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 June 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 August 8,
2002: 26,907,169.
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
-----------------------------------------------
June 30, June 30,
2002 2001
---------------------- ---------------------
Net revenues $ 84,646 $ 77,124
Costs and expenses:
Cost of sales 65,180 61,755
Other operating costs and expenses 1,276 1,381
Selling, general & administrative expenses 12,706 11,332
---------------------- ---------------------
79,162 74,468
---------------------- ---------------------
Operating income 5,484 2,656
Interest expense, net (787) (874)
Minority interest in net (income)
loss of consolidated subsidiary (98) 164
---------------------- ---------------------
Income before income taxes 4,599 1,946
Provision (benefit) for income taxes 1,939 (247)
---------------------- ---------------------
Net income $ 2,660 $ 2,193
====================== =====================
Net income per common share
Basic $ 0.09 $ 0.07
====================== =====================
Diluted $ 0.09 $ 0.06
====================== =====================
Weighted average shares outstanding
Basic 29,444 31,344
====================== =====================
Diluted 35,025 34,948
====================== =====================
The accompanying notes are an integral part of the interim consolidated financial statements.
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, March 31,
2002 2002
----------------------- ------------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 13,041 $ 19,228
Accounts receivable (less allowances of
$6,045 and $5,320, respectively)
29,581 29,401
Other receivables 4,105 2,337
Inventories 44,898 41,657
Prepaid expenses and other current assets 4,233 3,719
Deferred tax assets 6,129 7,671
----------------------- ------------------
Total current assets 101,987 104,013
Property and equipment - (net of accumulated depreciation
and amortization of $5,254 and $4,688, respectively) 10,714 11,116
Deferred catalog expenses 1,253 2,017
Cost in excess of net assets acquired (net of accumulated
amortization of $2,283) 7,891 7,944
Trademarks (net of accumulated amortization of $5,055
and $4,986, respectively) 3,667 3,734
Deferred tax assets 5,263 5,728
Other assets 1,253 1,287
----------------------- ------------------
Total Assets $ 132,028 $ 135,839
======================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 7,137 $ 8,671
Current maturities of long-term borrowings 9,867 8,853
Accounts payable and other current liabilities 38,803 33,279
Accrued sales returns 3,727 3,817
Income taxes payable (26) 103
------------------- ---------------------
Total current liabilities 59,508 54,723
Long-term borrowings 23,388 29,046
Minority interest 17,429 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; 51,475,511 shares issued; 26,907,169
and 31,166,478 shares outstanding, respectively 515 515
Capital in excess of par value 114,451 114,451
Accumulated other comprehensive losses (122) (122)
Accumulated deficit (66,776) (69,436)
Treasury stock, at cost 24,568,342 and 20,309,033 shares, respectively (19,675) (13,978)
----------------- -------------------
Total shareholders' equity 31,703 34,740
----------------- -------------------
Total Liabilities and Shareholders' Equity $ 132,028 $ 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)
Three Months Ended
----------------------------------------------
June 30, June 30,
2002 2001
--------------------- --------------------
Cash Flows from Operating Activities:
Net cash provided (used) by operating activities $ 5,786 $ (2,075)
--------------------- --------------------
Cash Flows from Investing Activities:
Investment in affiliate, net of cash acquired of $161 -- (315)
Other (98) (33)
--------------------- --------------------
Net cash used by investing activities (98) (348)
Cash Flows from Financing Activities:
Purchase of common stock and options (5,697) (550)
Net repayments of borrowings (6,178) (1,265)
--------------------- --------------------
Net cash used by financing activities (11,875) (1,815)
Net decrease in cash and cash equivalents (6,187) (4,238)
Cash and cash equivalents at beginning of year 19,228 7,987
--------------------- --------------------
Cash and cash equivalents at end of period $ 13,041 $ 3,749
===================== ====================
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][R]"
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 June 30,
2002 and the results of operations for the quarters ended June 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 quarter ended June 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 months ended June 30, 2002 and 2001
is as follows (in thousands):
Three Months Ended
---------------------------------------
June 30, June 30,
2002 2001
---------------- ----------------
(Unaudited)
Net income $ 2,660 $ 2,193
Currency translation adjustment 1 --
Unrealized gains (losses) on securities, net (1) 4
---------------- ----------------
Comprehensive income $ 2,660 $ 2,197
================ ================
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
Months Ended
--------------------------------------------
June 30, June 30,
2002 2001
---------------------- ------------------
(Unaudited)
Numerator:
Net income $ 2,660 $ 2,193
Add back to effect assumed conversions:
Interest on convertible debentures 441 --
---------------------- -------------------
Numerator for diluted earnings per share $ 3,101 $ 2,193
====================== ===================
Denominator:
Denominator for basic earnings per share - weighted average shares 29,444 31,344
Effect of dilutive securities:
Preferred shares -- 3,154
Options 377 450
Convertible debentures 5,204 --
---------------------- -------------------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed conversions 35,025 34,948
====================== ===================
Basic earnings per share $ 0.09 $ 0.07
====================== ===================
Diluted earnings per share $ 0.09 $ 0.06
====================== ===================
NOTE 4- CAPITAL STRUCTURE
Our outstanding capital stock at June 30, 2002 consisted of common stock
and Series A convertible preferred stock. Effective March 31, 2002 the
conversion feature of the preferred shares expired.
At June 30, 2002, Emerson had outstanding approximately 1.7 million options
with exercise prices ranging from $1.00 to $1.50. At June 30, 2002, SSG had
outstanding approximately 420,000 options with exercise prices ranging from
$0.95 to $9.44.
At June 30, 2002, Emerson also had outstanding approximately $20.8 million
of 8.5% Senior Subordinated Convertible Debentures (the "Debentures"). On June
28, 2002, Emerson entered into secured financing necessary to retire the
Debentures. See "Note 9 - Borrowings".
On May 25, 2000 Emerson entered into a Termination, Settlement, Redemption,
and Option Agreement (the "Agreement") with Geoffrey P. Jurick, its Chairman,
Chief Executive Officer and President, and two of Mr. Jurick's institutional
creditors, resolving outstanding litigation between Mr. Jurick and two of his
three outside creditors. As part of the Agreement, Emerson was granted an option
to purchase from the two institutional creditors the remaining 4.1 million
shares of Common Stock owned by them for approximately $5.5 million. On May 25,
2001, Emerson extended the option term for one additional year by making a
$550,000 payment. On June 10, 2002, Emerson exercised the 4.1 million share
option for $5.5 million using cash generated from operations to complete this
transaction.
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
for the sporting goods segment, weighted-average cost method for items
manufactured and for items purchased for resale. As of June 30, 2002 and March
31, 2002, inventories consisted of the following (in thousands):
June 30, 2002 March 31, 2002
--------------------- ---------------------
(Unaudited)
Raw materials $ 2,164 $ 2,153
Work-in-process 290 258
Finished 45,171 41,531
------------------ -----------------
47,625 43,942
Less inventory allowances (2,727) (2,285)
------------------ -----------------
$ 44,898 $ 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 carryforward period are reduced.
NOTE 7 - INVESTMENT IN SPORT SUPPLY GROUP, INC.
As of June 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
Statements of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"), which requires that goodwill not be amortized
but instead be tested for impairment at least annually by reporting unit. We
have adopted SFAS 142 effective April 1, 2002 and, accordingly, ceased
amortization of goodwill. SFAS 142 provides for a transitional period. Any need
for impairment must be assessed within the first six months from adoption. We
are still in the process of evaluating the relevant provisions of SFAS 142 and
have not yet determined whether SFAS 142 will have an immediate effect on the
financial statements upon adoption.
SFAS 142 requires the recognition separate from goodwill of identifiable
intangible assets if certain criteria are met, and eliminates the amortization
of goodwill and certain identifiable intangible assets. Under the provisions of
SFAS 142, intangible assets, including goodwill, that are not subject to
amortization will be tested for impairment annually and more frequently if
events or changes in circumstances indicate that the asset might be impaired.
The pro forma adoption of SFAS No. 142 for the three month period ended
June 30, 2001, would have resulted in an increase in consolidated net income of
approximately $52,000 and no effect on basic or diluted earnings per share.
NOTE 9 - BORROWINGS
As of June 30, 2002 and March 31, 2002, borrowings and capital lease
obligations consisted of the following (in thousands):
June 30, March 31,
2002 2002
-------------------- -----------------
(Unaudited)
8 1/2% Senior Subordinated Convertible
Debentures Due 2002 $ 20,750 $ 20,750
Notes payable under revolving line of credit 12,253 16,839
Equipment notes and other 252 310
-------------------- -----------------
33,255 37,899
Less current maturities 9,867 8,853
-------------------- -----------------
Long term debt and notes payable $ 23,388 $ 29,046
==================== =================
The Debentures were issued by Emerson in August 1995, bear interest at the
rate of 8 1/2% per annum, payable quarterly, are subordinated to all existing
and future senior indebtedness (as defined in the Indenture governing the
Debentures) and are scheduled to mature August 15, 2002. The Debentures are
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 are redeemable
in whole or in part at our option and, in the case of Emerson's exercise of the
Debentures call provision, require a call price of 101% of principal. The
Debentures are subject to certain restrictions on transfer and restrict, among
other things, the amount of senior indebtedness and other indebtedness that
Emerson, and, in certain instances, its consolidated subsidiaries, may incur.
Each holder of Debentures has the right to cause Emerson to redeem the
Debentures if certain designated events (as defined in the Indenture governing
the Debentures) should occur.
Prior to June 28, 2002, Emerson had an existing Loan and Security Agreement
(the "Loan and Security Agreement"), which included a senior secured credit
facility in the amount of $15 million with a U.S. financial institution. The
facility provided for revolving loans and letters of credit, subject to
individual maximums, which, in the aggregate, could not exceed the lesser of $15
million or a "Borrowing Base" amount based on specified percentages of eligible
accounts receivable and inventories. Amounts outstanding under the senior credit
facility are secured by (i) substantially all of our U.S. and Canadian assets
except for trademarks, which are subject to a negative pledge covenant, and (ii)
a portion of our investment in SSG. The interest rate charged on this facility
was the prime rate of interest plus 1.25%. Pursuant to the Loan and Security
Agreement, Emerson was restricted from, among other things, paying cash
dividends (other than on the Series A Preferred Stock), redeeming stock in
certain instances, and entering into certain transactions without the lender's
prior consent and was required to maintain certain net worth levels. An event of
default under the credit facility would trigger a default under the Debentures.
As of June 30, 2002, approximately $7.1 million was outstanding under this
facility and was retired subsequent to June 30, 2002 as set forth below. At June
30, 2002 and 2001, there were no letters of credit issued under the credit
facility.
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 will be used to retire all of the Debentures, which is expected to
occur on or prior to their maturity date of August 15, 2002. 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
will be restricted from, among other things, paying cash dividends other than on
preferred shares, repurchasing Emerson's common stock and entering into certain
transactions without the lender's prior consent and will be subject to certain
net worth and leverage financial covenants. Amounts outstanding under the Loan
Agreement are secured by substantially all of Emerson's assets.
Subsequent to June 30, 2002 the Loan and Security Agreement was fully
retired using proceeds from the revolving line of credit as set forth in the
Loan Agreement. Debentures, face amount $13,127,000, plus accrued interest, were
repurchased and retired prior to their maturity date. Accordingly, Long Term
Debt and Notes Payable include that portion of the Term Loan to be amortized
beyond one year.
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 June 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 - SEGMENT INFORMATION
The following table presents certain operating segment information for each
of the three-month periods ended June 30, 2002 and 2001 (in thousands):
Consumer Sporting
Electronics Goods
June 30, 2002:
Net revenues from external customers $57,883 $26,773
Income before income taxes $ 4,423 $ 337
Segment assets $71,562 $60,466
June 30, 2001:
Net revenues from external customers $49,169 $27,955
Income (loss) before income taxes $ 2,392 $ (523)
Segment assets $55,264 $65,140
Note 11 - 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 months ended June 30, 2002 and 2001
2002 2001
---------------- -------------------
(Unaudited)
Net revenues (in thousands) $84,646 $77,124
100.0% 100.0%
Cost of sales 77.0% 80.1%
Other operating costs and expenses 1.5% 1.8%
Selling, general and administrative expenses 15.0% 14.7%
Operating income 6.5% 3.4%
Provision (benefit) for income taxes 2.3% (0.3)%
Net income 3.1% 2.8%
Results of Consolidated Operations - Three months ended June 30, 2002
compared with three months ended June 30, 2001
Net Revenues - Net revenues for the three-month period ended June 30, 2002
increased $7.5 million (9.8%) as compared to the same period ended June 30,
2001. The increase was primarily from an increase in the consumer electronics
segment, partially offset by a decrease in the sporting goods segment.
Cost of Sales - Cost of sales, as a percentage of consolidated net
revenues, decreased from 80.1% for the three months ended June 30, 2001 to 77.0%
for the same period in fiscal 2003. The decrease in cost of sales was 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 decreased from 1.8% for the
three months ended June 30, 2001 to 1.5% for the same period in fiscal 2003.
Selling, General and Administrative Expenses ("S,G&A") - S,G&A, as a
percentage of consolidated net revenues, were 15.0% for the three months ended
June 30, 2002 as compared to 14.7% for the three months ended June 30, 2001. In
absolute terms S,G&A increased $1.4 million for the first three months of fiscal
2003 as compared to the first three months of fiscal 2002. The increase as a
percentage of consolidated net revenues and 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
months ended June 30, 2002 was primarily the result of the utilization of
previously recognized net operating loss carryforwards, partially offset by a
foreign tax benefit in the consumer electronics segment.
Net Income - As a result of the foregoing factors, we earned net income of
$2.7 million (3.1%) for the three months ended June 30, 2002 as compared to $2.2
million (2.8%) for the three months ended June 30, 2001.
Consumer Electronics Segment:
The following table summarizes certain financial information relating to
the consumer electronics segment for the three months ending June 30, 2002 and
2001(in thousands):
2002 2001
----------------------- -----------------------
(Unaudited)
Net revenues $57,883 $49,169
Cost of sales 46,556 41,739
Other operating costs 1,276 1,381
Selling, general & administrative 5,017 3,040
----------------------- -----------------------
Operating income 5,034 3,009
Interest expense, net 611 617
----------------------- -----------------------
Income before income taxes taxes 4,423 2,392
Provision (benefit) for income taxes 1,812 (57)
----------------------- -----------------------
Net income $2,611 $2,449
======================= =======================
Results of Consumer Electronics Operations - Three months ended June 30,
2002 compared with three months ended June 30, 2001.
Net Revenues - Net revenues for the three months ended June 30, 2002
increased $8.7 million (17.7%) as compared to the same period ended June 30,
2001. The increase in net revenues was comprised of an increase in unit sales of
audio products partially offset by a decrease in unit sales of microwave ovens
products. Revenues earned from the licensing of Emerson's trademarks increased
to $3.9 million for the first three months of fiscal 2003 as compared to $1.3
million for the same period in fiscal 2002.
Cost of Sales - Cost of sales, as a percentage of consumer electronics net
revenues, decreased from 84.9% for the three months ended June 30, 2001 to 80.4%
for the three months ended June 30, 2002. The decrease in cost of sales as a
percentage of consumer electronics net revenues was primarily attributable to a
greater impact of licensing revenues, which have no direct associated costs, and
to a lesser degree higher gross profit margins on product sales.
The consumer electronics segment gross profit margins continue to be
subject to competitive pressures arising from pricing strategies associated with
the price categories of the consumer electronics market in which Emerson
competes. 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 from 2.8% for the
three months ended June 30, 2001 to 2.2% for the three months ended June 30,
2002. The decrease between fiscal 2002 and 2003 was 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 8.7% for the three months
ended June 30, 2002 as compared to 6.2% for the three months ended June 30, 2001
primarily due to recoveries of provisions related to substandard receivables in
the prior year, which were not repeated in the current year, and an increase in
co-operative advertising costs and freight expense .
Interest Expense, net - Interest expense remained relatively unchanged for
the first three months of fiscal 2003 as compared to the same period in fiscal
2002.
Provision (benefit) for Income Taxes - Emerson's provision for income taxes
was $1.8 million for the three months ended June 30, 2002 as compared to a
benefit of $57,000 for the three months ended June 30, 2001. The benefit of
$57,000 in fiscal 2002 consisted primarily of a foreign taxes, partially offset
by a Federal tax provision; conversely, the provision of $1.8 million in fiscal
2003 primarily consisted of deferred tax expense related to previously
recognized Federal and state tax net operating losses, partially offset by a
foreign tax benefit.
Net Income - As a result of the foregoing factors, the consumer electronics
segment earned net income of $2.6 million (4.5% of net revenues) for the three
months ended June 30, 2002 as compared to $2.5 million (5.0% of net revenues)
for the three months ended June 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 months ended June
30, 2002 and 2001 (in thousands):
2002 2001
--------------------- ----------------------
(Unaudited)
Net revenues $ 26,773 $ 27,955
Cost of sales 18,634 20,016
Selling, general & administrative 7,626 8,205
--------------------- ----------------------
Operating income (loss) 513 (266)
Interest expense, net (176) (257)
--------------------- ----------------------
Income (loss) before income taxes 337 (523)
Provision (benefit) for income taxes 127 (190)
--------------------- ----------------------
Net income (loss) $ 210 $ (333)
===================== ======================
Results of Sporting Goods Operations - Three months ended June 30, 2002
compared with three months ended June 30, 2001
Net Revenues - Net revenues decreased approximately $1.2 million (4.2%) for
the three-month period ended June 30, 2002 as compared to the three-month period
ended June 30, 2001. The decrease in sporting goods net revenues was primarily a
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 71.6% for the three month period ended June 30, 2001 to
69.6% for the three month period ended June 30, 2002. The decrease is 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 $579,000 for the three month period ended June 30, 2002
as compared to the three month period ended June 30, 2001. As a percentage of
sporting goods net revenues, S,G&A decreased to 28.5% from 29.4% for the three
month period ended June 30, 2002 as compared to the three month period ended
June 30, 2001. 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; iii. a decrease
in legal fees; and iv. a decrease in facility expenses.
Interest Expense, net - Interest expense decreased by approximately $81,000
for the three month period ended June 30, 2002 as compared to the three month
period ended June 30, 2001, due primarily to lower overall borrowing levels and
lower interest rates.
Benefit for Income Taxes - SSG recorded a tax provision of approximately
$127,000 for the three months ended June 30, 2002 as compared to a tax benefit
of $190,000 for the same period in fiscal 2002.
Net Income - As a result of the foregoing factors, the sporting goods
segment earned net income of $210,000 (0.8% of net revenues) for the three
months ended June 30, 2002 as compared to a net loss of $333,000 (-1.2% of net
revenues) for the three months ended June 30, 2001.
Liquidity and Capital Resources
Net cash provided by operating activities was $5.8 million for the three
months ended June 30, 2002. Cash was primarily provided by our profitability and
an increase in accounts payable, partially offset by an increase in inventories.
Net cash used by investing activities was $98,000 for the three months
ended June 30, 2002. Cash was utilized primarily for the purchase of fixed
assets.
Net cash used for financing activities was $11.9 million for the three
months ended June 30, 2002. Cash was primarily utilized for the exercise of an
option to repurchase Emerson common stock and to reduce borrowings.
Emerson and SSG maintain asset-based credit facilities as described in Note
9 - Borrowings. At June 30, 2002, there were approximately $7.1 million of
borrowings outstanding under these facilities by Emerson, which was paid off
subsequent to June 30, 2002 as previously discussed, and $12.2 million of
borrowing outstanding by SSG. No letters of credit were outstanding by either
Emerson or SSG as of June 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 $5.0 million credit facility which is used for inventory
purchases and (ii) two back-to-back letters of credit totaling $45 million. At
June 30, 2002, our Hong Kong subsidiary pledged $2.2 million in certificates of
deposit to this bank to assure the availability of the $5.0 million credit
facility and a $2.5 million seasonal line increase. At June 30, 2002, there were
approximately $7.0 million and $11.8 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 purchase orders other than for
product as of June 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 quarter ended June 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
Our 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
judgements. Changes in strategy and/or market conditions could significantly
impact these judgements and require adjustments to recorded asset balances. SSG
is still in the process of evaluating the relevant provisions of SFAS 142 and
have not yet determined whether SFAS 142 will have an immediate effect on the
financial statements upon adoption. However, amortization of goodwill was ceased
upon adoption of SFAS 142. If it were determined that there was an impairment of
our intangible assets related to goodwill and other acquired intangibles,
write-downs of these assets would be required.
Inflation, Foreign Currency, and Interest Rates
Neither inflation nor currency fluctuations had a significant effect on our
results of operations during the first 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 rate. While a significant increase in interest rates could have an adverse
effect on the our financial condition and our results of operations, 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.
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, such as United Parcel Service; (v) our ability to
comply with the restrictions imposed upon us by our outstanding indebtedness;
and (vi) 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.
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.
None.
ITEM 3. Default Upon Senior Securities.
(a) None
(b) None
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
ITEM 5. Other Information.
(a) None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K - Current report on Form 8-K, dated June 10,
2002 reporting the exercise of the option to purchase 4.1 million shares under
the Termination, Settlement, Redemption and Option Agreement.
Reports on Form 8-K - Current report on Form 8-K, dated July 1, 2002
reporting the $40 million revolving credit and term loan agreement.
* 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: August 8, 2002 /s/ Geoffrey P. Jurick
-----------------------
Geoffrey P. Jurick
Chairman, Chief Executive Officer
and President
Date: August 8, 2002 /s/ Kenneth A. Corby
--------------------
Kenneth A. Corby
Executive Vice President and
Chief Financial Officer