Emerson Radio Corp (MSN) 2004 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Emerson Radio Corporation June 30th, 2003 earnings conference call.

At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the company, we will open up the conference for questions and answers after the presentation.

Joining us today are Mr. Geoffrey P. Jurick, Chairman and Chief Executive Officer of Emerson Radio Corp.; and Mr. Kenneth Corby, Chief Financial Officer and Executive Vice-President of Emerson Radio.

I would like to turn the call over now to Mr. Geoffrey P. Jurick. Please go ahead, sir.

Hello, everyone.

We invite you to the fiscal 2004 first quarter earnings call. Conference of Emerson Radio.

I'm going to turn over review to Ken, our Chief Executive - our Financial Officer and after that I will get back to you for questions. Hello, Ken.

Good morning, everybody.

Before we get started I would like to remind our listeners that the presentation contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. That can be identified by words such as believes, expects, projects and similar expressions that involve numerous risks and uncertainties. The company's actual results could vary and could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the company's filings with the Securities and Exchange Commission.

Consolidated financial results. For three month period ended June 30th, 2003, revenues declined to $57.6 million from $83.6 million or 31% from revenue decreases in both segments as gross margins declined from 22 to 21 1/2%.

SG&A expenses decreased in absolute dollars due to reductions in the sporting goods segment, more than offsetting increases in the electronic segment. Overall SG&A expenses, excluding one time charges associated with Emerson's acquisition attempt, declined due to continued stringent cost controls on all fronts.

Consolidated operating loss of $44,000 resulted due to the above factors with consumer electronics reporting a loss of $364,000 and sporting goods reporting an operating profit of $320,000. This compared to a consolidated operating profit of $5.6 million in the comparable prior year, comprised of $5.1 million from consumer electronics and $337,000 from sports goods respectively.

Cumulative change in accountable principle.

Last year the company wrote off 100% of its $5.6 million in goodwill associated with Sport Supply Group due to accounting standards pertaining to intangibles. This year the company had no such change in accounting principle. On a consolidated bases, net loss for the period totalled $445,000 or a loss of 2 cents per share as compared to a loss of $2.9 million for last year or 7 cents a share.

Electronics segment.

Revenues decreased to $31.6 million from $56.8 million over the prior year reflecting a 44.3% decrease. The decrease in net revenues was a result of declines in sales in product categories due to the slow down of the economy, a decrease in license revenues, an increase in product returns and a reduction in inventory levels maintained by our customers. Last year also benefited from retailers restocking efforts that arose from deferred purchasing and to accelerated purchasing in an effort to avoid expected product shortages as a result of the, then impending, west coast dock strike.

Gross margins also decreased from 18% to 16% due to higher margins on audio products being more than offset by declines in microwave ovens and a decline in sale of our higher margin theme products.

After removing costs of approximately $643,000 associated with an unsuccessful acquisition attempt from the current period results, SG&A expenses decreased to $3.5 million from $3.9 million in the same year ago period. Such decreases were a result of reduced spending in various categories. Furthermore, if not for these expenses, the company would have been profitable for the current quarter in its electronic segment.

As a result of the foregoing, a net loss of $506,000 was recorded for the first quarter, as compared to net income of $2.5 million over the prior year for the electronic segment.

Sporting good segment.

Net revenues declined approximately $812,000 for the three month period ended June 30th to $26 million from $26.8 million in the same period last year. Gross profit margins decreased to 28.4% from 30.4% of revenues, as a result of competitive pricing in various product categories more than offsetting gains realized from the migration of more efficient - to more efficient third-party manufacturers.

SG&A declined by 8% to $6.9 million from $7.6 million due to declines in wages and selling and promotional relates fees primarily associated with catalog production and mailing costs as revenues continue to migrate to it's internet ordering platform. Such declined reflected the continued benefit of this migration which require less attending cost to maintain than through traditional product ordering.

Net income, prior to the non-cash writeoff of SSG goodwill, was $115,000 compared to last years' $210,000. The writeoff of SSGs' $7.4 million goodwill last year is reflected, as mentioned earlier, as a cumulative affect of change in accounting principal, of which $5.6 million is reflected in the consolidated financial results of operations. Following this accounting adjustment, SSGs' net income was $115,000 for the current three month period as compared to last year's net loss of $7.2 million.

Balance sheet.

The consolidated balance sheet, on a year-over-year basis, improved in several key financial points due to continued management of the company's key liquid assets which are, namely, inventory and accounts receivable. Working capital increased by $16 million as reflected in the improvement in current ratio.

Reductions in current liabilities, namely, trade merchant debt and bank debt combined with an improvement in accounts receivable DSO over the prior year, reflect the companies strict asset management and strong free cash flow. Bank relations and liquidity remain solid with consolidated debt reduced by $6 million.

Free cash flow, a non-GAAP measurement comprised of earnings before income taxes, depreciation and amortization, plus a change in our working capital, improved to $9.8 million in the three month period as compared to $2.3 million in the comparative last year period. In other words, cash flow - free cash flow per share improved to 34 cents from 7 cents in the same period last year. Continued debt level reductions further improved Emerson's debt to equity ratios.

Looking forward. September quarter, sporting goods.

Migration to the internet we expect to continue. We expect the SG&A reduction expense in SG&A expenses reduction to continue. We are looking to expand retail sales and product placement through additional initiatives. We are reconfiguring our team dealer division by closing one store and utilizing distribution agreements as a more efficient method to obtain revenues. We also are expansion -- expanding into other major brands which have been made available to us such as Wilson, Rawlings, (INAUDIBLE) on selected buy / sell arrangements.

Electronics.

We expect the September revenues to be below last years strong performance due to several factors. Number one, retail buying remains sluggish and there is a continued reluctance by our customers to maintain higher inventory levels, other than "just in Time", in spite of certain expedited shipping occuring through the use of air freight. We are repositioning our portfolio of theme products by adding Nickelodeon items, expanding our GIRLPOWER and discontinued NASCAR, Hello, Kitty and our MaryKate and Ashley theme products due to market opportunities.

Three, store closures made by K-Mart earlier this year are expected to affect us through the September quarter and finally the ramp up of sale to China have been slowed somewhat due to the effect of SARS and due to the additional time necessary to finalize product placements and sourcing. Initially expected to begin shipment in September, we now see it further delayed.

Nickelodeon.

Nickelodeon is expected to - is an exciting addition to Emersons theme products and we expect to begin shipping product in the September quarter. Additionally, we recently in principle, agreed to further expand this license by adding karaoke and cameras, thus offering us a powerful assortment of products and characters expanded far beyond what we originally visualized in our initial license agreement with Nickelodeon. European efforts are ongoing and this, we believe, in time will prove to be a substantial opportunity.

Regarding licensing, we should begin to see Emerson branded flat panel plasma, as well as flat panel LCD screens, in the upcoming months as test marketing efforts begin on these new technology products. Further evidence that more and more types of products are bearing the Emerson name in this very high growth, high fashion market segment.

Product distribution.

We are optimistic that entry into drugstore chains will provide beneficial revenue growth as you look to begin shipping products to Walgreens, Eckerts and Long's drugstores for the first time, thus providing access to a new distribution channel and the many storefronts and customers that these stores offer.

Acquisition growth opportunities.

Our financial strength is solid as evidenced by our recent attempt to acquire the various brand names of bankrupt (INAUDIBLE) Corporation on a worldwide basis. We were successful in raising a significant amount of capital to engage in this transaction. However, the final pricing exceeded our reasonable financial evaluation and we elected not to pursue this opportunity any further. We will continue to evaluate accretive acquisitions that compliment our existing core lines of business.

S-3 update.

We have responded to a second round of comments issued to us by the SEC concerning Emerson's form S-3. Such comments have primarily addressed disclosure clarifications contained in the S-3 and in Emerson's forms 10-K and 10-Q. Such disclosure changes have been reflected in Emerson's Form 10-K for the period ended 3/31/03 and on our Form 10-Q for the period ended 6/30/03, which we'll be shortly filing. A timetable and specific placement date have not been established relative to the placement of the shares that are being registered pursuant to this form 3 - form S-3.

In summary, Emerson remains strategically focused on certain efforts that include licensing, expansion of our international operations; growth of our theme products; entry into additional product categories; growth through acquisition; maintaining strong cash flow through various commercial and tax planning strategies.

Our business model is sound and has resulted in significant improvement to Emerson on virtually every front. It's further allowed us to raise a significant amount of capital in pursuit of the acquisition opportunity mentioned earlier. Our management team remains focused on achieving these objectives that have been interrupted by a difficult economy. With that, Operator, I would like to open up the discussion to a question and answer, please.

Thank you very much, sir.

The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers.

If you have a question, please press star 1 on your push button telephones. If you wish to withdraw that question, please press star 2. Your questions will be taken in the order that they are received.

Please stand by for - for your first question, gentlemen. Our first question comes from Jeff Apel of Alias Capital.

Good morning, guys.

Good morning, Jeff.

What happened? Was the dropoff in sales Wal-Mart or is it one of the other big clients that could account for it?

Across the board there have been revenue (INAUDIBLE) for the various reasons that we've outlined.

Again, Wal-Mart reducing their inventory stocking levels. The product sell through on the related product continues to be very strong, it's simply a pull back on inventory levels on their behalf.

Target we are seeing the same sort of situation. And K-Mart, as we mentioned, their store closures last year affected us and we continue to see that affect through the September quarter. But overall, we were seeing additional penetration into the drugstore chain, which we were not in before, and so we see this as an opportunity moving into September as well as the remaining portion of the fiscal year.

My follow-up question to that is, we are hearing rumblings that Wal-Mart might be private labeling some electronics. Have you heard anything about that also?

And also, the other question I had, while I'm on the phone is - you know, we have been tracking closely Mr. Jurick's sale of 4.2 million shares that the court deemed necessary to fulfill the obligation of paying his former partner, Mr. Stallings, widow the $15 million. What's the status of the secondary offering?

Let me address the issue of private label.

All manufacturers for sometime have considered private labeling for various reasons. For margin, for house branding, et cetera. So this comes as an ongoing competitive situation that has existed for years. We believe that the Emerson brand name, along with the value added that we provide, such as our logistics support, such as our brand recognition, and such as our customer service, will continue to support our brand name and our product placements as it has over the many past years.

Regarding the status of the S-3, as indicated, there has been no timetable set for the placement of those shares. Mr. Jurick is not under court order to sell those shares. There is no order in place to that effect. So the nature of the timing is one subject, that subject to proper placement and orderly placement of the shares in the marketplace.

Right. 'Cause I remember, you know, meeting the company in late February and I know there have been some issues with the accounting and some issues now with the numbers.

I presume, now, that this is cleared up and the, you know, the current status of the business has come to the surface, it would be clear from the SEC point of view to sell the shares now.

Let me make something clear, Jeff. There has never been an accounting issue. So, this the first time - that statement is inaccurate.

I'm sorry. I meant, wasn't there an issue with the K being late because of the goodwill?

Our 10-K - the extension was filed to allow Sports Supply Group to complete its evaluation of its goodwill. And that was completed and the results were filed.

I'm sorry. I got confused with that. Thank you.

Thanks, guys. Next question is from Mark Cooper of Benton and Associates. Please state your question.

Ken, can you give me the total debt number at the end of the quarter?

Our consolidated bank debt was approximately $28 million.

And that's total consolidated debt?

That's correct.

And the year over year number is $46 million, is that correct?

Year over year, if your comparing June of last year to June of this year, we've reduced our bank debt by about $6 million.

Okay.

So I'm still not asking, I guess the right question.

What was total debt then last year's first quarter? For some reason I have $46.6 million.

Last year total debt -- we were looking at bank debt this year. Consolidated basis.

I hope we were saying the same thing. When I say total debt. Not just bank debt. Total debt.

With trade payables is. That's right. I'm sorry. If you include merchant trade debt along with bank debt it's roughly 30 - $43 million in current liabilities. Is that what you are referring to?

Yes.

Okay.

Then,so what is that comparable number this year?

Current liabilities were $43.7 million this year. Last year current liabilities were $59 million. So there is an increase of approximately $15 million -- I'm sorry, an increase of approximately $15 million and current and being offset by long term reduction.

Okay. The working capital or the cash flow, what is the cash flow from operations this quarter?

Cash flow from operations as measured in the statement changes, cash flow?

Right.

Was negative $11 million and that's primarily associated with an increase of $10 million to inventory, as well as increase of $5 million to cash receivable due to seasonal increases.

Okay. So your free cash flow was actually negative this quarter?

We measure free cash flow as EBITDA plus our change in working capital.

I know how you measure it, but that's not what's in your pocket.

I'm not trying to quibble with you or anything, but the balance sheet although it's heavy on the asset side and that makes it good from an asset side. Right now it's cash poor and I'm trying to understand how much of the bloating is gonna result in reduced margins going forward. 'Cause it looks like you have --

I see what you are after. Well, again, it's a seasonal increase in our inventory. We don't look to the inventory as being the larger number having an impact on margin going forward. Rather, we rook at that time from two perspectives.

Number one is, let's talk about sporting good segment where we've closed manufacturing locations and we've outsourced that product to third party manufacturers. On that front we are stocking an additional inventory levels because of the order lead time associated with it.

On the electronics segment, our inventory, on a year-over-year basis, is up slightly but that is to meet the product demand of Wal-Mart and Target which we are seeing that inventory shipped through now and we expect the inventory to come back into seasonal levels as we've seen in the prior year. So we don't look to the inventory, increasing inventories being a threat to our margin at this point.

It's hard to understand exactly how this seems to have not been noticed the last conference call. The last one was relatively upbeat, talking about things like NASCAR and MaryKate and Ashley.

And did I hear you say earlier now, MaryKate and Ashley is no longer a business of yours?

That's right. We've - we are repositioning our theme product categories.

When did that happen?

As a matter of fact, that happened in between obviously the last earnings call that we had and the information we are providing now. The business has been changing and this is current information we are bringing to you.

Well, you can see what you basically have dropped a bomb this morning. The stock price reflects that.

It's just difficult to understand now what the nature of the company's balance sheet, although it's asset rich, it looks like the company is rapidly becoming cash poor and that is not a good sign. And I'm trying to understand why you have elected, so far, not to give any better indication of what the next quarter could be. You should have a pretty good idea of what your orders are and if we are looking at another sales decline that's comparable to the one we just had.

Well we are - from a liquidity stand-point there is still significant liquidity with our banking lines. Again, the inventories - the DSO has declined on a year-over-year basis so we are seeing improvement on our A/R.

Our inventory turnover is slightly above this year where it was last-- or, I'm sorry, slightly below this year where it was last year. But overall from inventory and asset perspective, what we are seeing is a seasonal increase that doesn't make us uncomfortable from a financial perspective. Seeing that the orders are coming through to relieve that inventory and seeing our initiative on the sporting good segment, as far as outsourcing the product manufacturing.

Look, let me ask you this., Ken. We are here in the middle of August right now. So you should have a pretty good idea of what your September quarter is going to look like.

We do have a good understanding of what our September quarter looks like.

And last year we did approximately $115 million of revenues in the September quarter. And this year we were looking at a range of about 25% less for consolidated revenues for our September quarter.

Once again, we are seeing continued deferment of purchasing and for the full year results, it's really - way - very much too early to make that sort of prediction. If patterns continue along the lines of what we saw back in 2001 and in 2000, where retailers continue to pull back on purchasing and then, very late in the program came back and made significant product demands, you could see December and March as being very strong quarters. But, at this point it, it is very much too soon to go beyond September.

Let me ask you, what gives you the confidence that the sales declines are really deferred purchases and not, you know, status quo?

Well, a couple of issues.

Number one, our SKU placements have increased or remain the same in many situations on our core products. And number two, is from our correspondence directly with our retailers, our accounts.

One of the things that plays a role here is that we reduced a week of inventories, the retailers are holding right now. And last year, Ken, you might want to mention that.

Last year we had our retailers between last year and this year we do in fact see retailers going to a "Just in Time" inventory model, where we traditionally had approximately 8 weeks worth of inventory on hand at the retailers, this past quarter what we are seeing going into September quarter is that has reduced significantly, and sometimes down - in some instances down to two weeks and three weeks which is running very, very thin.

We have been receiving indications from the retailers this is too thin and in some cases, we have been asked to air ship product in because of stockout situations. So we don't expect the continued price pressure on the retailers because of having to bear the cost of air freight and because of the difficulties running out of stocked product to continue. That's why we are optimistic that December, these product delays that we're seeing - product purchase delays - we're optimistic that they shouldn't - They should alleviate themselves by getting back to a more normal, more higher inventory level. But at this point it is too soon to say this for certain.

I will let somebody else go. Thank you.

Thank you. Our next question comes from Jim Windle of Futher Lane Asset Management.

State your question, sir.

Hi.

You mentioned that the Nickelodeon is - will start shipping in the second quarter and that over time it's going to be a much bigger opportunity than you thought. How many SKUs you will be shipping initially?

How fast will that ramp up and how do those numbers compare with number of SKUs you were planning on shipping from MaryKate and Ashley and for NASCAR?

Couple of things.

With Nickelodeon, we first engaged in license agreement in the beginning part of the year and we recently, in principle, expanded it to additional product categories, as well as additional theme products.

The second part of that expansion given that it's late in the calendar year, we look to see -- we look at the calendar year '04 as seeing the benefits of that. In '03, I'm sorry - the fiscal '04 calendar year that we were in right now, we look to see approximately three SKU placements going into various distribution channels and we look to that being more successful launch than our GIRLPOWER which was our most successful launch ever. And margins are comparable to the GIRLPOWER product line. So we are seeing significantly higher margins on the theme product and we're seeing placements in a variety of various [INAUDIBLE]

Jim, let me add this.

We have done an analysis earlier in the year that the GIRLPOWER was actually on a ramp up better than the Hello, Kitty which was, until then, our most successful one. We've done a recent analysis of the Nickelodeon related products before we even expanded that to our other product categories as we just have recently done. I can say it's roughly three times as much as Hello, Kitty was in the same time period in 1999.

And also the amount of accounts embracing the Nickelodeon related products is also a approximately three times as high as the Hello, Kitty was. So we really think we got a tiger by the tail with Nickelodeon.

We are very excited about it. Just takes time. We want to have good products out there. And, you know, get it to as many accounts as we can.

Obviously, to us, having gotten a Walgreens with I think about 4,000 stores, that's major cool for us. We have not been in these accounts before. So to get in there with some of our products gives us tremendous exposure.

And the amount of television these people put behind the product is way beyond anything we've ever had other than NASCAR. Did not translate into the type of business we really wanted to do. And you can't do everything. We decided to give that up.

You have to focus on a few big ones and so to us Nickelodeon, GIRLPOWER right now are the big ones. The person that asked before, we had to make that decision. We had to let MaryKate and Ashley go and we had to let NASCAR go because you can't fumble with everything out there. You really take the biggest pond and that's where you go with your fishing rod and that's where you have to be and that's what we did.

Right. If I could follow-up, how much of the sales decline is purely attributable to kind of the large retailers domestically? You had - you were showing good growth in Europe and Latin America. Is that subject to the same trends or is that holding up better?

We had a worldwide, you know, almost recessionary situation coming into this year and stretching for the first six months. We also have things like SARS which you did not experience as badly in the United States as it was experienced elsewhere. But it had the difficulties of not being able to meet the buyers who did not come to Asia this year.

We had difficulties even with visiting our own Chinese partners because of the situation, the airlines canceled flights, the hotels were empty and people were wearing masks. All of these things contributed to a very difficult situation.

Obviously it slowed down everything we wanted to do. We couldn't travel the way we wanted to normally. There were enormous risks in pushing things. So we had to slow down. It was just one of those things.

Obviously -- also, war situation in the Iraq kept a lot of people off balance. We are just now starting to get a more normalized situation again. It was pretty much worldwide.

Okay. Thanks.

Our next question comes from Mark Ceivey of Consumer Electronics Daily. Please state your question.

Two quick questions, on the drugstore chains, is it all stores in the case of all three chains. How many SKUs and, I'm assuming, Emerson branded product?

Let me answer that question.

It is through all stores. And the SKU placement range is from one SKU to three SKUs, depending on what chain we were talking about. But we were talking about being in Longs with 455 stores, Eckerts with over 2600 stores, and finally then Walgreens with just under 3900 stores.

And that's Emerson branded product and what type of products are you talking about?

The audio product, it's Emerson branded as well as our themed Nickelodeon products.

Okay. Nickelodeon as well, and that's in the case of all three?

Some have just Nickelodeon, others have just Emerson and others have both.

Okay. And in the case of the plasma and the LCD, I'm assuming that's coming through licensing and through (INAUDIBLE) are there any ideas price-wise where it might fall or size-wise?

We have - right now, I think the first shot will be LCD screens. The 15" will be a major test with Wal-Mart. They have are in the middle of that right now. And I think it will be very competitively priced.

I mean, I've heard some prices which are very competitive. And I know that , you know, if that works there will be larger screens coming and at the same time plasma is also in the works. That's as much as we know.

Okay. And lastly, just on the expansion of the agreement there with Nickelodeon to include karaoke, if memory serves me, they've had an agreement with another karaoke company, I think a company called Singing Machine or something like that. This replacing that?

Yes. We are replacing Singing Machine. The Singing Machine that has a different reason. Doesn't have anything to do with what we are doing.

Right. And those two products that were added to the agreement, when do you expect to have those available?

Very soon. We have karaoke available. I mean, we've had it already for a year. And putting it under the Sponge Bob or Jimmy Neutron theme shouldn't be a problem. We have the technology in our showrooms. We have it ready.

And the cameras?

Cameras, we have pretty solid contracts with very good suppliers.

Okay.

If I can clarify. We expect that the -- the products subject to the newly added products to be made available to us beginning in January of '04.

Okay.

Shipment beginning sometime there after, yet unscheduled.

Okay. Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Jeff Ophel from Alias Capital. Please state your question. Mr. Ophel, your line is now live.

Okay.

Gentlemen, as a reminder, should you have a question, please press the star 1 on your push button telephones at this time.

Our next comes from Steve Monty of Sky Capital. Please state your question.

I have a couple of questions in the consumer electronics area.

First of all, how much of a decline did you see in the microwave oven sales?

Microwave oven sales declined by approximately -- let me look for that number, Steve, I don't have it right at my fingertips here. So let me come back to you on that.

So how does the profitability of the microwave oven business compare to the profitability of your other product categories?

The microwave product category has been under significant pressure for the past several years, as you can see from our public filings that the microwave sales has been declining. And this year there has been a margin decline as a response to the competitive marketing conditions. From that perspective, our margins in the first period in microwaves are less than the margins on our other core products such as audio and, of course, less than our theme products as well.

How much merchandise was sold by others who were licensees of the Emerson brand name and how does that compare with the year ago quarter?

A year ago the volume that the brands that were sold is actually up very slightly. It's up very, very slightly. The licensing revenues associated with it are down slightly.

And again, competitive pricing issues primarily in the video category which includes the televisions, the VCRs and DVD type entities, is where the slight decline is coming from.

I'm a little confused, in your year end press release there was a comment in there about the out (INAUDIBLE) licensing revenue continues to grow significantly on several fronts domestically and internationally. Now a month later or less than a month later you are telling us that there was a slight increase?

There is a slight decline in the June quarter but for the full year we still believe that the products subject to license revenues are going to increase on a year over year basis. We are seeing - our expectations are that we will see that on existing product placements through our video license agreement that we expect to see it through the introduction of the successful introduction of the LCD flat panels as well as the plasma screens. And we also expect to see it from the continued significant expansion that we were seeing in Europe. So while the first -while the June quarter was - came in below where we would like to have been, for the full year we're still on target for that higher number.

Which would be?

Well we didn't give a growth revenue last year. I believe, Mr. Jurick's comments last time alluded to approximately $200 million in additional product sales that may come through under license agreements.

Which will get you over $900 million for the year?

That's right.

At about the same royalty rate as the year that ended in March?

I would expect, Steve, probably a slightly lower royalty rate than what we saw in March .

Are we talking about (weight)?

Yield, overall yield.

The rate, Steve, would stay the same. At the moment we have no reason to adjust the rates in any direction.

Well, if the rate's the same and you're gonna be up over $900 million versus something over $600 million, then it would seem to me that we are talking about a royalty stream rising from, what was it, $10.3 million to something in the area of $14 million?

Not quite that much. But it should rise. Part of it is, Steve, is price related. Some of that additional revenue is done the a -- at a highly competitive pricing.

Tell us about the highly competitive situation in the sport supply business.

'Cause I was under the impression that we were gonna to be looking at an improvement in the company's gross profit margin per the last conference call and here we are down 2 percentage points in the first quarter.

Basically our outlook was based on the fact that we are increasingly tossing products in Asia. That process has been interrupted, frankly, to some extent, by the SARS situation. It has really slowed us down for about a quarter of a year. Making it less possible for people to run to the factories, for the engineering people to deal with the product development as we would have liked to.

When did you become aware of the impact of SARS?

It was -- we did not know the impact -- we could not judge how long it would take and the overall impact it was just one of those -- it was an act of God problem.

When did you become aware of this impact?

We knew that the SARS was a problem already in March.

Certainly didn't come across that way in the July 14th conference call.

We didn't know how long it would last. We really didn't.

It's history now, isn't it?

Now it's history, yes. Thank God. Really slowed things down in the sourcing countries. Don't forget we are sourcing most of our stuff here right around this area.

I'm disturbed because, in that conference call on the 14th what we were discussing, and I raised the question for the outlook for the gross profit margin in the sports supply, and I raised the question with you that ,"would a 5 percentage point increase be realistic?", and "would the reduction in SG&A be sufficient, enable you to have a profit in sports supply/" And you indicated, yes, in both instances and then subsequently you had an SEC filing that indicated that the gross profit margin would be up 5% not 5 percentage points and now we were looking at the reporting of the June quarter and we were down 2% points.

The statement at the time was more longer term. I mean, it wasn't supposed to be just for the next 90 days.

Do you see the possibility of improving the gross margin by the time the current fiscal year is over?

I think we were working on it very hard. I think we have additional opportunities to get there. Our programs remain the same. They were interrupted by a couple of things that occurred. And the basic plans we were implementing are the same.

We aren't changing because of anything. I think we are going to get there. I'm very hopeful that we will improve the sporting goods segment and I'm very hopeful also for the electronic segment.

I think we have identified where our problems came from. We know where the margin erosion was. We know why our revenues are down and we are working to fix that. But I can't be a 90-day wonder against all odds. Sometimes things are different. And sometimes you think certain things will happen but they just don't pan out in the time frame that you are looking at.

Tell us about the relationship with Sanlian? When will that ramp up?

We are in the process of it. We just over the last four weeks we have put more emphasis behind it again. We are sending people up there more often now and we are in the throws of finalizing the joint venture that will actually source and sell these products through the stores.

You mean a contract hasn't been signed yet with Sanlian?

Well, we have a letter of intent but we've changed the modus operandi a few times. We are going to ship everything from Hong Kong then we decided to form a joint venture (INAUDIBLE) and it's the most convenient way to run the business. We also needed to figure out the taxation angles of it and the customer service angles. So we will get there. We have it -- once we have it in place, it will ramp up pretty quickly.

When do you think this will be?

We are at it. We are having conferences every other day on that.

Will we see some shipments in the course of the December quarter?

Yes, yes definitely.

Will it be meaningful?

I should think so. Anything we can do to get into that market is just a question of time and we will just keep on growing. We've got the right partners. We've got the right structure. We've got the right products. All of these things have been analyzed to the nth degree and I think, yes, once you get in there, you will keep on growing.

Let's back up a little bit. You said something about a joint venture, and as I gather instead of you shipping directly to Sanlian. Does that change the revenue recognition?

Well, not really. The revenue record -- recognition will be 80% Emerson. The joint venture will be 80/20. The stores are 100% Sanlian and the sourcing will be done by Emerson. So we are sharing the revenue recognition at our end 80/20 and they are sharing, of course, 100% at the store level.

Is there any difference in the seasonality of the consumer electronics business over in China as compared to the United States?

Yes, definitely. Celebrate Christmas really is another emphasis which is Chinese New Year which would be --

What would be the timing of this?

That's the -- it changes every year but it's normally anywhere between the end of January and the beginning of March. It depends on the calendar that they use. Chinese New Year falls definitely into our fourth quarter. Whatever it is. This year I think it's the end of January.

So this could be a seasonal plus for you as compared to the year domestic consumer electronic business in the March quarter?

Yes, definitely. That's with a we were shooting for.

Help us to overcome the heavy emphasis on Thanksgiving and Christmas. Although Christmas is being celebrated more and more, don't ask me why, but the Chinese love to celebrate just about everything.

(Are you able to) forward to somebody else.

Thanks, Steve.

Our next question comes from Mark Ceivey of Consumer Electronics Daily . Please state your question.

Just two last, quick questions.

On - with respect to Sanlian, how many SKUs are we talking about and what types of products, and with respect to the record time effort, were you looking at all the audio brands or just a select number like Jensen or Advent or something like that?

When it comes to Sanlian, we were looking at primarily audio as well as some video SKUs as well. The final count has not been established because of various negotiations issues that Mr. Jurick referred to earlier. When it comes to Reciton, we pursued the worldwide operations, as well as all the brands that Reciton held. And, of course, they were the North American operations as well as their European operations such as, Magnet and Eco. So we saw a nice synergistic benefit there.

But, as we indicated, the pricing just got to a level that was beyond what our models were indicating to us was a value.

Okay. And that was just the audio? Not the accessories?

That was worldwide. That was audio and accessories.

And also the European business.

Right, right.

Were you looking at somewhere of the level -- I know if I remember correctly it sold off the audio something around $40 million. I think combined it was slightly under $100 million. Was that in the area -- were you looking at substantially less than that?

What's over $110 million if you consider all these factors that entered into it because the initial offer included $5 million more in receivables than were on the table at the auction date because they collected out that much in receivables as of that morning that was news to everybody at the time.

Then you had other factors in there that essentially made the deal more expensive than the numbers written up in the press. In the last minute RCA entered the picture out of the blue and they shoved the other bidders to the side at the time it was Gemini, actually, was the front runner. And RCA just kept on bidding higher and higher and higher for the accessory end of it.

So whoever wanted to cut a deal, they would have to wind up bidding for all three businesses. And frankly, you know, at some point you say, well sometimes the best deal you do is the deal you didn't do, because it just sounded a little expensive at the end of a day's worth of bidding. We pulled back. I think we did the right thing.

Where -- had you -- where did you place the value roughly?

We were as a reminder, it was a auction that was run pursuant to bankruptcy. At the end of the day there were two active bidders, it was us and Thompson RCA. So, that would give you some kind of indication of - to our pricing levels.

Audio Vox was there in the middle. So basically the combination Audio Vox and RCA is what we were up against and that's how we had to finely say, okay, enough is enough.

Were you substantially below that roughly $110 million?

Not at all. We were right there.

We are right at that level.

As I said before, the overall calculations including debt assumption of $5 million in Germany and $5 million missing in the receivable stateside and a quite significant tax liability - potential tax liability in Germany which is extremely complicated to explain here, but the overhaul valuation of our eyes was higher than $110 million.

Where do you think it would have hit, factored that in?

Yeah, right.

How substantially higher than 110?

I would say probably I forget now, 10, $15 million? And our math if I recall it, and then of course you have to account for the fact that the Rockford people had totally replaced the Jenson brand at Wal-Mart.

Then our research we found out that they were quite a lot of returns sitting in various accounts that Reciton had sold to, that had not been returned to Reciton in time for the bankruptcy, they were probably purposely held back because they didn't want to fall into the estate, so they waited. But anybody new coming in with those brands has to eat through that stuff and that can be quite complicated.

Okay. Great.

And just lastly, in the recently completed quarter there, as far as the licensing revenues go, is there a year to year number you could put to -- you said they were down slightly or something in that area. I was wondering if there was a year to year number to put to those?

On a year-to-year basis, as a matter of fact. We are down $3.9 million last year versus $3.1 million this year.

This year. Okay. Great. Thank you very much.

Thank you, Mark.

Ladies and gentlemen, if there are any further questions at this time, please press star 1 on your push button telephones.

Our next question comes from Jim Ophel from Alias Capital.

One thing that's troubling to me and some other investors is all the insider sales, was that done through an appropriate time window? What do they know that we didn't know?

The company has available to it a stock option program which makes it available to all of its employees.

The company does have a policy in place as far as a trading window is and is concerned. The trading window that existed after the release of the March earnings was the first window available since January.

The options that you are referring to and I believe the executives and individuals you are referring to had those options for a number of years. I still am holding my options. I still believe that still holding my options and the shares I purchased in the market myself. And the employee has -- it's their election and their form of compensation to choose to exercise those options or not.

While there may be a view that there were of some sort of inside information, that is simply not the case. Are there any other questions?

Our last question comes from Mark Cooper of Benson Associates. Please state your question.

Thanks, Ken.

I don't mean to belabor this but I'm going to say it.

It's difficult to take your last comments in the context that the last conference call was in the middle of July, which, unless your systems are extremely slow, and based on what you told me they are not, you pretty much had a good idea of what this revenue shortfall was going to be. And looking at the transcripts of the last call, there were a number of questions about the level of the dropoff that we would be anticipating. And it just seems to me that, you know, 45% reduction in sales is probably something that we would have expected to have highlighted to some extent, especially given the momentum that the company had developed.

And right now when, I asked you the question earlier suggesting September is already running at another 15% decline, is that correct?

No. What I - earlier when you asked about September, what I indicated was it's running at a 25% year over year reduction.

Okay, 25%. I'm sorry.

But given the indications from, you know, on the retail side, Mark, as you know, the retailers when they hold their orders very, very close to the vest, and we are seeing that very much so in this period through June period and through September. I don't, again, not to belabor the point, but for the sake of reemphasizing it, we believe that we were going to see a significant amount of deferred product sales come through in our June month and it didn't simply happen.

And now we were into our September quarter and that same sort of downward pressure is there and we are expecting that to restart, but again, we don't want to make predictions about December and don't want to make predictions about March as well at this point in time. We were giving the best indications of revenues as we possibly can. We want to have transparency so that we do effectually ignore the market and allow everybody to understand what's happening internally So the forecast that we are providing for you now is as current as we could possibly be and we're gonna do our best to keep bringing you that information.

I appreciate that.

If you just start putting the pieces together, one can come up with something that has the appearance, of some, of less than transparency, especially given those auction sales that appeared post the conference call when the third quarter or this quarter sales should have been fairly well-known internally, at least.

And those things just ultimately spell bad decision making in terms of communicating with your shareholders. I would just encourage you to be more transparent because the results are what happens today with the stock price now. Credibility of your communications has been damaged to some extent. And the odds are, the odds are that this is not the first shoe to drop. I hope that you buck that trend.

You know, this is the June quarter was very difficult for us. September is difficult.

We maintain that the strategy, Mark, that the long-term goals we have in place there and the financial goals we have in place and the programs we've referred to will come to fruition. They simply need some time to gain traction. And that's what we are moving through right now. I appreciate from your perspective how it can have the perception of what you are suggesting. But we will continue to do our best and bring you the most current information we have. Is there another question?

No, sir. At this time, I will now turn the conference back to you.

Well thank you very much for your attention and your questions and we hope to see you soon with some very nice news. I can't tell you any more than that right now.

Thank you very much, everybody.

Thank you, sir.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089 with an ID number of 302931. You may also access the replay at the company's website, www.EmersonRadio.com.

This concludes our conference call for today. Thank you for participating and have a great day. All participants may disconnect.

Thank you.