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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-25226
EMERSON RADIO CORP.
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(Exact name of registrant as specified in its charter)
Delaware 22-3285224
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Nine Entin Road, Parsippany, NJ 07054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 884-5800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days. [X] YES [ ] NO.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [ ] YES [X] NO.
Aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates of the registrant at September 30, 2004
(computed by reference to the last reported sale price of the Common Stock on
the American Stock Exchange on such date): $44,451,232.
Number of Common Shares outstanding at June 7, 2005: 27,203,164
DOCUMENTS INCORPORATED BY REFERENCE:
Document Part of the Form 10-K
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Proxy Statement for 2005 Annual Meeting of Part III
Stockholders
1
PART I
This Annual Report on Form 10-K contains, in addition to historical
information, "forward-looking statements" (within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties. See
"Business- Forward-Looking Statements."
ITEM 1. BUSINESS
THE COMPANY
We operate in two business segments:
o consumer electronics; and
o sporting goods.
The consumer electronics segment designs, sources, imports and markets
a variety of consumer electronic products and licenses its trademarks for a
variety of products worldwide. The sporting goods segment, which is operated
through our 53% ownership of Sport Supply Group, Inc., distributes and markets
sports related equipment and leisure products primarily to institutional
customers in the United States.
Emerson was originally formed in the State of New York in 1956 under
the name Major Electronics Corp. In 1977, we reincorporated in the State of New
Jersey and changed our name to Emerson Radio Corp. In 1994, we were
reincorporated in the State of Delaware. Our principal executive offices are
located at Nine Entin Road, Parsippany, New Jersey 07054-0430. Our telephone
number in Parsippany, New Jersey, is (973) 884-5800.
Unless the context otherwise requires, the term:
o "Emerson" refers to our "consumer electronics" segment which is
operated through Emerson Radio Corp. and its subsidiaries, other
than SSG;
o "SSG" refers to our "sporting goods" segment which is operated
through Sport Supply Group, Inc. and its subsidiaries; and
o "we", "us" and "our" refers to both Emerson and SSG.
For additional disclosures of our business segments and major
customers, as well as financial information about geographical areas, see Item 8
- - "Financial Statements and Supplementary Data" - Note 14 of Notes to
Consolidated Financial Statements.
2
SUPERVISION AND REGULATION
We file reports and other information with the Securities and Exchange
Commission ("SEC") pursuant to the information requirements of the Securities
Exchange Act of 1934. Readers may read and copy any document we file at the
SEC's public reference room at 450 Fifth St. N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operations
of the public reference room. Our filings are also available to the public from
commercial document retrieval services and at the SEC's website at www.sec.gov.
We make available through our internet website free of charge our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, amendments to such reports and other filings made by us with the SEC,
as soon as practicable after we electronically file such reports and filings
with the SEC. Our website address is www.emersonradio.com. The information
contained in our website is not incorporated by reference in this report.
On March 5, 2004, SSG filed a Form 15 with the Securities and Exchange
Commission giving notice of the termination of the registration of its
securities and the suspension of duty to file periodic reports under Sections 13
and 15(d) of the Securities Exchange Act of 1934. As a result, SSG is no longer
required to file annual reports on Form 10-K, quarterly reports on Form 10-Q or
current reports on form 8-K with the SEC.
CONSUMER ELECTRONICS SEGMENT
General
Emerson, directly and through several subsidiaries, designs, sources,
imports, markets, sells and licenses to certain licensees a variety of consumer
electronic products, both domestically and internationally, under the Emerson(R)
and HH Scott(R) brand names. These products include:
o video products - televisions, combination television/VCR/DVDs,
digital video discs (DVD), video cassette recorders (VCR) and set
top boxes;
o microwave ovens;
o audio, clocks and clock radios, home theater systems and
multi-media;
o houseware products; and
o video accessories, telecommunication equipment, certain computer
accessories, specialty, other consumer electronic products and
mobile electronics.
Emerson also licenses a variety of specialty themed logos and marks
from third parties for use on audio products that bear the names of these third
parties. We refer to these licenses as inward licenses.
3
The trade name "Emerson Radio" dates back to 1912 and is one of the
oldest and most well respected names in the consumer electronics industry. See
"Consumer Electronics Segment - Licensing and Related Activities."
Emerson believes it possesses an advantage over its competitors due to
the combination of:
o the "[EMERSON LOGO]" brand recognition;
o its distribution base and established customer relations;
o its sourcing expertise and established vendor relations;
o an infrastructure with personnel experienced in servicing and
providing logistical support to the domestic mass merchant
distribution channel; and
o its extensive experience in establishing license and distribution
agreements on a global basis for a variety of products.
Emerson intends to continue leveraging its core competencies to offer a
broad variety of current and new consumer electronic products to customers. In
addition, Emerson intends to enter into additional licenses of third party trade
names and trademarks ("inward licenses"), as well as licenses for the use of
Emerson's trade names and trademarks by third parties ("outward licenses") and
distribution agreements that take advantage of Emerson's trademarks and utilize
the logistical and sourcing advantages for products that are more efficiently
marketed through these agreements. We continuously evaluate potential licenses
and distribution agreements. In March 2003, Emerson entered into a license
agreement with Nickelodeon to license the Nickelodeon name, trademark and logo,
along with several other Nickelodeon trademarks and logos. See - "Consumer
Electronics Segment - Licensing and Related Activities".
Emerson's core business consists of selling, distributing, and
licensing various low to moderately priced categories of consumer electronic
products. The majority of Emerson's marketing and sales efforts are concentrated
in the United States and, to a lesser extent, certain other international
regions. Major competitors in these markets are foreign-based manufacturers and
distributors. See "Consumer Electronics Segment - Competition."
Products
Emerson's current product and branded categories consist of the
following:
VIDEO PRODUCTS AUDIO PRODUCTS OTHER
- -------------- -------------- -----
Televisions Portable stereo systems Housewares
Specialty televisions Digital clock radios Home theater
Digital video discs (DVD) Shelf stereo systems Microwave ovens
Specialty video cassette players Specialty clock radios Multi-media
Video cassette recorders (VCR) Telecommunications
4
Growth Strategy
We believe growth opportunities exist through the implementation of the
following:
o higher penetration levels within our existing customers through
increases in the products offered and sold to existing accounts;
o expansion of our existing customer base in United States through our
sales staff and sales representative organizations;
o expansion of our existing worldwide customer base through our
foreign distribution agreements and direct selling, particularly in
Europe and Asia;
o expansion into distribution channels we are not currently utilizing
through new products that are being offered by Emerson;
o development and sales of new products not presently being offered by
Emerson, such as electronics and accessories that utilize popular
theme characters and logos through the use of various trademarks
licensed from third parties;
o further development of our direct to consumer sales channel, through
Emerson's internet web-site;
o continuing to capitalize on the "[EMERSON LOGO]" and "H.H.
Scott(R)" trademarks through continued efforts to enter into license
agreements with third parties to license the "[EMERSON LOGO]" and
"H.H. Scott(R)" trademarks for products not currently being sold,
and in geographic areas not presently being serviced; and
o expansion through strategic mergers with and acquisitions of other
businesses.
In connection with Emerson's strategic focus, Emerson may acquire an
equity position in other corporate entities.
Emerson believes that the "[EMERSON LOGO]" trademark is recognized in
many countries. A principal component of Emerson's growth strategy is to utilize
this global brand name recognition together with its reputation for quality and
cost competitive products to aggressively promote its product lines within the
United States and targeted geographic areas on an international basis. Emerson
believes that it will be able to compete more effectively in the highly
competitive consumer electronics and microwave oven industries, domestically and
internationally, by combining innovative approaches to its current product line
and augmenting its product line with complementary products. Emerson intends to
pursue such plans either independently or by forging new relationships,
including license arrangements, distributorship agreements and joint ventures.
See "Consumer Electronics Segment - Licensing and Related Activities."
5
Sales and Distribution
Emerson's Direct Import Program allows its customers to import and
receive product directly from Emerson's manufacturers located outside the United
States. Under the Direct Import Program, title for its products passes in the
country of origin upon shipment of the product by the manufacturer. Emerson also
sells product to customers from its U.S. based finished goods inventory, which
is referred to as its Domestic Program. Under the Domestic Program, title for
its products primarily passes at the time of shipment. Under both programs, we
recognize revenues at the time title passes to the customer. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Emerson has an integrated system to coordinate the purchasing, sales
and distribution aspects of its operations. Emerson receives orders from its
major accounts electronically, via electronic data interface (EDI), facsimile,
telephone or mail. Emerson does not have long-term contracts with any of its
customers, but rather receives orders on an ongoing basis. Products imported by
Emerson, generally from the Far East, are shipped by ocean and/or inland freight
and then stored in contracted public warehouse facilities for shipment to
customers. All inventory is monitored by Emerson's electronic inventory system.
As a purchase order is received and filled from inventory, warehoused product is
labeled and prepared for outbound shipment to customers by common, contract or
small package carriers for sales made from inventory.
Domestic Marketing
In the United States, Emerson markets its products primarily through:
o mass merchandisers;
o discount retailers;
o toy retailers; and
o distributors and specialty catalogers.
In fiscal 2005 and 2004, Wal-Mart Stores accounted for approximately
30% and 25% of our consolidated net revenues, respectively, and Target Stores
accounted for approximately 12% and 15% of our consolidated net revenues,
respectively. No other customer accounted for more than 10% of our consolidated
net revenues in either period. Management believes that a loss, or a significant
reduction of sales to Wal-Mart or Target would have a material adverse effect on
our business and results of operations.
Approximately 45% and 49% of the net consumer electronics revenues in
fiscal 2005 and 2004, respectively, were made through third party sales
representative organizations that receive sales commissions and work in
conjunction with Emerson's own sales personnel. With Emerson's permission, third
party sales representative organizations may sell competitive products in
addition to Emerson's products. In most instances, either party may terminate a
sales representative relationship on 30 days prior notice by Emerson and 90 days
prior notice by the sales representative organization in accordance with
customary industry practice. Emerson utilizes approximately 22 sales
representative organizations, including two through which approximately 18% and
16% of the net consumer electronics revenues were made in fiscal 2005. For
fiscal 2004, two sales organizations accounted for approximately 15% and 10% of
the net consumer electronics revenues. No other sales representative
organization accounted for more than 10% of the consumer electronics net
revenues in either year. The remainder of Emerson's sales are serviced by its
sales personnel. Management does not believe that the loss of one or more sales
representative organizations would have a material adverse effect on our
business and results of operations.
6
Foreign Marketing
Emerson primarily markets and distributes its products in the United
States. Accordingly, foreign sales account for less than 10% of total revenues
and are not considered material. Emerson intends to expand its existing
worldwide customer base through its foreign distribution agreements and direct
selling, particularly in Europe and Asia.
Licensing and Related Activities
Emerson has several license agreements that allow licensees to use our
trademarks for the manufacture and/or the sale of consumer electronics and other
products and are referred to as outward licenses. These license agreements allow
the licensee to use our trademarks by a specific product category, by a specific
geographic area (that primarily includes some or all the countries located in
North America, South America, Mexico and parts of Europe), by a specific
customer base, by any combination of the above, or by any other category that
might be defined in the license agreement. These license agreements are subject
to renewal at the initial expiration of the agreements and are governed by the
laws of the United States, and have expiration dates ranging from March 2006
through February 2010. Total license revenues recognized and earned in fiscal
2005, 2004, and 2003 were approximately $10,804,000, $10,973,000, and
$10,388,000, respectively. Emerson records licensing revenues as earned over the
term of the related agreements.
Effective January 1, 2001, Emerson entered into a license agreement
("Video License Agreement") with Funai Corporation, Inc. ("Funai"), which was
amended, to extend the Video License Agreement to December 31, 2006. The Video
License Agreement provides that Funai will manufacture, market, sell and
distribute specified products bearing the "[EMERSON LOGO]" trademark to
customers in the U.S. and Canadian markets. Under the terms of the agreement,
Emerson receives non-refundable minimum annual royalty payments of $4.3 million
each calendar year and a license fee on sales of products subject to the Video
License Agreement in excess of the minimum annual royalties. During fiscal 2005,
2004 and 2003, license revenues of $8,555,000, $8,759,000 and $8,520,000,
respectively, were recorded under this agreement.
Throughout various parts of the world, Emerson maintains distribution
and outward license agreements that encompass various Emerson(R) branded
products into defined geographic areas.
7
Emerson intends to pursue additional licensing and distribution
opportunities and believes that such activities have had and will continue to
have a positive impact on operating results by generating income with minimal
incremental costs, if any, and without the necessity of utilizing working
capital. See Item 1 - "Business - Forward-Looking Information" and Item 7
- -"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Effective March 2003, Emerson entered into a license agreement with MTV
Networks to license the Nickelodeon name, trademark and logo, along with several
of Nickelodeon's trademarks and logos. The initial term of the agreement expired
in December 2005, and has been, in accordance with the contract option, extended
by one year to December 2006. Additionally, Emerson entered into a second
contract with MTV Networks for increased Nickelodeon character trademarks and
logos, along with expanded product categories. The term of this second contract
also expires in December 2006. These licenses provide Emerson with the rights to
use such marks in the United States, and require certain minimum royalties to be
paid to MTV Networks.
Design and Manufacturing
Emerson's products are manufactured by several original equipment
manufacturers in accordance with Emerson's specifications. During fiscal 2005
and 2004, 100% of Emerson's purchases consisted of imported finished goods from
manufacturers primarily located in:
o South Korea;
o China;
o Malaysia; and
o Thailand.
Emerson's design team is responsible for product development and works
closely with Emerson's suppliers. Emerson's engineers determine the detailed
cosmetic, electronic and other features for new products, which typically
incorporate commercially available electronic parts to be assembled according to
their design. Accordingly, the exterior designs and operating features of the
products reflect Emerson's judgment of current styles and consumer preferences.
Emerson's designs are tailored to meet the consumer preferences of the local
market, particularly in the case of its international markets.
The following summarizes Emerson's purchases from its major suppliers:
Fiscal Year
-----------------------
SUPPLIER 2005 2004
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StarLite 16% 15%
Lasco Industries 15% 10%
Oxygen 11% *
Avatar Mfg * 14%
GMT Industries * 12%
Daewoo * 12%
* - less than 10%
8
No other supplier accounted for more than 10% of Emerson's total
purchases in fiscal 2005 or 2004. Emerson considers its relationships with its
suppliers to be satisfactory and believes that, barring any unusual material or
part shortages or economic, fiscal or monetary conditions, Emerson could
develop, as it already has, alternative suppliers. No assurance can be given
that ample supply of product would be available at current prices if Emerson was
required to seek alternative sources of supply without adequate notice by a
supplier or a reasonable opportunity to seek alternate production facilities and
component parts. See Item 1 - "Business - Forward-Looking Information, Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 7A - "Inflation, Foreign Currency and Interest Rates."
Warranties
Emerson offers limited warranties for its consumer electronics,
comparable to those offered to consumers by its competitors in the United
States. Such warranties typically consist of a 90 day period for audio products
and one year period for microwave products, under which Emerson will pay for
labor and parts, or offer a new or similar unit in exchange for a non-performing
unit.
Returned Products
Emerson's customers return product to Emerson for a variety of reasons,
including:
o retailer return policies with their customers;
o damage to goods in transit and cosmetic imperfections; and
o mechanical failures.
Emerson has entered into agreements with the majority of its suppliers
that require the supplier to accept returned defective product. Emerson pays a
fee to the supplier and in exchange receives a unit.
Backlog
We do not believe that backlog is a significant factor in our consumer
electronics segment. The ability of management to correctly anticipate and
provide for inventory requirements is essential to the successful operation of
our consumer electronics business.
9
Trademarks
Emerson owns the:
o "[EMERSON LOGO]";
o "Emerson Research(R)";
o "Emerson Interactive sm";
o "Girl Power TM";
o "H.H. Scott(R)"; and
o "Scott(R)"
trademarks for certain of its home entertainment and consumer electronic
products in the United States, Canada, Mexico and various other countries. Of
the trademarks owned by Emerson, those registered in the United States and
Canada must be renewed at various times through 2011 and 2014, respectively.
Emerson's trademarks are also registered in various other countries, which
registrations must be renewed at various times. Emerson intends to renew all
trademarks necessary for its business. Emerson considers the "[EMERSON LOGO]"
and HH Scott(R) trademarks to be of material importance to its business
and, to a lesser degree, the remaining trademarks. Emerson licenses the
"[EMERSON LOGO]" and HH Scott(R) trademarks to third parties, the scope of
which is on a limited product and geographic basis and for a period of time.
See "Consumer Electronics Segment - Licensing and Related Activities."
Competition
As published in the January 2005 edition of the Consumer Electronics
Association Market Research report, the market segments of the consumer
electronics industry in which Emerson competes generates approximately $21
billion of factory sales annually and is highly fragmented, cyclical and very
competitive. The industry is characterized by the short life cycle of products,
which requires continuous design and development efforts.
Emerson primarily competes in the low to medium-priced sector of the
consumer electronics market. Management estimates that Emerson has several dozen
competitors that are manufacturers and/or distributors, many of which are much
larger and have greater financial resources than Emerson. Emerson competes
primarily on the basis of:
10
o its reliability;
o quality;
o price;
o design;
o consumer acceptance of its products; and
o quality service and support to retailers and their customers.
Emerson also competes at the retail level for shelf space and
promotional displays, all of which have an impact on its established and
proposed distribution channels.
Seasonality
Emerson generally experiences stronger demand from its customers for
its products in the fiscal quarters ending September and December. However,
during the last several years, this revenue pattern has been less prevalent due
to the need for retailers to plan earlier for the winter holiday selling season
and our management's ability to obtain additional orders to meet increased
product demand during the March and June fiscal quarters.
Working Capital
Our consumer electronics segment is impacted by its seasonality in that
it generally records the majority of annual sales in the quarters ending
September and December, requiring it to maintain higher inventory levels during
the quarters ending June and September, therefore increasing the working capital
needs during these periods. Management believes that the outward license
agreements, sales margin stability and the policies in place for returned
products should continue to favorably impact our cash flow. Management believes
that anticipated cash flow from operations and the financing presently in place
will provide sufficient liquidity to meet its operating and debt service cash
requirements in the year ahead. Management believes the Company's working
capital practices are similar to those of its competitors.
SPORTING GOODS SEGMENT
General
Management believes SSG is a leading direct mail marketer of sports
related equipment and leisure products for sale primarily to the institutional
market in the United States.
From July 2003 through November 2003, certain of SSG's team dealer
locations were discontinued. In November 2003, SSG sold all of the issued and
outstanding capital stock of it's wholly-owned subsidiary, Athletic Training
Equipment Company, Inc. ("ATEC"). Collectively, we refer to these as
"Discontinued Operations" and accordingly, the accompanying financial statements
reflect these as discontinued operations. These transactions helped reduce the
overhead of SSG along with providing funds to reduce the debt of SSG.
11
Products
Management believes SSG manufactures and distributes one of the
broadest lines of sporting goods, physical educational, recreational and leisure
products to the institutional market. SSG offers over 10,000 products, of which
SSG manufactures approximately 1,000 of these products and the remainder are
purchased from other manufacturers. The SSG product lines include: archery;
baseball; softball; basketball; camping; football; tennis and other racquet
sports; gymnastics; indoor recreation; game tables; physical education; soccer;
field and floor hockey; lacrosse; track and field; volleyball; weight lifting;
fitness equipment; outdoor playground equipment; and early childhood development
products.
Management believes brand recognition is important to the institutional
market. Most of SSG's products are marketed under trade names or trademarks
owned or licensed by SSG and include the following:
Alumagoal(R) Blastball(R) BSN(R)
Champion Barbell Curvemaster(R) Fibersport
Flag A Tag(R) Gamecraft GSC Sports
Maxpro(R) MacGregor(R) New England Camp & Supply
NorthAmerican Recreation(R) Passon's Sports Pillo Polo(R)
Port-A-Pit(R) Pro Base(R) Pro Down(R)
Pro Net Rol-Dri(R)and Tidi-Court Toppleball(R)
U.S. Games, Inc(R) Voit (R)
Growth Strategy
SSG believes it is well positioned to grow its business due to:
o its ability to process and fulfill a high capacity of orders;
o its well-developed expertise in catalog design and merchandising;
and
o its information technology system and its Internet platform.
One of the most important contributions of SSG's information technology
platform is that the order processing and fulfillment capabilities are
integrated throughout the operations of SSG, including all of SSG's websites.
Each website is strategically targeted to a specific customer group or product
line. The continued migration of SSG's customers to its websites is important to
SSG's growth and success.
Sales and Distribution
SSG's websites enable its customers to place orders, access account
information, track orders, and perform routine customer service inquiries on a
real-time basis, twenty-four hours a day, seven days a week. This functionality
allows for more convenience and added flexibility for its customers.
12
SSG's sourcing, warehousing, distribution and fulfillment capabilities
and its fully integrated information system, provide the necessary capacities,
logistics, information and technological capabilities to meet the demands and
growth potential of commerce.
Domestic Marketing
SSG offers products directly to the institutional market primarily
through:
o a variety of distinctive, information-rich catalogs;
o sales personnel strategically located in certain large
metropolitan areas;
o in-bound and out-bound telemarketers;
o a team of experienced bid and quote personnel; and
o the Internet.
SSG's marketing efforts are supported by a database of over 250,000
customers, a call center, a custom-designed distribution center and several
manufacturing facilities. SSG currently offers approximately 10,000 sports
related equipment products to over 100,000 customers, which include: public and
private schools; colleges; universities and military academies; municipal and
governmental agencies; military facilities; churches; clubs; camps; hospitals;
youth sports leagues; non-profit organizations; team dealers; and certain large
retail sporting goods chains.
SSG believes that its customer base in the United States is the largest
in the institutional direct mail market for sports related equipment.
Licensing and Related Activities
SSG has inward licenses for certain well-known names and trademarks
that allow it to manufacture, sell, and distribute specified sport related
products and equipment to institutional customers using the licensed names for
specified royalty fees paid to licensors. See "Business-Sporting Goods Segment -
Trademarks."
Design and Manufacturing
SSG manufactures, assembles and distributes many of its products at its
facilities. See Item 2 - "Properties."
Most of SSG's manufactured products are standardized. Certain products
manufactured by SSG are custom made; such as tumbling mats ordered in color or
size specifications. The principal raw materials used by SSG in manufacturing
are, for the most part, readily available from several different sources. No one
supplier accounts for more than 10% of the total raw materials supplied to SSG.
Such raw materials include: foam; vinyl; nylon thread; steel and aluminum
tubing.
13
Items not manufactured by SSG are purchased from various suppliers
primarily located in the United States, Taiwan, Australia, the Philippines,
Thailand, China, Pakistan, Sweden and Canada. SSG has no significant purchase
contracts with any major supplier of finished products, and most products
purchased from suppliers are available from other sources. Purchases of most
finished products are made in U.S. dollars and are, therefore, not subject to
direct foreign exchange rate differences.
Warranties
SSG typically offers limited warranties for its sporting goods, which
are comparable to its competitors.
Returned Products
In most instances, SSG's customers have the right to return product
within 30 days. Returned products in the sporting goods segment are less
frequent than the consumer electronics segment, and are not considered a
significant factor in SSG's operations.
Backlog
SSG had a backlog of approximately $2.4 million at March 31, 2005, $2.2
million at March 31, 2004, and $2.9 million at March 31, 2003.
Trademarks
SSG licenses certain well known trade names and trademarks allowing it
to manufacture, sell, and distribute specified sport related products and
equipment to institutional customers using these names for specified royalty
fees. These license agreements have expiration dates ranging from December 2009
through 2040, in some cases with renewable terms and include our license with
MacGregor(R), which expires in 2040 and allows us to manufacture, promote, sell
and distribute specified products and equipment under the MacGregor(R) name.
Competition
SSG competes in the institutional sporting goods market principally
with:
o local sporting goods dealers;
o retail sporting goods stores;
o other direct mail catalog marketers; and
o providers of sporting goods on the Internet.
14
SSG has identified approximately 15 other direct mail and internet
companies in the institutional market most of whom management believes are
competitors that are substantially smaller than SSG in terms of geographic
coverage, products, e-commerce capability, customer base and revenues.
SSG competes in the institutional market principally on the basis of
brand, price, product availability, quality and customer service. SSG believes
it has an advantage in the institutional market over traditional sporting goods
retailers and team dealers because its selling prices do not include comparable
price markups attributable to traditional multi-distribution channel markups. In
addition, SSG's expansive product lines and the ability to control the
availability of goods that SSG sources enables it to respond more rapidly to
customer demand.
Seasonality
SSG has historically experienced strong revenues during the March, June
and September quarters primarily due to volume generated by spring and summer
sports, favorable outdoor weather conditions and school needs before summer
closings.
Working Capital
The sporting goods segment is impacted by seasonality with its March
quarter being the highest sales period, and the quarter ending December being
its lowest sales period. This seasonality requires the sporting goods segment to
maintain higher amounts of inventory during the quarters ending March and June,
therefore increasing the working capital needs during these periods.
GOVERNMENT REGULATION
Pursuant to the Tariff Act of 1930, as amended, the Trade Act of 1974
and regulations promulgated there under, the United States government charges
tariff duties, excess charges, assessments and penalties on many imports. These
regulations are subject to constant change and revision by government agencies
and by action by the United States Trade Representative and may have the effect
of increasing the cost of goods purchased by us or limiting quantities of goods
available to us from our overseas suppliers. A number of states have adopted
statutes regulating the manner of determining the amount of payments to
independent service centers performing warranty service on products such as
those sold by us. Additional Federal legislation and regulations regarding the
importation of consumer electronics products, including the products marketed by
us, have been proposed from time-to-time and, if enacted into law, could
adversely affect our financial condition and results of operations.
Many of our products are subject to Federal regulations, among other
laws, which empowers the Consumer Product Safety Commission (the "CPSC") to
protect consumers from hazardous sporting goods and other articles. The CPSC has
the authority to exclude from the market certain articles that are found to be
hazardous and can require a manufacturer to refund the purchase price of
products that present a substantial product hazard. CPSC determinations are
subject to court review. Similar laws exist in some states and cities in the
United States.
15
PRODUCT LIABILITY AND INSURANCE
Because of the nature of the products sold by us, particularly those
products sold by SSG, we are periodically subject to product liability claims
resulting from personal injuries. We may become involved in various lawsuits
incidental to our business. Additionally, significantly increased product
liability claims continue to be asserted successfully against manufacturers and
distributors of sports equipment throughout the United States resulting in
general uncertainty as to the nature and extent of manufacturers' and
distributors' liability for personal injuries. See Item 3 - "Legal Proceedings".
In recent years, product liability insurance has become much more
expensive, more restrictive and more difficult to obtain. Accordingly, there can
be no assurance that our general product liability insurance will be sufficient
to cover any successful product liability claims made. In our opinion, any
ultimate liability arising out of currently pending product liability claims
will not have a material adverse effect on the financial condition or results of
operations. However, any claims substantially in excess of the insurance
coverage, or any substantial claim not covered by insurance, could have a
material adverse effect on our financial condition and results of operations.
EMPLOYEES
As of April 29, 2005, we had approximately 379 employees, of which 139
were employed by Emerson, and 240 were employed by SSG. None of our employees
are represented by unions, and we believe our labor relations are good.
RISK FACTORS
You should carefully consider these risk factors in addition to our
financial statements, including the notes to such financial statements.
Additional risks that we do not yet know of or that we currently think are
immaterial may also impair our business operations. If any of the following
risks occur, our business, financial condition or operating results could be
adversely affected. In that case, the trading price of our common stock could
decline.
BUSINESS RELATED RISKS
The loss, or significant reduction in business of any of our key
customers, including Wal-Mart and Target, could negatively affect our revenues
and could decrease our earnings.
We are highly dependent upon sales of our consumer electronic products
to certain of our customers, including Wal-Mart and Target. During our fiscal
years ended March 31, 2005 and 2004, Wal-Mart stores accounted for approximately
30% and 25%, respectively, and Target stores accounted for approximately 12% and
15%, respectively, of our consolidated net revenues. Although no other customer
in either of our operating segments accounted for greater than 10% of our
consolidated net revenues during these periods, other customers may account for
more than 10% of our consolidated net revenues in future periods. All purchases
of our products by customers in both of our operating segments are made through
purchase orders and we do not have any long-term contracts with any of our
customers. The loss of Wal-Mart or Target, or any of our other customers to
which we sell a significant amount of our products or any significant portion of
orders from Wal-Mart or Target, or such other customers or any material adverse
change in the financial condition of such customers could negatively affect our
revenues and decrease our earnings.
16
The failure to maintain our relationships with our licensees, licensors and
distributors or the failure to obtain new licensees, licensors or distribution
relationships could negatively affect our revenues and decrease our earnings.
We maintain license agreements that allow licensees to use our
Emerson(R) and H.H. Scott(R) trademarks for the manufacture and sale of consumer
electronics and other products. In addition, we maintain distribution agreements
for the distribution of our consumer electronics products into defined
geographic areas. Although we have entered into agreements with certain of our
licensees and distributors of consumer electronics products, most of which have
a term of three years or less and expire between March 2006 and February 2010,
including our agreement with Funai, we cannot assure that such agreements will
be renewed when the terms of such agreements expire, or that our relationships
with our licensees or distributors will be maintained on satisfactory terms or
at all. The failure to maintain our relationships with Funai and our other
licensees and distributors, the failure to obtain new licensees or distribution
relationships or the failure by our licensees to protect the integrity and
reputation of our Emerson(R) and H.H. Scott(R) trademarks could negatively
affect our licensing revenues and decrease our earnings. In addition, we
maintain license agreements with MTV Networks to license the Nickelodeon name,
trademark and logo, along with several of Nickelodeon's trademarks and logos,
each of which expire in December 2006. We may not be able to renew the license
on terms favorable to us or at all. The failure to maintain our relationship
with MTV Networks or other licensors could negatively affect our revenues and
decrease our earnings.
Our sporting goods business licenses certain well-known names and
trademarks, including MacGregor(R) that expires in 2040, and allows us to
manufacture, promote, sell and distribute specified products and equipment.
Although the MacGregor(R) agreement expires in 2040, we cannot be assured that
our relationship with MacGregor(R) will be maintained on satisfactory terms or
at all. The non-renewal or termination of one or more of our material licenses
in our sporting goods business would eliminate our ability to sell products
bearing such names and trademarks and decrease our earnings.
Our revenues and earnings could be negatively affected if we cannot anticipate
market trends or enhance existing products or achieve market acceptance of new
products.
Our success is dependent on our ability to successfully anticipate and
respond to changing consumer demands and trends in a timely manner. In addition,
to increase our penetration of current markets and gain footholds in new markets
for our products, we must maintain existing products and integrate them with new
products. We may not be successful in developing, marketing and releasing new
products that respond to technological developments or changing customer needs
and preferences. We may also experience difficulties that could delay or prevent
the successful development, introduction and sale of these new products. In
addition, these new products may not adequately meet the requirements of the
marketplace and may not achieve any significant degree of market acceptance. If
release dates of any future products or enhancements to our products are
delayed, or if these products or enhancements fail to achieve market acceptance
when released, our sales volume may decline and earnings could be negatively
affected. In addition, new products or enhancements by our competitors may cause
customers to defer or forgo purchases of our products, which could also
negatively affect our revenues and earnings.
17
We depend on a limited number of suppliers for our components and raw materials
and any interruption in the availability of these components and raw materials
used in our products could reduce our revenues and adversely affect our
relationship with our customers.
We rely on a limited number of suppliers, most of which are located
outside of the United States, for the components and raw materials used in our
consumer electronics and sporting good products. Although there are many
suppliers for each of our component parts and raw materials, we are dependent on
a limited number of suppliers for many of the significant components and raw
materials. This reliance involves a number of significant risks, including:
o lack of availability of materials and interruptions in delivery
of components and raw materials from our suppliers;
o manufacturing delays caused by such lack of availability or
interruptions in delivery;
o fluctuations in the quality and the price of components and raw
materials, in particular due to the petroleum price impact on
such materials; and
o risks related to foreign operations.
We do not have any long-term or exclusive purchase commitments with any
of our suppliers. StarLite, Lasco Industries and Oxygen are our largest
suppliers of components for our consumer electronics products, each of which
accounted for more than 10% of our purchases of components for our consumer
electronics products for our latest fiscal year. Our failure to maintain
existing relationships with our suppliers or to establish new relationships in
the future could also negatively affect our ability to obtain our components and
raw materials used in our products in a timely manner. If we are unable to
obtain ample supply of product from our existing suppliers or alternative
sources of supply, we may be unable to satisfy our customers' orders which could
reduce our revenues and adversely affect our relationship with our customers.
The operating results of our sporting good segment may continue to be affected
by budgetary restrictions of schools and government agencies.
A substantial portion of our sporting goods product revenues are
generated through sales to the institutional market, including:
o public and private schools;
o colleges and universities;
o military academies;
o municipal and governmental agencies;
o military and correctional facilities;
o youth sports leagues.
18
As a result, our sporting goods business is substantially dependent on
the budgetary allowances of schools as well as local, state and federal
government agencies. Restrictions or reductions to the budgeted spending of
these entities could reduce the amount of goods purchased from us and could
materially adversely affect our revenues and earnings.
If our original equipment manufacturers are unable to deliver our products in
the required amounts and in a timely fashion, we could experience delays or
reductions in shipments to our customers which could reduce our revenues and
adversely affect our relationship with our customers.
All of our consumer electronic products and approximately 23.0% of our
sporting good products are manufactured in accordance with our specifications by
original equipment manufacturers principally located in:
o South Korea;
o China;
o Malaysia;
o Thailand; and
o Taiwan
If we are unable to obtain our products from the original equipment
manufacturers located in these countries in the required quantities and quality
and in a timely fashion, we could experience delays or reductions in product
shipments to our customers which could negatively affect our ability to meet the
requirements of our customers, as well as our relationships with our customers.
Unanticipated disruptions in our operations or slowdowns by our suppliers,
manufacturers and shipping companies could adversely affect our ability to
deliver our products and service our customers which could reduce our revenues
and adversely affect our relationship with our customers.
Our ability to provide high quality customer service, process and
fulfill orders and manage inventory depends on:
o the efficient and uninterrupted operation of our call center,
distribution center and manufacturing facilities related to our
sporting goods segment; and
o the timely and uninterrupted performance of third party
manufacturers and suppliers, shipping companies, and dock workers
relating to both our consumer electronics and sporting goods
segments.
19
Any material disruption or slowdown in the operation of our call
center, distribution center, manufacturing facilities or management information
systems, or comparable disruptions or slowdowns suffered by our principal
manufacturers, suppliers and shippers could cause delays in our ability to
receive, process and fulfill customer orders and may cause orders to be
canceled, lost or delivered late, goods to be returned or receipt of goods to be
refused. Our sporting goods segment ships approximately 60% of its products
using United Parcel Service. A strike by UPS or any of our other major carriers
or any other disruption in our ability or our customer's ability to receive our
products as a result of a strike or otherwise could materially adversely affect
our results of operations as a result of our failure to deliver our products in
a timely manner and using other more expensive freight carriers.
The operations of our sporting goods segment are subject to high fixed costs,
which could adversely affect our earnings.
The operations and maintenance of our call center, distribution center,
manufacturing facilities and management information systems related to our
sporting goods segment involve substantial fixed costs. Paper and postage are
significant components of our sporting goods segment operating costs. Catalog
mailings entail substantial paper, postage, and costs associated with catalog
development, each of which is subject to price fluctuations. If net revenues are
substantially below expectations, these fixed costs may not be proportionately
reduced and could materially adversely affect the earnings of our sporting goods
segment and, in turn, our consolidated earnings.
Our revenues and earnings could be adversely affected by foreign regulations and
changes in the political, public health and economic conditions in the foreign
countries in which we operate our business.
We derive a significant portion of our revenues from sales of products
manufactured by third parties located primarily in China, South Korea, Malaysia,
Thailand and Taiwan. In addition, third parties located in these and other
countries located in the same region produce and supply many of the components
and raw materials used in our products. Conducting an international business
inherently involves a number of difficulties and risks that could adversely
affect our ability to generate revenues and could subject us to increased costs.
The main factors that may adversely affect our revenues and increase our costs
are:
o currency fluctuations which could cause an increase in the price of
the components and raw materials used in our products and a decrease
in our profits;
o more stringent export restrictions in the countries in which we
operate which could adversely affect our ability to deliver our
products to our customers;
o tariffs and other trade barriers which could make it more expensive
for us to obtain and deliver our products to our customers;
o political instability and economic downturns in these countries
which could adversely affect our ability to obtain our products from
our manufacturers or deliver our products to our customers in a
timely fashion; and
o seasonal reductions in business activity in these countries during
the summer months which could adversely affect our sales.
20
In addition, the prior outbreak of severe acute respiratory syndrome,
or SARS, which had particular impact in China, Hong Kong and Singapore, had a
negative effect on our consumer electronics operations. Our operations,
including our ability to obtain our products in a timely fashion, could be
impacted again, including disrupting the operation of our suppliers,
manufacturers and shipping companies, each of which could adversely affect our
earnings, should SARS reoccur in the future.
We have experienced, and may in the future experience, many of these
risks and cannot predict the impact of any particular risk on our operations.
However, any of these factors may materially adversely affect our revenues
and/or increase our operating expenses.
The seasonality of our business, as well as changes in consumer spending and
economic conditions, may cause our quarterly operating results to fluctuate and
cause our stock price to decline.
Our net revenue and operating results may vary significantly from
quarter to quarter. The main factors that may cause these fluctuations are:
o seasonal variations in operating results;
o variations in the sales of our products to our significant
customers;
o increases in returned consumer electronics products in the March
quarter which follows our peak September and December selling
quarters;
o variations in manufacturing and supplier relationships;
o if we are unable to correctly anticipate and provide for inventory
requirements from quarter to quarter, we may not have sufficient
inventory to deliver our products to our customers in a timely
fashion or we may have excess inventory that we are unable to sell;
o the discretionary nature of our customers' demands and spending
patterns;
o changes in market and economic conditions; and
o competition.
In addition, our quarterly operating results could be materially
adversely affected by political instability, war, acts of terrorism or other
disasters.
Sales of our consumer electronics products are somewhat seasonal due to
consumer spending patterns, which tend to result in significantly stronger sales
in our September and December fiscal quarters, especially as a result of the
holiday season. Our sporting goods segment is also somewhat seasonal due to
stronger demand for its products during the March fiscal quarter due to volume
generated by spring and summer sports, favorable outdoor weather conditions and
school needs before summer closings. These patterns will probably not change
significantly in the future. Although we believe that the seasonality of our
business is based primarily on the timing of consumer demand for our products,
fluctuations in operating results can also result from other factors affecting
us and our competitors, including new product developments or introductions,
availability of products for resale, competitive pricing pressures, changes in
product mix, pricing and product reviews and other media coverage. Due to the
seasonality of our business, our results for interim periods are not necessarily
indicative of our results for the year.
21
Our sales and earnings can also be affected by changes in the general
economy since purchases of consumer electronics and sporting goods are generally
discretionary for consumers and subject to budgetary constraints by schools and
government agencies. Our success is influenced by a number of economic factors
affecting disposable consumer income, such as employment levels, business
conditions, budgetary restrictions of schools and government agencies, interest
rates and taxation rates. Adverse changes in these economic factors, among
others, may restrict consumer spending or increase budgetary restrictions at
schools and government agencies, thereby negatively affecting our sales and
profitability.
As a result of these and other factors, revenues for any quarter are
subject to significant variation, which may adversely affect our results of
operations and the market price for our common stock.
If our third party sales representatives fail to adequately promote, market and
sell our consumer electronic products, our revenues could significantly
decrease.
A portion of our consumer electronic product sales are made through
third party sales representative organizations, whose members are not our
employees. Our level of sales depends on the effectiveness of these
organizations, as well as the effectiveness of our own employees. Some of these
third party representatives may sell, with our permission, competitive products
manufactured by other third parties as well as our products. During our fiscal
years ended March 31, 2005 and 2004, these organizations were responsible for
approximately 45% and 49%, respectively, of our net consumer electronics
revenues during such periods. In addition, two of these representative
organizations were responsible for a significant portion of these revenues. If
any of our third party sales representative organizations engaged by us,
especially our two largest, fails to adequately promote, market and sell our
consumer electronics products, our revenues could be significantly decreased
until a replacement organization or distributor could be retained by us. Finding
replacement organizations and distributors could be a time consuming process
during which our revenues could be negatively impacted.
The ownership of our common stock by Geoffrey P. Jurick, our Chairman, Chief
Executive Officer and President, substantially reduces the influence of our
other stockholders.
Geoffrey Jurick, our Chairman, Chief Executive Officer and President,
owns approximately 38.0% of our outstanding common stock. As a result, Geoffrey
Jurick currently has the ability to influence significantly the actions that
require stockholder approval, including:
o the election of our directors; and
o the approval of mergers, sales of assets or other corporate
transactions or matters submitted for stockholder approval.
22
As a result, our other stockholders may have little or no influence
over matters submitted for stockholder approval.
In January 2005, Geoffrey P. Jurick, the Chairman, Chief Executive
Officer and President of Emerson Radio Corp., obtained a $16 million loan from a
foreign financial institution. The loan (which, prior to extension, came due on
April 20, 2005) currently matures on July 20, 2005, is guaranteed by a third
party unaffiliated with Emerson and is secured by a pledge by Mr. Jurick of
approximately 10 million shares of his Emerson common stock (approximately 38%
of Emerson's common stock). If the loan term is not further extended and the
loan is not repaid at maturity, the stock could be utilized to satisfy Mr.
Jurick's obligations.
We may seek to make acquisitions that prove unsuccessful or strain or divert our
management's attention and our capital resources.
We may seek to grow our business through acquisitions of related
businesses. Such acquisitions present risks that could materially adversely
affect our earnings, including:
o the diversion of our management's attention from our everyday
business activities;
o the assimilation of the operations and personnel of the acquired
business;
o the incurring of additional expenses related to such acquisitions,
whether or not such acquisitions are consummated;
o the contingent and latent risks associated with the past operations
of, and other unanticipated problems arising in, the acquired
business; and
o the need to expand management, administration and operational
systems.
If we make such acquisitions, we cannot predict whether:
o we will be able to successfully integrate the operations of any new
businesses into our business;
o we will realize any anticipated benefits of completed acquisitions;
or
o there will be substantial unanticipated costs associated with
acquisitions.
In addition, future acquisitions by us may result in:
o potentially dilutive issuances of our equity securities;
o the incurrence of additional debt; and
o the recognition of significant charges for depreciation and
amortization related to goodwill and other intangible assets.
23
We continuously evaluate potential acquisitions of related businesses. However,
competition for such potential acquisitions is intense and we have not reached
any agreement or arrangement with respect to any particular acquisition and we
may not be able to complete any acquisitions on favorable terms or at all.
We are subject to intense competition in the industries in which we operate,
which could cause material reductions in the selling price of our products or
losses of our market share.
The consumer electronics industry and the institutional market for
sporting goods and leisure products are highly competitive, especially with
respect to pricing and the introduction of new products and features. Our
consumer electronics segment competes in the low to medium-priced sector of the
consumer electronics market and competes primarily on the basis of:
o reliability;
o quality;
o price;
o design;
o consumer acceptance of the Emerson(R) trademark; and
o quality service and support to retailers and our customers.
Our sporting goods segment competes in the institutional sporting
goods market principally with local sporting goods dealers, retail sporting
goods stores, other direct mail catalog marketers and providers of sporting
goods on the Internet. Our sporting goods segment competes principally on the
basis of:
o brand;
o quality;
o price;
o product availability; and
o customer service.
24
In recent years we and many of our competitors have regularly lowered
prices, and we expect these pricing pressures to continue. If these pricing
pressures are not mitigated by increases in volume, cost reductions or changes
in product mix, our revenues and profits could be substantially reduced. As
compared to us, many of our competitors have:
o significantly longer operating histories;
o significantly greater managerial, financial, marketing, technical
and other competitive resources; and
o greater name recognition.
As a result, our competitors may be able to:
o adapt more quickly to new or emerging technologies and changes in
customer requirements;
o devote greater resources to the promotion and sale of their products
and services; and
o respond more effectively to pricing pressures.
These factors could materially adversely affect our operations and
financial condition. In addition, competition could increase if:
o new companies enter the market;
o existing competitors expand their product mix; or
o we expand into new markets.
An increase in competition could result in material price reductions or
loss of our market share.
Our business could be adversely affected if we cannot protect our intellectual
property rights or if we infringe on the intellectual property rights of others.
Our ability to compete effectively will depend on our ability to
maintain and protect our proprietary rights. We own the Emerson(R) trademark,
which is materially important to our business, as well as our license, other
trademarks and proprietary rights that are used for certain of our home
entertainment and consumer electronics products. In addition, we license names
and trademarks in connection with our sporting goods business. Our trademarks
are registered throughout the world, including the United States, Canada,
Mexico, France, Spain, Germany and the United Kingdom. However, third parties
may seek to challenge, invalidate, circumvent or render unenforceable any
proprietary rights owned by or licensed to us. In addition, in the event third
party licensees fail to protect the integrity of our trademarks, the value of
these marks could be adversely affected.
25
The laws of some foreign countries in which we operate may not protect
our proprietary rights to the same extent as do laws in the United States. The
protections afforded by the laws of such countries may not be adequate to
protect our intellectual property rights.
Our inability to protect our proprietary rights could materially
adversely affect the license of our trade names and trademarks to third parties
as well as our ability to sell our products. Litigation may be necessary to:
o enforce our intellectual property rights;
o protect our trade secrets; and
o determine the scope and validity of such intellectual property
rights.
Any such litigation, whether or not successful, could result in substantial
costs and diversion of resources and management's attention from the operation
of our business.
We may receive notice of claims of infringement of other parties'
proprietary rights. Such actions could result in litigation and we could incur
significant costs and diversion of resources in defending such claims. The party
making such claims could secure a judgment awarding substantial damages, as well
as injunctive or other equitable relief. Such relief could effectively block our
ability to make, use, sell, distribute or market our products and services in
such jurisdiction. We may also be required to seek licenses to such intellectual
property. We cannot predict, however, whether such licenses would be available
or, if available, that such licenses could be obtained on terms that are
commercially reasonable and acceptable to us. The failure to obtain the
necessary licenses or other rights could delay or preclude the sale, manufacture
or distribution of our products and could result in increased costs to us.
We could be exposed to product liability or other claims for which our product
liability or other insurance may be inadequate.
A failure of any of the products marketed by us, particularly those
products sold by our sporting goods segment, may subject us to the risk of
product liability claims and litigation arising from injuries allegedly caused
by the improper functioning or design of our products. Although we currently
maintain product liability insurance in amounts which we consider adequate, we
cannot assure that:
o our insurance will provide adequate coverage against potential
liabilities;
o adequate product liability insurance will continue to be available
in the future; or
o our insurance can be maintained on acceptable terms.
We and certain of our officers and directors, are party to a class
action lawsuit and we cannot assure the outcome of such litigation. Although we
maintain liability insurance in amounts that we consider adequate, we cannot
assure that such policies will provide adequate coverage against potential
liabilities. To the extent product liability or other litigation losses are
beyond the limits or scope of our insurance coverage, our expenses could
materially increase. See Item 3 - "Legal Proceedings".
26
The inability to use our tax net operating losses could result in a charge to
earnings and could require us to pay higher taxes.
Both Emerson and SSG have substantial tax net operating losses
available to reduce taxable income for federal and state income tax purposes. A
portion of the benefit associated with the tax net operating losses has been
recognized as a deferred tax asset in our financial statements and could be used
to reduce our tax liability in future profitable periods. We believe these net
deferred tax assets will be realized through tax planning strategies available
in future periods and future profitable operating results. Although realization
is not assured at either Emerson or SSG, we believe it is more likely than not
that all of the remaining net deferred tax assets will be realized. The amount
of the deferred tax asset considered realizable, however, could be reduced or
eliminated in the near term if certain tax planning strategies are not
successfully executed, or estimates of future taxable income during the
carryforward period is reduced.
In addition, transactions consummated by us or Geoffrey Jurick, that
together with other transactions consummated by Emerson, SSG or Mr. Jurick or
that involve the common stock of Emerson or SSG, are deemed collectively to
result in a change of control of Emerson or SSG, respectively, and under the tax
code could limit the use of our tax net operating losses. In the event that
either Emerson or SSG is unable to utilize its tax net operating losses in a
reasonable time frame, it would be required to adjust its deferred tax asset on
its financial statements which would result in a charge to earnings.
Additionally, should the utilization of tax net operating losses be limited, we
would be required to pay a greater amount of taxes in future periods.
Our existing indebtedness may adversely affect our ability to obtain additional
funds and may increase our vulnerability to economic or business downturns.
From time to time we incur debt in connection with our operations. As a
result, we may be subject to the risks associated with indebtedness, including:
o we must dedicate a portion of our cash flows from operations to pay
debt service costs and, as a result, we have less funds available
for operations and other purposes;
o it may be more difficult and expensive to obtain additional funds
through financings, if available at all;
o we are more vulnerable to economic downturns and fluctuations in
interest rates, less able to withstand competitive pressures and
less flexible in reacting to changes in our industry and general
economic conditions; and
o if we default under any of our existing credit facilities or if our
creditors demand payment of a portion or all of our indebtedness, we
may not have sufficient funds to make such payments.
27
We have pledged substantially all of our assets to secure our borrowings under
our credit facilities and are subject to covenants that may restrict our ability
to operate our business.
Our indebtedness under our credit facilities are secured by
substantially all of our assets. If we default under the indebtedness secured by
our assets, those assets would be available to the secured creditor to satisfy
our obligations to the secured creditor. In addition, our credit facilities
impose certain restrictive covenants, including financial, ownership,
operational and net worth covenants. Failure to satisfy any of these covenants
could result in all or any of the following:
o acceleration of the payment of our outstanding indebtedness;
o our inability to borrow additional amounts under our existing
financing arrangements; and
o our inability to secure financing on favorable terms or at all from
alternative sources.
Any of these consequences could significantly reduce the amount of
cash and financing available to us which in turn would adversely affect our
ability to operate our business, including acquiring our products from our
manufacturers and distributing our products to our customers.
MARKET RELATED RISKS
The market price of our common stock has experienced significant price and
volume fluctuations from time to time.
The market price for our common stock and for securities of similar
companies has from time to time experienced significant price and volume
fluctuations. Factors which may affect our market price include:
o market conditions in the industries in which we operate;
o competition;
o sales or the possibility of sales of our common stock;
o our results of operations and financial condition; and
o general economic conditions.
Furthermore, the stock market has experienced significant price and
volume fluctuations unrelated to the operating performance of particular
companies. These market fluctuations may also adversely affect the market price
of our common stock.
Our organizational documents and Delaware law may make it harder for us to be
acquired without the consent and cooperation of our board of directors and
management.
28
Several provisions of our organizational documents and Delaware law
may deter or prevent a takeover attempt, including a takeover attempt in which
the potential purchaser offers to pay a per share price greater than the current
market price of our common stock. Under the terms of our certificate of
incorporation, our board of directors has the authority, without further action
by the stockholders, to issue shares of preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof. The
ability to issue shares of preferred stock could tend to discourage takeover or
acquisition proposals not supported by our current board of directors.
FORWARD-LOOKING INFORMATION
This report contains various forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act") and information that is based on
management's beliefs as well as assumptions made by and information currently
available to management. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct. When used in this report, the words
"anticipate", "believe", "estimate", "expect", "predict", "project", and similar
expressions are intended to identify forward-looking statements. We cannot
guarantee the accuracy of the forward-looking statements, and you should be
aware that our actual results could differ materially from those contained in
the forward-looking statements due to a number of factors, including the
statements under "Risk Factors" set forth above and "Critical Accounting
Policies" set forth in Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Due to these uncertainties and risks, readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report.
ITEM 2. PROPERTIES
The following table sets forth the material properties owned or leased
by us:
Approximate Lease
Square Expires
Facility Purpose Footage Location or is Owned
---------------- ------- -------- --------
Consumer electronics segment:
Corporate headquarters 22,500 Parsippany, NJ December 2009
Hong Kong office 10,000 Hong Kong, China October 2005
Macao office (1) 2,000 Macao, China Owned
Macao office 8,700 Macao, China Owned
Warehouse 97,105 Irving, TX June 2010
Sporting goods segment:
Manufacturing and corporate 135,000 Farmers Branch, TX December 2007
headquarters
Warehouse and fulfillment processing 181,000 Farmers Branch, TX December 2007
Manufacturing 35,000 Anniston, AL Owned
Manufacturing 45,000 Anniston, AL Owned
(1) - currently in process of being sold.
29
Emerson also utilizes public warehouse space with terms typically of
one year. Public warehouse expenses for Emerson varies based on a percentage of
sold products shipped from the location.
We believe that the properties used for our operations are in
satisfactory condition and adequate for our present and anticipated future
operations. In addition to the facilities listed above, SSG leases space in
various locations, primarily for use as sales offices, which lease terms range
from month to month to three years and are not material to us.
ITEM 3. LEGAL PROCEEDINGS
Putative Class Actions
Between September 4, 2003 and October 30, 2003, several putative
class action lawsuits were filed in the United States District Court for the
District of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth
Corby and John Raab (the "Individual Defendants") on behalf of purchasers of
Emerson's publicly traded securities between January 29, 2003 and August 12,
2003 (the "Class Period.") On December 17, 2003, the Court entered a Joint
Stipulation and Order consolidating these putative class actions under the
caption In Re Emerson Radio Corp. Securities Litigation, 03cv4201 (JLL) (the
"Consolidated Action.") Further to that Stipulation and Order, lead plaintiff
was appointed and co-lead counsel and co-liaison counsel were approved by the
Court in the Consolidated Action. Consistent with the Stipulation and Order, the
plaintiffs filed an Amended Consolidated Complaint (the "Amended Complaint")
that, among other things, added Jerome Farnum, one of Emerson's directors, as an
individual defendant in the litigation.
Generally, the Amended Complaint alleges that Emerson and the
Individual Defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and Rule 10b-5 promulgated there under, by (i) issuing
certain positive statements during the Class Period regarding our ability to
replace lost revenues attributable to the Hello Kitty(R) license and (ii)
omitting to disclose that Emerson suffered allegedly soured relationships with
its largest retail customers. The Amended Complaint further alleges that these
statements were materially false and misleading when made because Emerson
allegedly misrepresented and omitted certain adverse facts which then existed
and disclosure of which was necessary to make the statements not false and
misleading. Emerson and the Individual Defendants deny all allegations and have
moved to dismiss the Complaint in its entirety for failure to state a claim. The
motion to dismiss was fully briefed and was submitted to the Court on October
15, 2004. The Court's decision on the motion is pending. Emerson and the
Individual Defendants intend to defend the lawsuit vigorously.
30
Other Matters
We are a party to various other litigation matters, in most cases
involving ordinary and routine claims incidental to our business. We cannot
estimate with certainty our ultimate legal and financial liability with respect
to such pending litigation matters. However, we believe, based on our
examination of such matters, that our ultimate liability will not have a
material adverse effect on our financial position, results or operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
(a) Market Information
Our common stock has traded on the American Stock Exchange under the
symbol MSN since December 22, 1994. The following table sets forth the range of
high and low sales prices for our common stock as reported by the American Stock
Exchange during the last two fiscal years.
FISCAL 2005 FISCAL 2004
------------------- ------------------
High Low High Low
First Quarter $ 4.10 $ 3.00 $ 7.88 $ 5.95
Second Quarter 3.25 2.56 7.80 2.47
Third Quarter 3.83 2.58 4.28 3.15
Fourth Quarter 3.98 3.00 4.05 3.27
There is no established trading market for our Series A convertible
preferred stock, whose conversion feature expired as of March 31, 2002.
(b) Holders
At April 25, 2005, there were approximately 342 stockholders of record
of our common stock. We believe that the number of beneficial owners is
substantially greater than the number of record holders, because a large portion
of our common stock is held of record in broker "street names."
(c) Dividends
Our policy has been to retain all available earnings, if any, for the
development and growth of our business. We have not paid and do not intend to
pay cash dividends on our common stock. In addition, our credit facility
restricts our ability to pay cash dividends on our common stock.
(d) Unregistered Securities
None
(e) Share Repurchases
For the fiscal year ended March 31, 2005, we did not repurchase any
shares under the Emerson Radio Corp.'s common stock share repurchase program.
The share repurchase program was publicly announced in September 2003 to
repurchase up to 2,000,000 shares of Emerson's outstanding common stock. Share
repurchases are made from time to time in open market transactions in such
amounts as determined in the discretion of Emerson's management within the
guidelines set forth by Rule 10b - 18 under the Securities Exchange Act. Prior
to the fiscal year ended March 31, 2005, we repurchased 1,111,625 shares under
this program. The maximum number of shares that are available to be repurchased
under Emerson Radio Corp's common share repurchase program as of March 31, 2005
was 888,375.
31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data
for the five years ended March 31, 2005. The selected consolidated financial
data should be read in conjunction with our Consolidated Financial Statements,
including the notes thereto, and Item 7 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
-------------- ------------- -------------- -------------- ------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2003 2002 2001 (1)
-------------- ------------- -------------- -------------- ------------
(In thousands, except per share data)
Summary of Operations:
Net Revenues (2) $ 320,704 $ 263,774 $ 330,315 $ 297,175 $ 354,760
Operating Income (loss) $ 11,303 $ (1,032) $ 18,685 $ 9,535 $ 13,980
Income (loss) from continuing
operations $ 5,855 $ (3,735) $ 26,206 $ 18,649 $ 13,495
Income (loss) from discontinued operations,
net of tax $ 50 $ 2,661 $ 840 $ 758 (842)
Cumulative effect of change in accounting
principle
-- -- (5,546) -- --
Net income (loss) $ 5,905 $ (1,074) $ 21,500 $ 19,407 $ 12,653
Balance Sheet Data at Period End:
Total Assets $ 131,168 $ 118,669 $ 134,562 $ 135,839 $ 119,006
Current Liabilities 45,899 40,637 48,668 54,723 45,330
Long-Term Debt 14,970 15,027 18,079 29,046 38,257
Shareholders' Equity 53,603 47,212 51,237 34,740 15,131
Working Capital 56,116 46,729 49,101 49,290 39,497
Current Ratio 2.2 to 1 2.2 to 1 2.0 to 1 1.9 to 1 1.9 to 1
Per Common Share: (3)
Basic net income (loss) per share:
Income (loss) from
continuing operations $ .22 $ (.14) $ .95 $ .60 $ .38
Discontinued operations -- .10 .03 .02 (.02)
Cumulative effect of change in
accounting principle -- -- (.20) -- --
------------- ------------ ------------- ------------ -----------
$ .22 $ (.04) $ .78 $ .62 $ .36
============= ============ ============= ============ ===========
Diluted net income (loss) per share:
Income (loss) from
continuing operations $ .22 $ (.14) $ .91 $ .50 $ .35
Discontinued operations -- .10 .03 .02 (.02)
Cumulative effect of change in
accounting principle -- -- (.19) -- --
------------- ------------ ------------- ------------ ------------
$ .22 $ (.04) $ .75 $ .52 $ .33
============= ============ ============= ============ ===========
Weighted Average Shares Outstanding:
Basic 26,991 27,227 27,716 31,298 35,066
Diluted 27,264 27,227 28,640 40,485 38,569
32
(1) Prior to March 23, 2001, the investment in SSG was accounted for under the
equity method of accounting. On March 23, 2001, a majority interest in SSG
was reached and required this interest be accounted for as a partial
purchase to the extent of the change in control. The assets and liabilities
of SSG have been revalued to fair value to the extent of Emerson's interest
in SSG. SSG's results of operations and the minority interest related to
those results have been included in our results of operations as though it
had been acquired at April 1, 2000.
(2) During fiscal 2004, SSG discontinued operations of certain team dealer
operations, and sold all of the capital stock of Athletic Training
Equipment Company, Inc. ("ATEC"). These transactions were classified as
discontinued operations, and accordingly reported separate from continuing
operations. The financial statements for fiscal 2001 through 2003 have been
reclassified to reflect such discontinued results.
(3) For fiscal 2002 and 2001, dilutive securities include 3,531,000 and
3,066,000 shares, respectively, assuming conversion of Series A preferred
stock at a price equal to 80% of the weighted average market value of a
share of common stock, determined as of March 31, 2002, and 2001. For
fiscal 2005, 2003, 2002 and 2001, dilutive securities also include 322,000,
924,000, 452,000 and 437,000 shares assuming conversion of 632,000,
1,195,000, 1,645,000 and 1,658,000 options, respectively, and 100,000
warrants for fiscal 2003. For fiscal 2002, dilutive securities also
included 5,204,000 shares assuming the conversion of convertible
debentures. Per common share data is based on the net income or loss for
the year and deduction of the amount of dividends required to be paid to
the holders of the preferred stock and the weighted average of common stock
outstanding during each fiscal year. Loss per share in fiscal 2004 does not
include potentially dilutive securities assumed outstanding since the
effects of such conversion would be anti-dilutive.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During fiscal 2001, Emerson increased its ownership in SSG to 50.1%.
Accordingly, Emerson's and SSG's results of operations are consolidated for
fiscal 2005, 2004 and 2003. See Item 8 - "Financial Statements and Supplementary
Data - Note 1 and Note 3 of Notes to Consolidated Financial Statements."
Management's Discussion and Analysis of Financial Condition and Results of
Operation is presented in three parts: consolidated operations, consumer
electronics segment and sporting goods segment.
The following discussion of our operations and financial condition
should be read in conjunction with the Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
Special Note: Certain statements set forth below constitute
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. See Item 1 - "Business-
Forward-Looking Information."
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all figures are approximations.
CONSOLIDATED OPERATIONS:
The following table sets forth, for the periods indicated, certain
items related to our consolidated statements of operations as a percentage of
net revenues for the fiscal years ended March 31. A detailed discussion of the
material changes in our operating results is set forth under our discussion of
our two operating segments: consumer electronics and sporting goods.
2005 2004 2003
---- ---- ----
Net revenues (in thousands) $ 320,704 $ 263,774 $ 330,315
================= ================= ===============
100.0% 100.0% 100.0%
Cost of sales 81.8% 81.7% 80.0%
Other operating costs and expenses 1.8% 2.0% 1.3%
Selling, general and administrative expenses 12.9% 15.9% 13.0%
Acquisition costs (recovered) incurred (0.1%) 0.6% --
Stock based costs 0.1% 0.2% --
----------------- ----------------- ---------------
Operating income (loss) 3.5% (0.4%) 5.7%
Interest expense, net 0.5% 0.5% 0.8%
Minority interest in net (income) loss of
consolidated subsidiary (0.2%) 0.3% 0.2%
----------------- ----------------- ---------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 2.8% (0.6%) 5.1%
Provision (benefit) for income taxes 1.0% 0.8% (2.8%)
----------------- ----------------- ---------------
Income (loss) from continuing operations 1.8% (1.4%) 7.9%
Income from discontinued operations, net of
tax -- 1.0% 0.3%
Cumulative effect of change in
accounting principle -- -- (1.7%)
----------------- ----------------- ---------------
Net income (loss) 1.8% (0.4%) 6.5%
================= ================= ===============
34
RESULTS OF CONSOLIDATED OPERATIONS - FISCAL 2005 COMPARED WITH FISCAL 2004
Net Revenues - Net revenues for fiscal 2005 increased approximately
$56.9 million, or 21.6%, to $320.7 million as compared to $263.8 million for
fiscal 2004. The increase in net revenues was primarily due to an increase of
approximately $50.8 million, or 28.3%, in the consumer electronics segment, as
well as an increase of $6.1 million, or 7.3%, in the sporting goods segment.
Cost of Sales - Cost of sales, in absolute terms, increased $46.8
million, or 21.7%, to $262.3 million for fiscal 2005 as compared to $215.5
million for fiscal 2004. This increase was primarily due to an increase of $44.6
million, or 29.0% in the consumer electronics segment, as well as an increase of
$2.3 million, or 3.6%, in the sporting goods segment. As a percentage of
consolidated net revenues, cost of sales increased from 81.7% in fiscal 2004 to
81.8% in fiscal 2005.
Other Operating Costs and Expenses - Other operating costs and expenses
are associated with the consumer electronics segment and include those
components as described in Note 1 of the Notes to Consolidated Financial
Statements. As a result of increased activity in these areas, other operating
costs increased $635,000, or 12.1%, from $5.3 million (2.0% of consolidated net
revenues) in fiscal 2004 to $5.9 million (1.8% of consolidated net revenues) in
fiscal 2005.
Selling, General and Administrative Expenses ("S,G&A") - In absolute
terms, S,G&A costs decreased by approximately $717,000, or 1.7%, from $42.0
million in fiscal 2004 to $41.3 million in fiscal 2005. In the consumer
electronics segment, S,G&A expenses increased $1.6 million, or 9.8%, while the
sporting goods segment recorded a decrease in S,G&A costs of $2.3 million, or
8.7%. As a percentage of consolidated net revenues, S,G&A expenses decreased to
12.9% for fiscal 2005 as compared to 15.9% for fiscal 2004, principally as a
result of the increase in consolidated net revenues.
Acquisition Costs (Recovered) Incurred - Acquisition costs are
associated with the consumer electronics segment. Adjustments to acquisition
costs incurred in the prior year were recorded in fiscal 2005, resulting in a
recovery of such costs of $454,000, or -0.1% of consolidated net revenues. For
fiscal 2004, acquisition costs were $1.6 million, or 0.6% of consolidated net
revenues, due to two unsuccessful acquisition attempts during the year.
35
Stock Based Costs - Stock based costs relate to the cost of warrants
associated with consulting service agreements and stock options expense
associated with the early adoption of SFAS 123R, "Share-Based Payments" for
fiscal 2005. (See Note 1 to accompanying financial statements). In absolute
terms, stock based costs were approximately $377,000, or 0.1% of consolidated
net revenues, for fiscal 2005, as compared to $524,000, or 0.2% of consolidated
net revenues, for fiscal 2004.
Interest expense, net - In absolute terms, interest expense increased
$220,000, or 16.4%, from $1.3 million in fiscal 2004 to $1.6 million in fiscal
2005. The increase was primarily due to higher borrowing amounts and borrowing
costs in the consumer electronics segment, resulting in an increase of $463,000,
or 52.4%, partially offset by a decrease of $243,000, or 52.9%, in the sporting
goods segment. Interest expense, as a percentage of consolidated net revenues,
remained unchanged at 0.5% for both fiscal 2005 and fiscal 2004.
Minority Interest in Net (Income) Loss of Consolidated Subsidiary -
Minority interest in net (income) loss of consolidated subsidiary represents
that portion of the sporting goods segment (income) loss for the fiscal year
that relates to the ownership of SSG by shareholders other than us. See Item 8 -
"Financial Statements and Supplementary Data - Note 1 of Notes to Consolidated
Financial Statements."
Provision (Benefit) For Income Taxes - The provision for income taxes,
which primarily represents the deferred tax charges associated with Emerson's
profits in the United States, increased approximately $833,000, or 38.7%, to
$3.0 million for fiscal 2005 from approximately $2.2 million for fiscal 2004.
The increase in the provision for income taxes was primarily due to an increase
in pre-tax profit in the consumer electronics segment.
Income from Discontinued Operations, Net of Tax - From July 2003
through November 2003, SSG ceased operating several of its Team Dealer
locations. In November 2003, SSG sold all of the issued and outstanding shares
of capital stock of its wholly owned subsidiary - ATEC. Income of $50,000 was
recorded during the wind down of these operations (the "discontinued
operations") in fiscal 2005 as compared to income of approximately $2.7 million,
or 1.0% of consolidated net revenues for fiscal 2004.
Net Income (loss) - As a result of the foregoing factors, we had net
earnings of approximately $5.9 million (1.8% of consolidated net revenues) for
fiscal 2005 as compared to a net loss of $1.1 million (-0.4% of consolidated net
revenues) for fiscal 2004.
RESULTS OF CONSOLIDATED OPERATIONS - FISCAL 2004 COMPARED WITH FISCAL 2003
Net Revenues - Net revenues for fiscal 2004 decreased approximately
$66.5 million, or 20.1%, to $263.8 million as compared to $330.3 million for
fiscal 2003. The decrease in net revenues was primarily due to a decrease of
approximately $65.3 million, or 26.6%, in the consumer electronics segment, as
well as a decrease of $1.3 million, or 1.5%, in the sporting goods segment.
36
Cost of Sales - Cost of sales, in absolute terms, decreased $48.6
million, or 18.4%, to $215.4 million for fiscal 2004 as compared to $264.0
million for fiscal 2003. This decrease was primarily due to a decrease of $49.1
million, or 24.2%, in the consumer electronics segment, partially offset by an
increase of $474,000, or 0.8%, in the sporting goods segment. As a percentage of
consolidated net revenues, cost of sales increased from 80.0% in fiscal 2003 to
81.7% in fiscal 2004. The percentage increase in cost of sales was primarily the
result of lower margins in the consumer electronics segment in fiscal 2004.
Other Operating Costs and Expenses - Other operating costs and expenses
are associated with the consumer electronics segment and include those
components as described in Note 1 of Note to Consolidated Financial Statements.
As a result of increased activity in these areas, other operating costs
increased $0.9 million, or 20.8%, from $4.3 million (1.3% of consolidated net
revenues) in fiscal 2003 to $5.3 million (2.0% of consolidated net revenues) in
fiscal 2004.
Selling, General and Administrative Expenses ("S,G&A") - In absolute
terms, S,G&A expenses decreased $1.2 million, or 2.7%, to $42.0 million in
fiscal 2004 as compared to $43.2 million in fiscal 2003. This decrease in S,G&A
was primarily the result of a decrease of $1.5 million, or 8.6%, in the consumer
electronics segment, partially offset by an increase of $319,000, or 1.2% in the
sporting goods segment. As a percentage of consolidated net revenues, S,G&A
expenses increased to 15.9% for fiscal 2004 as compared to 13.0% for fiscal
2003, principally as a result of the decline in revenues.
Acquisition Costs - Acquisition costs are associated with the consumer
electronics segment. Acquisition costs were $1.6 million (0.6% of consolidated
net revenues) for fiscal 2004, due to two unsuccessful acquisition attempts
during the year. There were no acquisition costs in fiscal 2003.
Stock Based Costs - Stock based costs are associated with the consumer
electronics segment, which relate to the value of warrants issued in exchange
for consulting services. Stock based costs increased from $49,000 (less than
0.1% of consolidated net revenues) in fiscal 2003 to $523,000 (0.2% of
consolidated net revenues) in fiscal 2004.
Interest expense, net - Interest expense decreased $1.2 million, or
46.2%, from $2.5 million (0.8% of consolidated net revenues) in fiscal 2003 to
$1.3 million (0.5% of consolidated net revenues) in fiscal 2004. The decrease
was primarily due to lower borrowing amounts and lower interest rates, resulting
in a decrease of $1.0 million, or 53.4%, in the consumer electronics segment, as
well as a decrease of $0.2 million, or 23.4%, in the sporting goods segment.
Minority Interest in Net Loss of Consolidated Subsidiary - Minority
interest in net loss of consolidated subsidiary represents that portion of the
sporting goods segment loss for the fiscal year that relates to the ownership of
SSG by shareholders other than us. See Item 8 - "Financial Statements and
Supplementary Data - Note 1 of Notes to Consolidated Financial Statements."
37
Provision (Benefit) For Income Taxes - The provision for income taxes
in absolute terms was $2.2 million in fiscal 2004 as compared to a tax benefit
of $9.3 million in fiscal 2003. The provision of $2.2 million in fiscal 2004
primarily represents the deferred tax charges associated with Emerson's profits
in the United States. The tax benefit in fiscal 2003 was primarily the result of
a reduction in the valuation reserve in the consumer electronics segment,
previously established against the deferred tax assets relating to the accounts
receivable and temporary inventory differences, as well as the recognition of
management's estimation of net operating loss carry forwards subject to
limitations under IRC Section 382. See Item 8 - "Financial Statements and
Supplementary Data - Note 7 of Notes to Consolidated Financial Statements."
Income from Discontinued Operations, Net of Tax - Income from
discontinued operations, net of tax, is associated with the sporting goods
segment. In July, October and November 2003, SSG ceased operations of its Team
Dealer locations in Little Rock, Arkansas, Enid, Oklahoma, and Wichita, Kansas,
respectively. In addition, SSG sold all of the issued and outstanding capital
stock of ATEC. Income from discontinued operations increased $1.9 million to
$2.7 million (1.0 % of consolidated net revenues) in fiscal 2004 from $0.8
million (0.3% of consolidated net revenues) in fiscal 2003. See Item 8 -
"Financial Statements and Supplementary Data - Note 17 of Notes to Consolidated
Financial Statements."
Net Income (loss) - As a result of the foregoing factors, we had a net
loss of approximately $1.1 million (-0.4% of consolidated net revenues) for
fiscal 2004 as compared to net income of $21.5 million (6.5% of consolidated net
revenues) for fiscal 2003.
CONSUMER ELECTRONICS SEGMENT:
The following table summarizes certain financial information relating
to the consumer electronics segment for the fiscal years ended March 31 (in
thousands):
2005 2004 2003
---------------- ----------------- -----------------
Net revenues $ 230,783 $ 179,952 $ 245,216
---------------- ----------------- -----------------
Cost of sales 198,221 153,643 202,699
Other operating costs 5,889 5,254 4,348
Selling, general & administrative 17,436 15,885 17,380
Acquisition costs (recovered) incurred (454) 1,553 --
Stock based costs 249 524 49
---------------- ----------------- -----------------
Operating income 9,442 3,093 20,740
Interest expense, net 1,346 883 1,893
---------------- ----------------- -----------------
Income before income taxes 8,096 2,210 18,847
Provision (benefit) for income taxes 2,983 2,150 (9,281)
---------------- ----------------- -----------------
Net income $ 5,113 $ 60 $ 28,128
================ ================= =================
RESULTS OF CONSUMER ELECTRONICS OPERATIONS - FISCAL 2005 COMPARED WITH FISCAL
2004
Net Revenues - Net revenues for fiscal 2005 increased $50.8 million, or
28.3%, to $230.8 million as compared to $180.0 million for fiscal 2004. Consumer
electronics net revenues are comprised of Emerson(R) branded product sales,
themed product sales and licensing revenues. Emerson(R) branded product sales
are earned from the sale of products bearing the Emerson(R) or HH Scott(R) brand
name; themed product sales represent products sold bearing a certain theme or
character; and licensing revenues are derived from licensing the Emerson(R) and
HH Scott(R) brand names to licensees for a fee. The increase in net revenues
comprised of:
38
i) Emerson(R) branded products sales increased to $202.9 million
in fiscal 2005 compared to $158.5 million in fiscal 2004, an
increase of $44.3 million, or 28.0%, primarily resulting from
increased sales volume.
ii) Themed product sales increased to $17.1 million in fiscal 2005
compared to $10.4 million in fiscal 2004, an increase of $6.7
million (63.7%), primarily due to increased Nickelodeon sales
volume.
iii) Licensing revenues decreased $169,000, or 1.5%, to $10.8
million in fiscal 2005 compared to $11.0 million in fiscal
2004, primarily due to slightly lower sales volumes from our
video licensing agreements.
Cost of Sales - In absolute terms, cost of sales increased $44.6
million, or 29.0%, to $198.2 million in fiscal 2005 as compared to $153.6
million in fiscal 2004. Cost of sales, as a percentage of net revenues,
increased from 85.4% in fiscal 2004 to 85.9% in fiscal 2005. The increase in
cost of sales in relative terms was primarily due to lower margins on Emerson(R)
branded and themed products, primarily attributable to competitive market
conditions.
Gross profit margins continue to be subject to competitive pressures
arising from pricing strategies associated with the price categories of the
consumer electronics market in which Emerson competes, accordingly, a change in
revenues does not directly correlate to a change in unit volume. Emerson's
products are generally placed in the low-to-medium priced category of the
market, which has a tendency to be highly competitive.
Other Operating Costs and Expenses - Other operating costs and expenses
include those components as described in Note 1 of Notes to Consolidated
Financial Statements. As a result of increased activity in these areas, other
operating costs and expenses as a percentage of net revenues were 2.6% in fiscal
2005 as compared to 2.9% in fiscal 2004. In absolute terms, other operating
costs and expenses increased $635,000, or 12.1%, to $5.9 million for fiscal 2005
as compared to $5.3 million in fiscal 2004.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a
percentage of net revenues, were 7.6% in fiscal 2005 as compared to 8.8% in
fiscal 2004. S,G&A, in absolute terms, increased $1.5 million, or 9.8%, to $17.4
million in fiscal 2005 as compared to $15.9 million for fiscal 2004. The
increase in S,G&A in absolute terms between fiscal 2005 and 2004 was primarily
due to increased freight out costs totaling $1.0 million, and increased
advertising expenditures of $800,000, partially offset by a decrease in
professional fees of $700,000, offset by smaller variances in other S,G&A
expenses.
Acquisition Costs (Recovered) Incurred - Acquisition costs are
associated with the consumer electronics segment. Adjustments to acquisition
costs incurred in the prior year were recorded in fiscal 2005, resulting in a
recovery of such costs of $454,000, or -0.2% of consumer electronics net
revenues. For fiscal 2004, acquisition costs were $1.6 million, or 0.9% of
consumer electronics net revenues, due to two unsuccessful acquisition attempts
during the year.
39
Stock Based Costs - Stock based costs relate to the cost of warrants
associated with consulting service agreements and stock options expense
associated with the early adoption of SFAS 123R "Share-Based Payments" for
fiscal 2005. Stock based costs decreased from $524,000 (0.3% of consumer
electronics net revenues) in fiscal 2004 to $249,000 (0.1% of consumer
electronics net revenues) in fiscal 2005, including approximately $161,000
related to the early adoption of SFAS 123R.
Interest Expense, net - Interest expense increased $463,000, or 52.4%,
to $1.3 million (0.6% of consumer electronics net revenues) in fiscal 2005 from
$0.9 million (0.5% of net revenues) in fiscal 2004. The increase was
attributable primarily to increased borrowings and borrowing costs.
Provision (benefit) for Income Taxes - Emerson's provision for income
taxes, which primarily represents the deferred tax charges associated with
Emerson's profits in the United States, was $3.0 million for fiscal 2005, or
1.3% of consumer electronics net revenues, as compared to $2.2 million for
fiscal 2004, or 1.2% of consumer electronics net revenues.
Net Income - As a result of the foregoing factors, the consumer
electronics segment generated net income of $5.1 million (2.2% of net revenues)
in fiscal 2005 as compared to $60,000 (less than 0.1% of net revenues) in fiscal
2004.
RESULTS OF CONSUMER ELECTRONICS OPERATIONS - FISCAL 2004 COMPARED WITH FISCAL
2003
Net Revenues - Net revenues for fiscal 2004 decreased $65.3 million, or
26.6%, to $180.0 million as compared to $245.2 million for fiscal 2003. Consumer
electronics net revenues are comprised of Emerson branded(R) product sales,
themed product sales and licensing revenues. Emerson(R) branded product sales
are earned from the sale of products bearing the Emerson(R) or HH Scott(R) brand
name; themed product sales represent products sold bearing a certain theme or
character; and licensing revenues are derived from licensing the Emerson(R) and
HH Scott(R) brand names to licensees for a fee. The decrease in net revenues
comprised of:
i) A decrease in Emerson(R) branded products sales of $34.2
million, or 17.7% to $158.5 million in fiscal 2004
compared to $192.6 million in fiscal 2003. These decreases
were associated with increased competition, decreased
orders from our primary customers and an overall slower
economy.
ii) Themed product sales decreased to $10.4 million in fiscal
2004 compared to $42.2 million fiscal 2003, or a decrease
of $31.7 million (75.2%). These decreases were due to the