SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to_________________________
Commission file number 0-25226
________________________________________________________________________________
EMERSON RADIO CORP.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 22-3285224
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Entin Road Parsippany, New Jersey 07054
_______________________________________________________________________________
(Address of principal executive offices) (Zip code)
(973)884-5800
_______________________________________________________________________________
(Registrant's telephone number, including area code)
_______________________________________________________________________________
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of common stock as of November 6,
2002: 27,037,102.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except earnings per share data)
Three Months Ended Six Months Ended
-------------------------------------------- ----------------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------------------- -------------------- -------------------- ---------------
Net revenues $ 117,688 $ 111,572 $ 202,334 $ 188,696
Costs and expenses:
Cost of sales 92,062 91,080 157,242 152,835
Other operating costs and
expenses 917 1,422 2,193 2,803
Selling, general &
administrative expenses 15,741 13,502 28,447 24,834
-------------------- -------------------- ------------------ --------------
108,720 106,004 187,882 180,472
-------------------- -------------------- -------------------- -------------
Operating income 8,968 5,568 14,452 8,224
Interest expense, net (788) (989) (1,575) (1,863)
Minority interest in net
(income) loss of
consolidated subsidiary (10) 155 (108) 319
-------------------- -------------------- -------------------- ---------------
Income before income taxes 8,170 4,734 12,769 6,680
Provision (benefit) for
income taxes 2,218 (5) 4,157 (252)
-------------------- -------------------- -------------------- ---------------
Net income $ 5,952 $ 4,739 $ 8,612 $ 6,932
==================== ==================== ==================== ===============
Net income per common share
Basic $ 0.22 $ 0.15 $ 0.31 $ 0.22
==================== ==================== ==================== ===============
Diluted $ 0.21 $ 0.13 $ 0.30 $ 0.20
==================== ==================== ==================== ===============
Weighted average shares outstanding
Basic 26,948 31,343 28,189 31,343
==================== ==================== ==================== ===============
Diluted 27,946 40,099 28,877 40,029
==================== ==================== ==================== ===============
The accompanying notes are an integral part of the interim
consolidated financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, March 31,
2002 2002
------------------------- ---------------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 3,856 $ 19,228
Accounts receivable (less allowances of $7,086 and
$5,320, respectively) 47,865 29,401
Other receivables 2,438 2,337
Inventories 45,821 41,657
Prepaid expenses and other current assets 4,138 3,719
Deferred tax assets 5,010 7,671
------------------------- ---------------------
Total current assets 109,128 104,013
Property and equipment - (net of accumulated depreciation
and amortization of $5,791 and $4,688, respectively) 10,337 11,116
Deferred catalog expenses 1,576 2,017
Cost in excess of net assets acquired (net of accumulated
amortization of $2,283 and $2,283, respectively) 7,838 7,944
Trademarks (net of accumulated amortization of $4,896 and
$4,986, respectively) 3,581 3,734
Deferred tax assets 4,936 5,728
Other assets 2,040 1,287
------------------------- ---------------------
Total Assets $ 139,436 $ 135,839
========================= =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 2,822 $ 11,303
Current maturities of long-term borrowings 4,117 8,853
Accounts payable and other current liabilities 47,615 30,647
Accrued sales returns 3,661 3,817
Income taxes payable 707 103
------------------------- ---------------------
Total current liabilities 58,922 54,723
Long-term borrowings 25,398 29,046
Minority interest 17,439 17,330
Shareholders' Equity:
Preferred shares - 10,000,000 shares authorized, 3,677
shares issued and outstanding 3,310 3,310
Common shares - $.01 par value, 75,000,000 shares
authorized; 51,563,777 and 51,475,511 shares issued;
26,995,435 and 31,166,478 shares outstanding,
respectively 516 515
Capital in excess of par value 114,550 114,451
Accumulated other comprehensive losses (200) (122)
Accumulated deficit (60,824) (69,436)
Treasury stock, at cost 24,568,342 and 20,309,033
shares, respectively (19,675) (13,978)
------------------------- ---------------------
Total shareholders' equity 37,677 34,740
------------------------- ---------------------
Total Liabilities and Shareholders' Equity $ 139,436 $ 135,839
========================= =====================
The accompanying notes are an integral part of the interim
consolidated financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
----------------------------------------------
September 30, September 30,
2002 2001
-------------------- ---------------------
Cash Flows from Operating Activities:
Net cash provided (used) by operating activities $ 7,494 $ (10,346)
-------------------- ---------------------
Cash Flows from Investing Activities:
Investment in affiliate, net of cash
acquired of $112 -- (348)
Other (404) (187)
-------------------- ---------------------
Net cash used by investing activities (404) (535)
Cash Flows from Financing Activities:
Purchase of common stock and options (5,597) (601)
Net repayments of borrowings (16,865) 6,140
-------------------- ---------------------
Net cash provided (used) by financing activities (22,462) 5,539
Net decrease in cash and cash equivalents (15,372) (5,342)
Cash and cash equivalents at beginning of year 19,228 7,987
-------------------- ---------------------
Cash and cash equivalents at end of period $ 3,856 $ 2,645
==================== =====================
The accompanying notes are an integral part of the interim
consolidated financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Emerson Radio
Corp. ("Emerson", consolidated - "Us", "We", "Our") and its majority-owned
subsidiaries, including Sport Supply Group, Inc. ("SSG").
We operate in two business segments: consumer electronics and sporting
goods. The consumer electronics segment designs, sources, imports and markets a
variety of consumer electronic products and licenses the "[EMERSON]" trademark
for a variety of products domestically and internationally to certain licensees.
The sporting goods segment, which is operated through Emerson's 53.2% ownership
of SSG, manufactures and markets sports related equipment and leisure products
to institutional customers in the United States.
The unaudited interim consolidated financial statements reflect all normal
and recurring adjustments that are, in the opinion of management, necessary to
present a fair statement of our consolidated financial position as of September
30, 2002 and the results of operations for the three and six month periods ended
September 30, 2002 and 2001. The unaudited interim consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and accordingly do not include all of the
disclosures normally made in our annual consolidated financial statements. It is
suggested that these unaudited interim consolidated financial statements be read
in conjunction with the consolidated financial statements and notes thereto for
the fiscal year ended March 31, 2002 ("fiscal 2002"), included in our annual
report on Form 10-K.
The consolidated financial statements include our accounts and all of our
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of the
unaudited interim consolidated financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes; actual results could materially differ from
those estimates.
Due to the seasonal nature of both segments, the results of operations for
the three and six month periods ended September 30, 2002 are not necessarily
indicative of the results of operations that may be expected for any other
interim period or for the full year ending March 31, 2003 ("fiscal 2003").
Certain reclassifications were made to conform prior years financial
statements to the current presentation.
NOTE 2 - COMPREHENSIVE INCOME
Our comprehensive income for the three and six month periods ended
September 30, 2002 and 2001 is as follows (in thousands):
Three Months Ended Six Months Ended
------------------------------------ -----------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------------- --------------- --------------- ----------------
(Unaudited) (Unaudited)
Net income $ 5,952 $ 4,739 $ 8,612 $ 6,932
Cumulative effect on equity of
SFAS 133, net of taxes (40) -- (40) --
Derivatives qualifying as
hedges, net of taxes (37) -- (37) --
Currency translation adjustment -- 3 1 3
Unrealized gains (losses) on
securities, net (1) (3) (2) 1
----------------- --------------- -------------- ----------------
Comprehensive income $ 5,874 $ 4,739 $ 8,534 $ 6,936
================= =============== =============== ================
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
For the Three For the Six
Months Ended Months Ended
-------------------------------------- -----------------------------------
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
---------------- --------------- ---------------- ---------------
(Unaudited) (Unaudited)
Numerator:
Net income $5,952 $ 4,739 $8,612 $ 6,932
Add back to effect assumed conversions:
Interest on convertible
debentures -- 441 -- 882
-------------------- --------------- ---------------- ---------------
Numerator for diluted earnings $5,952 $ 5,180 $8,612 $ 7,814
per share
==================== =============== ================ ===============
Denominator:
Weighted average common
shares - Basic 26,948 31,343 28,189 31,343
Effect of dilutive securities:
Preferred shares -- 2,962 -- 2,962
Options & warrants 998 590 688 520
Convertible debentures -- 5,204 -- 5,204
-------------------- --------------- ---------------- ---------------
Weighted average shares
diluted 27,946 40,099 28,877 40,029
==================== =============== ================ ===============
Basic earnings per share $ 0.22 $ 0.15 $ 0.31 $ 0.22
==================== =============== ================ ===============
Diluted earnings per share $ 0.21 $ 0.13 $ 0.30 $ 0.20
==================== =============== ================ ===============
NOTE 4- CAPITAL STRUCTURE
Our outstanding capital stock at September 30, 2002 consisted of common
stock and Series A convertible preferred stock in which the conversion feature
expired effective March 31, 2002.
At September 30, 2002, Emerson had outstanding approximately 1.6 million
options with exercise prices ranging from $1.00 to $1.50 and SSG had outstanding
approximately 370,000 options with exercise prices ranging from $0.95 to $9.44.
On August 1, 2002 Emerson granted 200,000 warrants with an exercise price
of $2.20 which fully vests after one year from date of grant in conjunction with
a consulting agreement. The warrants were valued using the Black-Scholes option
valuation model and will be recognized over the related service period of the
consulting agreement which corresponds to the vesting period. For the quarter
ending September 30, 2002 approximately $12,000 was expensed to operations.
As of August 15, 2002, Emerson's $20.8 million of 8.5% Senior Subordinated
Convertible Debentures (the "Debentures") were fully retired using funds secured
from a financing facility that closed on June 28, 2002 and from the generation
of cash from operations. See "Note 9 - Borrowings".
NOTE 5 - INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method for the consumer electronics segment and
the weighted-average cost method for the sporting goods segment. As of September
30, 2002 and March 31, 2002, inventories consisted of the following (in
thousands):
September 30, 2002 March 31, 2002
------------------------- ----------------------
(Unaudited)
Raw materials $ 1,995 $ 2,153
Work-in-process 331 258
Finished 46,197 41,531
------------------------- ----------------------
48,523 43,942
Less inventory allowances (2,702) (2,285)
------------------------- ----------------------
$ 45,821 $ 41,657
========================= ======================
NOTE 6 - INCOME TAXES
We have tax net operating loss carry forwards included in net deferred tax
assets that can be used to offset future taxable income and can be carried
forward for 15 to 20 years. We believe the net deferred tax assets will be
realized through tax planning strategies available in future periods and future
profitable operating results. 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 carry forward period are reduced.
NOTE 7 - INVESTMENT IN SPORT SUPPLY GROUP, INC.
As of September 30, 2002 and March 31, 2002, Emerson owned 4,746,023 (53.2%
of the issued and outstanding) shares of common stock of SSG. SSG's results of
operations and the minority interest related to those results have been included
in our quarterly results of operations.
Effective March 1997, Emerson entered into a Management Services Agreement
with SSG, under which each company provides various managerial and
administrative services to the other company.
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
In June, 2001, the Financial Accounting Standards Board issued Statement
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Effective April 1,
2002, we adopted SFAS 142 which requires us to cease amortizing goodwill, and to
perform a transitional test for potential goodwill impairment upon adoption and
then test goodwill at least annually for impairment by reporting unit. Had we
ceased amortizing goodwill as of the beginning of fiscal 2002, net income for
the three and six month periods ending September 30, 2001 would have increased
by approximately $50,000 and $102,000, respectively, and have no effect on basic
or diluted earnings per share.
Goodwill impairment testing must also be performed more frequently if
events or other changes in circumstances indicate that goodwill might be
impaired. Under the provisions of SFAS 142, a two step process is used to
evaluate goodwill impairment. Under step one of the evaluation process, the
carrying value of a reporting unit is compared to its fair value to determine if
a potential goodwill impairment exists. Under step two of the evaluation
process, if a potential goodwill impairment is identified during step one, then
the amount of goodwill impairment, if any, is measured using a hypothetical
purchase price allocation approach. SFAS 142 required us to complete step one
within six months of adoption. SFAS 142 requires us to complete step two by the
end of our fiscal year ended March 31, 2003.
We have completed our step one analysis of the potential impairment of
goodwill in each of our two reporting units, which analysis has indicated that
we have a potential impairment of goodwill in our sporting goods reporting
unit. We are in the process of conducting step two of our transitional year
assessment for our sporting goods reporting unit, which will be completed by the
end of the fiscal year ended March 31, 2003. As the step two assessment involves
complex determinations with respect to the fair value of the individual assets
and liabilities of each reporting unit, the amount of goodwill impairment, if
any, cannot be reliably predicted at this time. As of September 30, 2002,
Emerson and SSG have approximately $400,000 and $7.4 million of goodwill on
their respective balance sheets. Under SFAS 142, any goodwill impairment
recorded upon transition is reported as a cumulative effect of a change in
accounting principle on the consolidated statement of operations as of the date
of adoption, and has no cash impact.
NOTE 9 - BORROWINGS
As of September 30, 2002 and March 31, 2002, borrowings and capital lease
obligations (excluding short-term borrowings) consisted of the following (in
thousands):
September 30, March 31,
2002 2002
--------------------- --------------------
(Unaudited)
8 1/2% Senior Subordinated Convertible Debentures Due 2002 $ -- $ 20,750
Term loan 14,000 --
Revolving line of credit 3,693 --
Notes payable under revolving line of credit 11,590 16,839
Equipment notes and other 232 310
--------------------- --------------------
29,515 37,899
Less current maturities 4,117 8,853
--------------------- --------------------
Long term debt and notes payable $ 25,398 $ 29,046
===================== ====================
Debentures, which were issued by Emerson in August 1995 were partially
retired in July and fully retired on August 15, 2002. These Debentures bore
interest at the rate of 8 1/2% per annum, payable quarterly, and were
subordinated to all existing and future senior indebtedness (as defined in the
Indenture governing the Debentures). The Debentures were convertible into shares
of Emerson's common stock at any time prior to redemption or maturity at an
initial conversion price of $3.9875 per share, subject to adjustment under
certain circumstances. The Debentures were redeemable in whole or in part at our
option and, in the case of Emerson's exercise of the Debentures call provision,
required a call price of 101% of principal. The Debentures were subject to
certain restrictions on transfer and restricted, among other things, the amount
of senior indebtedness and other indebtedness that Emerson, and, in certain
instances, its consolidated subsidiaries, could incur. Each holder of Debentures
had the right to cause Emerson to redeem the Debentures if certain designated
events (as defined in the Indenture governing the Debentures) were to occur.
On June 28, 2002, Emerson entered into a $40 million Revolving Credit and
Term Loan Agreement ("Loan Agreement") with several U.S. financial institutions,
which was funded on July 1, 2002. The Loan Agreement provides for a $25 million
revolving line of credit and a $15 million term loan. The $25 million revolving
line of credit replaces Emerson's existing $15 million senior secured facility
and provides for revolving loans, subject to individual maximums which, in the
aggregate, are not to exceed the lesser of $25 million or a "Borrowing Base"
amount based on specified percentages of eligible accounts receivables and
inventories and bears interest ranging from Prime plus 0.50% to 1.25% or, at
Emerson's election, LIBOR plus 2.00% to 2.75% depending on certain financial
covenants. The $15 million term loan combined with cash earned from our
operations was used to retire all of Emerson's Debentures. The interest rate
charged on the term loan ranges from Prime plus 1.00% to 1.75% or, at Emerson's
election, LIBOR plus 2.50% and 3.25% depending on certain financial covenants
and amortizes over a three-year period. Pursuant to the Loan Agreement, Emerson
is restricted from, among other things, paying cash dividends, repurchasing
Emerson's common stock and entering into certain transactions without the
lender's prior consent and is subject to certain financial covenants. Amounts
outstanding under the Loan Agreement are secured by substantially all of
Emerson's assets.
Notes payable under a revolving line of credit (Revolver) were issued by
SSG in March 2001, replacing a prior facility. The facility provides for a
three-year $25 million revolving line of credit, and provides for revolving
loans and is subject to individual maximums which, in the aggregate, cannot
exceed the lesser of $25 million or a "Borrowing Base" amount based upon
specified percentages of eligible accounts receivables and inventories. Amounts
outstanding under the senior credit facility are secured by substantially all
the assets of SSG and its subsidiaries. At September 30, 2002, the interest rate
charged under this facility was a combination of LIBOR plus 2.5% and the prime
rate of interest ranging from minus .25% to prime plus 1.0%. Pursuant to the
Loan and Security Agreement, SSG is restricted from, among other things, paying
cash dividends and entering into certain transactions without the lender's prior
consent.
NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for its interest rate protection agreement under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires all derivatives to be recorded as assets or liabilities and measured at
fair value. Gains or losses resulting from changes in the values of derivatives
are recognized immediately or deferred, depending on the use of the derivative
and whether or not it qualifies as a hedge.
The Company uses a derivative financial instrument to manage its interest
rate risk associated with fluctuations in interest rates on its debt. As of
September 30, 2002, the Company had outstanding an interest swap agreement that
converts $10 million, of its variable rate Loan Agreement to a fixed rate
instrument through 2004. These swap agreements are designed as cash flow hedges
and changes in fair value of the hedges are recorded in other comprehensive
income and reclassified into earnings in the same periods during which the
hedged transaction affects earnings. There is no ineffectiveness related to
these hedges.
NOTE 11 - SEGMENT INFORMATION
The following table presents certain operating segment information for each
of the three and six month periods ended September 30, 2002 and 2001 (in
thousands):
Three Months Ended September 30, 2002 Three Months Ended September 30, 2001
Consumer Consumer
Electronics Sporting Goods Electronics Sporting Goods
--------------------- ----------------------- --------------------- ----------------------
Net revenues $ 91,600 $ 26,088 $ 83,327 $ 28,245
Income (loss) before
income taxes $ 8,139 $ 31 $ 5,242 $ (508)
Segment assets $ 78,540 $ 60,896 $ 73,308 $ 66,834
Six Months Ended September 30, 2002 Six Months Ended September 30, 2001
Consumer Consumer
Electronics Sporting Goods Electronics Sporting Goods
--------------------- ----------------------- --------------------- ----------------------
Net revenues $ 149,473 $ 52,861 $132,496 $ 56,200
Income (loss) before
income taxes $ 12,401 $ 368 $ 7,711 $ (1,031)
NOTE 12 - LEGAL PROCEEDINGS
We are involved in legal proceedings and claims of various types in the
ordinary course of our business. While any such litigation to which we are a
party contains an element of uncertainty, we presently believe that the outcome
of each such proceeding or claim which is pending or known to be threatened, or
all of them combined, will not have a material adverse effect on our
consolidated financial position.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Management's Discussion and Analysis of Results of Operation is presented
in three parts: consolidated operations, the consumer electronics segment and
the sporting goods segment.
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 the consolidated statements of operations as a percentage of net
revenues.
For the three and six month periods ended September 30, 2002 and 2001:
Three Months ended September 30 Six Months ended September 30
------------------------------------- -----------------------------------------
2002 2001 2002 2001
----------------- --------------- -------------- -----------------
(Unaudited) (Unaudited)
Net revenues (in thousands) $117,688 $111,572 $202,334 $188,696
Cost of sales 78.2% 81.6% 77.7% 81.0%
Other operating costs and
expenses 0.8% 1.3% 1.1% 1.5%
Selling, general and
administrative expenses 13.4% 12.1% 14.1% 13.2%
Operating income 7.6% 5.0% 7.1% 4.3%
Provision (benefit) for income
taxes 1.9% 0.0% 2.1% (0.1)%
Net income 5.1% 4.3% 4.3% 3.7%
Net Revenues - Consolidated net revenues for the three and six month period
ended September 30, 2002 increased $6.1 million (5.5%) and $13.6 million (7.2%)
as compared to the same periods ended September 30, 2001. Increases in consumer
electronics segment net revenues more then offsetting decreases in the sporting
goods segment.
Cost of Sales - Cost of sales, as a percentage of consolidated net revenues for
the three and six month period ended September 30, 2002 decreased to 78.2% and
77.7% from 81.6% and 81.0%, respectively. The decreases in cost of sales for the
three and six month periods were primarily the result of higher margins in both
the consumer electronics and sporting goods segments.
Other Operating Costs and Expenses - Other operating costs and expenses are
associated with the consumer electronics segment. As a percentage of
consolidated net revenues, other operating costs and expenses decreased to 0.8%
from 1.3% for the three months ended September 30, 2002 compared to the same
period in fiscal 2002. For the six months ended September 30, 2002, other
operating costs, as a percentage of consolidated net revenues, decreased to 1.1%
from 1.5% for the same period in fiscal 2002.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a percentage
of consolidated net revenues, were 13.4% for the three months ended September
30, 2002 as compared to 12.1% for the three months ended September 30, 2001. For
the six months ended September 30, 2002, S,G&A, as a percentage of consolidated
net revenues, were 14.1% as compared to 13.2% for the same period in fiscal
2002. In absolute terms S,G&A increased $2.2 million and $3.6 million for the
three and six month periods ended September 30, 2002 as compared to the same
periods in fiscal 2002. The increase in absolute terms was due to the consumer
electronics segment, partially offset by a decrease in the sporting goods
segment.
Provision for Income Taxes - The provision for income taxes for the three and
six months ended September 30, 2002 was primarily the result of the utilizing of
previously recognized net operating loss carryforwards and a foreign tax
provision from the consumer electronics segment.
Net Income - As a result of the foregoing factors, we earned net income of
$6.0 million (5.1% of net revenues) and $8.6 million (4.3% of net revenues) for
the three and six months ended September 30, 2002 as compared to $4.7 million
(4.3% of net revenues) and $6.9 million (3.7% of net revenues)for the same year
ago periods.
Consumer Electronics Segment:
The following table summarizes certain financial information relating to the
consumer electronics segment for the three and six month periods ended September
30, 2002 and 2001 (in thousands):
Three Months Ended September 30 Six Months Ended September 30
---------------------------------------- -----------------------------------
2002 2001 2002 2001
---------------- ------------------ ---------------- --------------
(Unaudited) (Unaudited)
Net revenues $ 91,611 $ 83,327 $149,494 $132,496
Cost of sales 74,017 70,724 120,573 112,463
Other operating 917 1,422 2,193 2,803
Costs
Selling, general &
administrative 7,820 5,278 12,837 8,318
---------------- ------------------- ---------------- ---------------
Operating income 8,857 5,903 13,891 8,912
Interest expense,
net (645) (727) (1,256) (1,344)
---------------- ------------------- ---------------- ---------------
Income before 8,212 5,176 12,635 7,568
income taxes
Provision for
income taxes 2,209 181 4,021 124
---------------- ------------------- ---------------- ---------------
Net income $ 6,003 $ 4,995 $ 8,614 $ 7,444
================ =================== ================ ===============
Net Revenues - Consumer electronics net revenues for the three and six months
ended September 30, 2002 increased $8.3 million (9.9%) and $17.0 million
(12.8%), respectively, as compared to the same period ended September 30, 2001.
The increase in net revenues for the three and six month period was comprised of
an increase in unit sales of audio products and licensing revenues offset by a
decrease in unit sales of microwave oven products. Revenues earned from the
licensing of Emerson's trademarks were $6.0 million for the first six months of
fiscal 2003 as compared to $2.7 million for the same period in fiscal 2002.
Cost of Sales - Cost of sales, as a percentage of consumer electronics net
revenues, decreased to 80.8% and 80.7% for the three and six months ended
September 30, 2002 from 84.9% for the three and six months ended September 30,
2001. The decrease in cost of sales as a percentage of net revenues was
primarily attributable to a greater impact of licensing revenues, which have no
direct associated costs, and to higher gross profit margins on product sales.
Gross profit margins continue to be subject to competitive pressures arising
from pricing strategies associated with the product categories in which Emerson
competes. 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 as a
percentage of consumer electronics net revenues decreased to 1.0% and 1.5% for
the three and six month period ended September 30, 2002 from 1.7% and 2.1% for
the same year over year periods in fiscal 2002 primarily due to reduced
inventory servicing costs.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a percentage
of consumer electronics net revenues, was 8.5% and 8.6% for the three and six
months ended September 30, 2002, respectively, as compared to 6.3% for the three
and six months ended September 30, 2001 primarily due to recoveries of
provisions related to substandard receivables in the prior year, which were not
repeated in the current year, an increase in provisions for uncollectable
accounts ; an increase in co-operative advertising costs; an increase in payroll
expenses and freight expense.
Interest Expense, net - Interest expense decreased $82,000 and $88,000 for the
three and six months ended September 30, 2002, respectively, as compared to the
three and six months ended September 30, 2001 due to reduced borrowings and
lower interest rates.
Provision (benefit) for Income Taxes - The provision for income taxes was $2.2
million and $4.0 million for the three and six months ended September 30, 2002,
respectively, as compared to $181,000 and $124,000 for the three and six months
ended September 30, 2001, respectively. The provision for September 30, 2002
primarily consisted of deferred taxes related to previously recognized Federal
and state tax net operating loss benefits and a foreign tax provision.
Net Income - As a result of the foregoing factors, the consumer electronics
segment earned net income of $6.0 million (6.6% of net revenues) for the three
months ended September 30, 2002 as compared to $5.0 million (6.0% of net
revenues) for the three months ended September 30, 2001. For the six months
ended September 30, 2002 the consumer electronics segment earned $8.6 million
(5.8% of net revenues) as compared to $7.4 million (5.6% of net revenues) for
the six months ended September 30, 2001.
Sporting Goods Segment:
The following table summarizes certain financial information relating to
the sporting goods segment as reported by SSG for the three and six month
periods ended September 30, 2002 and 2001 (in thousands):
Three Months Ended September 30 Six Months Ended September 30
-------------------------------------- -----------------------------------
2002 2001 2002 2001
------------------ ----------------- ----------------- --------------
(Unaudited) (Unaudited)
Net revenues $ 26,088 $ 28,245 $ 52,861 $56,200
Cost of sales 18,056 20,356 36,690 40,372
Selling, general &
administrative 7,858 8,135 15,484 16,340
------------------ ----------------- ----------------- ----------------
Operating income (loss) 174 (246) 687 (512)
Interest expense, net (143) (262) (319) (519)
------------------ ----------------- ----------------- ----------------
Income (loss) before 31 (508) 368 (1,031)
income taxes
Provision (benefit) for
income taxes 9 (186) 136 (376)
------------------ ----------------- ----------------- ----------------
Net income (loss) $ 22 $ (322) $ 232 $ (655)
================== ================= ================= ================
Net Revenues - Net revenues decreased $2.2 million (7.6%) and $3.3 million
(5.9%) for the three and six month periods ended September 30, 2002 as compared
to the three and six month periods ended September 30, 2001. The decrease in net
revenues was primarily the result of a general slow-down in school and youth
organization funding and competitive pressures in the marketplace.
Cost of Sales - Cost of sales, as a percentage of sporting goods net revenues,
decreased from 72.1% for the three month period ended September 30, 2001 to
69.2% for the three month period ended September 30, 2002. For the six month
period ended September 30, 2002, cost of sales, as a percentage of sporting
goods net revenues, decreased to 69.4% from 71.8% for the six month period ended
September 30, 2001. The decrease was primarily the result of consolidating
several plants, exiting certain unprofitable product lines and improving product
sourcing.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A expenses
decreased approximately $277,000 and $856,000 for the three and six month
periods ended September 30, 2002, respectively, as compared to the three and six
month periods ended September 30, 2001. S,G&A expenses, as a percentage of
sporting goods net revenues, were 30.1% and 29.3% for the three and six month
periods ended September 30, 2002, respectively, as compared to 28.8% and 29.1%
for the three and six month periods in the prior fiscal year. The decrease was
primarily the result of the following: i. a decrease in payroll related expenses
attributable to a reduced headcount; ii. a decrease in depreciation and
amortization expense due to assets becoming fully depreciated and the
discontinuation of amortization of goodwill; and iii. a decrease in facility
expenses.
Interest Expense, net - Interest expense decreased by approximately $119,000 and
$200,000 for the three and six month periods ended September 30, 2002,
respectively, as compared to the three and six month periods ended September 30,
2001, due primarily to lower overall borrowing levels and lower interest rates.
Benefit for Income Taxes - A tax provision of approximately $9,000 for the three
months ended September 30, 2002 as compared to a benefit of $186,000 for the
three months ended September 30, 2001 was recorded. For the six months ended
September 30, 2002 SSG recorded a tax provision of $136,000 as compared to a tax
benefit of $376,000 for the same period in fiscal 2002. SSG has a net operating
loss carryforward included in net deferred tax assets that can be used to offset
future taxable income and can be carried forward for 15 to 20 years. We believe
the 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, we believe it is more likely than not that all of
the 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 are reduced.
Net Income - As a result of the foregoing factors, the sporting goods segment
had net income of $22,000 for the three months ended September 30, 2002 as
compared to a net loss of $322,000 for the three months ended September 30,
2001. For the six months ended September 30, 2002 the sporting goods segment
earned $232,000 as compared to a net loss of $655,000 for the six months ended
September 30, 2001.
Liquidity and Capital Resources
Net cash provided by operating activities was $7.5 million for the six
months ended September 30, 2002. Cash was primarily provided by our
profitability and an increase in accounts payable, partially offset by an
increase in accounts receivable.
Net cash used by investing activities was $404,000 for the six months ended
September 30, 2002. Cash was utilized primarily for the purchase of fixed
assets.
Net cash used for financing activities was $22.5 million for the six months
ended September 30, 2002. Cash was primarily utilized for the reduction of
borrowings, including the redemption of Emerson's outstanding debentures and the
exercise of an option to repurchase Emerson common stock.
Emerson and SSG maintain credit facilities as described in Note 9 -
Borrowings. At September 30, 2002, there were approximately $29.5 million of
borrowings outstanding under these facilities, of which approximately $17.7
million of borrowings were outstanding by Emerson and $11.8 million of
borrowings were outstanding by SSG. No letters of credit were outstanding under
these facilities by either Emerson or SSG as of September 30, 2002.
Two of our foreign subsidiaries maintain various credit facilities, as
amended, aggregating $50.0 million with Hong Kong banks consisting of the
following: (i) a $7.5 million credit facility with a $2.5 million seasonal
increase which is used for inventory purchases and (ii) two back-to-back letters
of credit totaling $45 million. At September 30, 2002, our Hong Kong subsidiary
pledged $2.2 million in certificates of deposit to one of its banks to assure
the availability of the $5.0 million credit facility and a $2.5 million seasonal
line increase. At September 30, 2002, there were approximately $8.9 million and
$9.2 million, respectively, of letters of credit outstanding under these credit
facilities.
At present, we believe that future cash flow from operations and our
existing institutional financing noted above will be sufficient to fund all of
our cash requirements for the next twelve months.
There were no substantial commitments for capital expenditures as of
September 30, 2002.
Contingencies
During the past several years, SSG has used the services of Strategic
Technologies, Inc. ("STI") to process their outbound truck freight bills. STI
audited SSG's freight bills and provided a listing of freight invoices that were
scheduled for payment, at which time SSG transferred funds to STI. STI was
required to issue checks to the various carriers within forty-eight (48) hours
of receipt of SSG's funds. STI filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code on July 19, 2002, which was converted to Chapter 7 of the
U.S. Bankruptcy Code on July 31, 2002. It is not possible for SSG to currently
determine the amount of funds, if any, that were transferred to STI and not
subsequently forwarded to SSG's carriers. In certain circumstances, SSG may have
to pay their freight carriers for invoices that were previously paid to STI and
to attempt to recover such monies from STI. No assurance can be made that SSG
will be able to recover such money.
Critical Accounting Policies
For the six months ended September 30, 2002, the significant changes to our
accounting policies from those reported in Form 10-K for the fiscal year ended
March 31, 2002 were as follows:
Intangible Assets
The sporting goods segment has significant intangible assets related to
goodwill and other acquired intangibles. The determination of related estimated
useful lives and whether or not these assets are impaired involves significant
judgments. Changes in strategy and/or market conditions could significantly
impact these judgments and require adjustments to recorded asset balances.
Effective April 1, 2002, we adopted SFAS 142 which requires us to cease
amortization of goodwill, to perform a transitional test for potential goodwill
impairment upon adoption, and then test goodwill for impairment at least
annually by reporting unit. See Note 8 - "Goodwill and Other Intangible Assets".
Inflation, Foreign Currency, and Interest Rates
Neither inflation nor currency fluctuations had a significant effect on our
results of operations during the first or second quarter of fiscal 2003. Our
exposure to currency fluctuations has been minimized by the use of U.S. dollar
denominated purchase orders, and by sourcing production in more than one
country. The consumer electronics segment purchases virtually all of its
products from manufacturers located in various Asian countries.
The interest on borrowings under our credit facilities is based on the
prime and LIBOR rate. We have entered into an interest hedge agreement to
partially mitigate such risk. While a significant increase in interest rates
could have an adverse effect on our financial condition for that portion of debt
not covered by such interest hedge contracts, we believe that given the present
economic climate, interest rates are not expected to increase significantly
during the coming year.
Recent Pronouncements of the Financial Accounting Standards Board
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4,44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections (Statement 145). The effect of
implementing Statement 145 on the Company will be that under Statement 145 gains
and losses on extinguishments of debt will be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under Statement 4.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The
effect of implementing Statement 146 on the Company will be that under Statement
146 a liability for a cost associated with an exit or disposal activity will be
recognized and measured at fair value only when the liability is incurred, and
not at the date of an entity's commitment to an exit plan as previously required
under Emerging Issues Task Force (EITF) Issue No. 94-3.
Forward-Looking Information
This report contains various forward-looking statements under the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") and information that
is based on our beliefs as well as assumptions made by and information currently
available to us. When used in this report, the words "anticipate", "believe",
"estimate", "expect", "predict", "project", and similar expressions are intended
to identify forward-looking statements. Such statements are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, expected or
projected. Among the key factors that could cause actual results to differ
materially are as follows: (i) the ability of the consumer electronics segment
to continue selling products to two of its largest customers whose net revenues
represented 22% and 19% of fiscal 2002 consolidated net revenues; (ii)
competitive factors in the consumer electronics segment, such as competitive
pricing strategies utilized by retailers in the domestic marketplace that
negatively impact product gross margins; (iii) the ability of the consumer
electronics and sporting goods segments to maintain their suppliers, primarily
all of whom are located in the Far East for the consumer electronics segment;
(iv) the ability of the sporting goods segment to have an uninterrupted shipping
service from outside carriers; (v) our ability to comply with the restrictions
imposed upon us by our outstanding indebtedness; (vi) the ability of the
consumer electronics segment to import and distribute product given the existing
conditions regarding the West Coast Pier Lockout; and (vii) general economic
conditions and other risks. 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. For additional risk factors as they
relate to the sporting goods segment, see SSG's Form 10-K for the fiscal year
ended March 29, 2002 Item 7 - "Certain Factors that May Affect the Company's
Business or Future Operating Results".
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not material.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this Quarterly Report on
Form 10-Q, we carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under
the Exchange Act). Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to us (including our consolidated subsidiaries) required to be included
in our periodic SEC filings. Since the date of that evaluation, there have been
no significant changes in our internal controls or in other factors that could
significantly affect those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.
For information on litigation to which we are a party, reference is made to
Part 1 Item-3-Legal Proceedings in the Company's most recent annual report on
Form 10-K.
ITEM 2. Changes in Securities and Use of Proceeds.
On August 1, 2002, we issued a warrant to purchase 200,000 shares of our
common stock to Further Lane Asset Management LP ("Further Lane") for consultant
services to be rendered by Further Lane to us. The warrants are exercisable
commencing August 1, 2003 at an exercise price of $2.20 per share and Further
Lane was granted piggy-back registration rights for the shares of common stock
issuable upon exercise of the warrants. The above transaction was a private
transaction not involving a public offering and was exempt from the registration
provisions of the Securities Act of 1933, as amended ("the Act"), pursuant to
Section 4(2) thereof. The sale of the securities was without the use of an
underwriter, and the warrants bear a restrictive legend permitting transfer
thereof only upon registration or an exemption under the Act. .
ITEM 3. Default Upon Senior Securities.
(a) None
(b) None
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Company's shareholders was held on September 25,
2002, at which time the shareholders elected the following slate of nominees to
remain on the Board of Directors: Robert H. Brown, Jr., Peter G. Bunger, Jerome
H. Farnum, Stephen H. Goodman and Geoffrey P. Jurick. Election of the Board of
Directors was the only matter submitted for shareholder vote. There were
26,907,169 shares of outstanding capital stock of the Company entitled to vote
at the record date for this meeting and there were present at such meeting, in
person or by proxy, stockholders holding 24,960,140 shares of the Company's
Common Stock, which represented 92.76% of the total capital stock outstanding
and entitled to vote. There were 24,960,140 shares voted on the matter of the
election of directors. The result of the votes cast regarding each nominee for
office was:
Nominee for Director Votes For Votes Withheld
-------------------- --------- --------------
Robert H. Brown, Jr. 24,825,779 134,361
Peter G. Bunger 24,882,579 77,561
Jerome H. Farnum 24,825,779 134,361
Stephen H. Goodman 24,825,779 134,361
Geoffrey P. Jurick 24,882,579 77,561
ITEM 5. Other Information.
(a) None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.12.2 Second Amendment to License Agreement effective August 1, 2002 by and
between Funai Corporation and Emerson.*
10.28 Common Stock Purchase Warrant Agreement entered into on August 1, 2002
by and between Emerson Radio Corp. and Further Lane Asset
Management LP.*
99.1 Certification of Chief Executive Officer, as required by Section 906 of
the Sarbanes-Oxley Act of 2002.*
99.2 Certification of Chief Financial Officer, as required by Section 906 of
the Sarbanes-Oxley Act of 2002.*
(b) Reports on Form 8-K - During the three month period ended
September 30, 2002, no Form 8-K was filed.
* filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERSON RADIO CORP.
(Registrant)
Date: November 8, 2002 /s/ Geoffrey P. Jurick
-----------------------
Geoffrey P. Jurick
Chairman, Chief Executive Officer
and President
Date: November 8, 2002 /s/ Kenneth A. Corby
--------------------
Kenneth A. Corby
Executive Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Geoffrey P. Jurick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emerson Radio Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 8, 2002
By: /s/ Geoffrey P. Jurick
---------------------------
Geoffrey P. Jurick
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth A, Corby, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emerson Radio Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 8, 2002
By: /s/ Kenneth A. Corby
Kenneth A. Corby
Chief Financial Officer