossapproximately $56,000 for the three months ended June 30, 2003.
Liquidity and Capital Resources
As of $2.4June 30, 2004, we had cash and cash equivalents of approximately $4.1 million compared to approximately $6.4 million at March 31, 2004. Working capital increased to $57.5 million at June 30, 2004 as compared to $46.8 million at March 31, 2004. The decrease in cash and cash equivalents of approximately $2.3 million was primarily due to operating activities, partially offset by financing activities.
Operating cash flow used in continuing operating activities was approximately $7.5 million for the three months ended December 31, 2002. For the nine months ended December 31, 2003 the sporting goods segment earned net income of $406,000 as compared to a net loss of $9.6 million for the nine months ended December 31, 2002.
Liquidity and Capital Resources
Operating cash flow provided by continuing operating activities was approximately $6.1 million for the nine months ended December 31, 2003.June 30, 2004. Cash was primarily provided from decreasesused for increases in inventory prepaid expenses and other current assets, partially offset by an increase in accounts receivable and a decrease in accounts payable and other current liabilities.
Operating cash flow provided by discontinued operations for the nine months ended December 31, 2003 was approximately $469,000 due to the results and disposals of SSG’s ATEC subsidiary and Team Dealer locations in Arkansas, Oklahoma and Kansas.receivable.
Net cash providedused by investing activities was approximately $10.2 million$167,000 for the ninethree months ended December 31, 2003, due to the sale of ATEC shares of $10.5 million, offset by the purchase of fixed assets,June 30, 2004, which consisted mainlyprimarily of computer and office equipment.equipment fixed asset acquisitions.
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Net cash used forprovided from financing activities was approximately $21.3$5.3 million for the ninethree months ended December 31, 2003. Cash wasJune 30, 2004, due primarily utilized forto the reduction of borrowings and the repurchase of Emerson’s common stock.net increase in long-term borrowings.
Emerson and SSG maintain credit facilities as described in Note 9 –to our consolidated financial statements — Borrowings. At December 31, 2003,June 30, 2004, there were approximately $9.5$21.7 million of borrowings outstanding under these facilities of whichand no letters of credit were outstanding. Approximately $2.6$17.5 million of borrowings were outstanding byunder the Emerson Loan Agreement and $6.9$4.2 million of borrowings were outstanding by SSG.under the SSG Loan Agreement. At December 31, 2003,June 30, 2004, Emerson and SSG were in compliance with the covenants in each of the Loan Agreements, as amended.loan agreements.
Certain of ourOur foreign subsidiaries maintain various credit facilities, as amended, aggregating $87.5$75.0 million, consisting of the following: (i) two letter of credit facilities totaling $12.5 million that provide for a $2.5 million seasonal increase. The facilities are used for inventory purchases and require us to pledge
• | two letter of credit facilities totaling $15.0 million which is used for inventory purchases; and | |||
• | three back-to-back letter of credit facilities totaling $60 million. |
At June 30, 2004, our Hong Kong subsidiary pledged approximately $3.0$3.6 million in certificates of deposit for suchto this bank to assure the availability and, (ii) four back-to-back
23
letter of the $15.0 million credit facilities totaling $75 million that require a compensating cash balance of $1.5 million.facilities. At December 31, 2003,June 30, 2004, there were approximately $7.3$12.6 million and $502,000, respectively, of letters of credit outstanding under these credit facilities. These letter of credit facilities require the foreign subsidiary to meet a net worth covenant which was complied with at June 30, 2004.
At present, we believe that future cash flow from operations and our existing institutional financing noted above will be sufficient to fund all of our cash requirements for the next twelve months.
The following summarizes our obligations at December 31, 2003June 30, 2004 for the periods shown (in thousands):
Payment due by period | ||||||||||||||||||||
Less than 1 | More than 5 | |||||||||||||||||||
Total | year | 1 – 3 years | 3 – 5 years | years | ||||||||||||||||
Notes Payable | $ | 9,335 | $ | 9 | $ | 2,450 | $ | 6,876 | $ | — | ||||||||||
Capital lease obligations | 119 | 62 | 57 | — | — | |||||||||||||||
Leases | 4,601 | 1,816 | 2,091 | 694 | — | |||||||||||||||
Total | $ | 14,055 | $ | 1,887 | $ | 4,598 | $ | 7,570 | $ | — | ||||||||||
Payment due by period | ||||||||||||||||||||
Less than 1 | More than 5 | |||||||||||||||||||
Total | year | 1 - 3 years | 3 - 5 years | year | ||||||||||||||||
Notes Payable | $ | 21,701 | $ | — | $ | 17,500 | $ | 4,201 | $ | — | ||||||||||
Capital lease obligations | 62 | 35 | 27 | — | — | |||||||||||||||
Leases | 7,584 | 2,378 | 3,714 | 1,492 | — | |||||||||||||||
Total | $ | 29,347 | $ | 2,413 | $ | 21,241 | $ | 5,693 | $ | — | ||||||||||
There were no material capital expenditure commitments and no substantial commitments for purchase orders outside the normal course of businesspurchase orders used to secure product as of December 31, 2003.June 30, 2004.
Contingencies20
During the past several years, SSG used the services of Strategic Technologies, Inc. (“STI”) to process their outbound truck freight bills. STI audited SSG’s freight bills and provided a listing of freight invoices that were scheduled for payment, at which time SSG transferred funds to STI. STI was required to issue checks to the various carriers within forty-eight (48) hours of receipt of SSG’s funds. STI filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on July 19, 2002, which was converted to Chapter 7 of the U.S. Bankruptcy Code on July 31, 2002. In certain circumstances, SSG has had to pay their freight carriers for invoices that were previously paid to STI and is attempting to recover such monies from STI. SSG has filed a proof of claim of approximately $593,000 for unpaid shipping charges and service fees paid to STI. No assurance can be made that SSG will be able to recover such money.
During the past several years, SSG used the services of Consolidated Freightways Corporation to ship product to its customers. Consolidated Freightways Corporation filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code on December 2, 2002, in the United States Bankruptcy Court in the District of California, Case No. RS 02-24284-MG. On August 25, 2003, the Bankruptcy Trustee for Consolidated
24
Freightways Corporation of Delaware filed a lawsuit in the United States Bankruptcy Court, Central District of California,to collect fees for the transportation of goods, that are alleged to be owed to the bankruptcy estate. The Trustee’s initial claim is $866,684, which includes approximately $265,000 in collection fees and late payment charges. SSG disputes the amount claimed by the Trustee and claims an offset of approximately $308,000 for goods lost or damaged by Consolidated Freightways in transit.
It is not possible at this time to determine the ultimate liabilities or recoveries that we may incur resulting from these lawsuits, claims, and proceedings. If these matters were to be ultimately resolved unfavorably at amounts exceeding our reserves, an outcome not currently anticipated, it is possible that such outcome could have a material adverse effect on our consolidated financial position or results of operations.
Critical Accounting Policies
For the three and nine month periodsperiod ended December 31, 2003,June 30, 2004, there were no significant changes to our accounting policies from those reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003.2004.
Inflation, Foreign Currency, and Interest Rates
Neither inflation nor currency fluctuations had a significant effect on our results of operations during the first three quartersquarter of fiscal 2004.2005. Our exposure to currency fluctuations has been minimized by the use of U.S. dollar denominated purchase orders, and by sourcing production in more than one country. The consumer electronics segment purchases virtually all of its products from manufacturers located in various Asian countries.
The interest on borrowings under our credit facilities is based on the prime and LIBOR rate. We believe that given the present economic climate, interest rates, while expected to rise, are not expected to increase significantly during the coming year.
Recent Pronouncements of the Financial Accounting Standards Board
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation of variable interest entities (“VIE’s”). FIN 46 requires a variable interest entity to be consolidated by a parent company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust or any
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other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. In October 2003, the FASB agreed to defer the effective date of FIN 46 for variable interest held by public companies in all entities that were acquired prior to February 1, 2003. This deferral is to allow time for certain implementation issues to be addressed through the issuance of a potential modification to the interpretation. The deferral revised the effective date for consolidation of these entities until the end of the first interim or annual period ending after December 15, 2003. We adopted this statement as of December 31, 2003 and it did not have any material impact on our financial statements.
In April 2003, the FASB issued FAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” FAS 149 amends and clarifies financial accounting and reporting for derivative instruments. This statement is effective for contracts entered into or modified after June 30, 2003. We adopted this statement as of July 1, 2003 and it did not have any material impact on our financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which addresses how an issuer classifies and measures financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuers. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective (except for certain measurement requirements, the effective date of which has been deferred indefinitely) at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before the issuance date of this Statement and still existing at the beginning of the interim period of adoption, transition shall be achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attribute required by this Statement. We adopted this statement as of July 1, 2003 and it did not have any material impact on our financial statements.
Forward-Looking Information
This report contains various forward-looking statements made pursuant to the safe harbor provisions under the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and information that is based on management’s beliefs as well as assumptions made by and information currently available to management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. When used in this report, the words “anticipate”, “believe”,
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“estimate” “estimate”, “expect”, “predict”, “project”, and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements which speak only as of the date hereof, and should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including the statements under “Risk Factors” set forth in our Form 10-K for the fiscal year ended March 31, 20032004 and other filings with the Securities and Exchange Commission (the “SEC”). For additional risk factors as they relate to the sporting goods segment, see SSG’s Form 10-K for the fiscal year ended March 28, 2003 Item 7 – “Certain Factors that May Affect the Company’s Business or Future Operating Results” and other filings with the SEC. We undertake no obligation to publicly release the results on any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
We maintain a website at www.emersonradio.com. We make available through our internet website free of charge our annual report on our website the proxy statements andForm 10-K, quarterly reports on FormsForm 10-Q, current reports on Form 8-K, 10-Kamendments to such reports and 10-Q that we fileother filings made by us with the SEC, as soon as practicable after we electronically file such reports and other filings with the SEC with respect to our securities as soon as reasonably practicable after such materialSEC. Our website address is electronically filed with or furnished to the SEC.
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www.emersonradio.com. The information contained in this website is not incorporated by reference in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes from items disclosed in Form 10-K for the fiscal year ended March 31, 2003.2004.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. (b)Changes in internal controls over financial reporting. There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.
Putative Class Actions
Between September 4, 2003 and October 30, 2003, several putative class action lawsuits were filed in the United States District Court for the District of New Jersey against usEmerson and Mssrs.Messrs. Geoffrey Jurick, Kenneth Corby and John Raab (the “Individual Defendants”) on behalf of purchasers of our publicly traded securities who bought shares 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
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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 a defendant in the litigation.
Generally, the original complaints allegeAmended Complaint alleges that weEmerson 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 growthability to replace lost revenues attributable to our Hello Kitty® license and demand for our products.(ii) omitting to disclose that Emerson suffered allegedly soured relationships with its largest retail customers. The complaintsAmended Complaint further allegealleges that these statements were each materially false and misleading when made because weEmerson allegedly misrepresented and omitted certain adverse facts which then existed and disclosure of which was necessary to make the statements not false and misleading.
The lead plaintiff in the Consolidated Action is currently scheduled to file an Amended and Consolidated Complaint on or about March 15, 2004, which may contain additional allegations. We Emerson, and the Individual Defendants intend to defend these lawsuitsthe lawsuit vigorously.
For other information on litigation to which we arethe Company is a party, reference is made to Part 1 Item-3-Legal Proceedings in our most recent annual report on Form 10-K.
ITEM 2. Changes in Securities and Use of Proceeds.
Issuance of Securities:
In October 2003, in connection with a consulting arrangement,None.
Share Repurchases:
For the quarter ending June 30, 2004, we granted warrants to purchase 50,000did not repurchase any shares of our common stock with an exercise price of $5.00 per share. In addition, in November 2003, we issued 45,544 shares of our common stock upon exercise of 100,000
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outstanding warrants under a cashless transaction. These securities were issued in transactions not involving a public offering and exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.
Share Repurchases:
The following table summarizes Emerson Radio Corp.’s common stock share repurchase program for the quarter ending December 31, 2003.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 and Exchange Act Rule 10B (18).Act. Prior to the December 31, 2003June 30, 2004 quarter, we repurchased 188,8001,111,625 shares under this program.
Cumulative | ||||||||||||||||
Number of | Maximum Number | |||||||||||||||
Shares Purchased | of Shares that | |||||||||||||||
as Part of | May Yet Be | |||||||||||||||
Total Number | Average | Publicly | Purchased | |||||||||||||
of Shares | Price Paid | Announced | Under the | |||||||||||||
Period | Purchased | Per Share | Programs | Programs | ||||||||||||
October 01, 2003 through October 31, 2003 | 267,000 | $ | 3.99 | 455,800 | 1,544,200 | |||||||||||
November 01, 2003 through November 30, 2003 | 84,425 | $ | 3.76 | 540,225 | 1,459,775 | |||||||||||
December 01, 2003 through December 31, 2003 | 245,100 | $ | 3.39 | 785,325 | 1,214,675 | |||||||||||
TOTAL | 596,525 | $ | 3.71 | |||||||||||||
ITEM 3. Default Upon Senior Securities.
(a) | None | ||
(b) | None |
ITEM 4. Submission of Matters to a Vote of Security Holders.
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ITEM 5. Other Information.
None |
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ITEM 6. Exhibits and Reports on Form 8-K.
(a) | Exhibits: | |
Amendment to Revolving Credit and Term Loan Agreement (Number | ||
31.1 | Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
31.2 | Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
32 | Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
(b) | Reports on Form 8-K: | |
Current report on Form 8-K, dated |
* | filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EMERSON RADIO CORP. | ||||
(Registrant) | ||||
Date: | /s/ Geoffrey P. Jurick | |||
Geoffrey P. Jurick | ||||
Chairman of the Board, | ||||
Chief Executive Officer and | President | |||
(Principal Executive Officer) |
Date: | /s/ Kenneth A. Corby | |
Kenneth A. Corby | ||
Executive Vice President and | ||
Chief Financial Officer | ||
(Principal Finance and | ||
Accounting Officer) |
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