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_________________________
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)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing 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.
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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.
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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
==================== =====================
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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
================= =============== =============== ================
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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
==================== =============== ================ ===============
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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
========================= ======================
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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
===================== ====================
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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)
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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%
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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
================ =================== ================ ===============
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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)
================== ================= ================= ================
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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.
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* 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
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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
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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
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SECOND AMENDMENT TO LICENSE AGREEMENT
This Second Amendment to License Agreement ("Second Amendment") dated effective as of August 1, 2002, is made by and between Emerson Radio Corp. ("Licensor") and Funai Corporation, Inc. ("Licensee").
WHEREAS, Licensor and Licensee are parties to that License Agreement ("Agreement") effective as of January 1, 2001, as amended by First Amendment to License Agreement, dated February 19, 2002; and
WHEREAS, the parties wish to further amend the Agreement effective as of the effective date of this Second Amendment to reflect a revised royalty rate for sales to Walmart only.
NOW, THEREFORE, the parties agree to the following:
1. Capitalized Terms and Amended Exhibit A. All capitalized terms not defined herein shall have the same meaning as in the Agreement. Exhibit A, Section III. of the Agreement shall be amended to read as set forth on the attached Amended Exhibit A.
2. All Other Provisions of the Agreement. All other provisions of the Agreement not amended herein shall continue to have their full force and effect.
IN WITNESS WHEREOF, this Second Amendment has been executed by the duly authorized representative of each party effective as of the above effective date.
EMERSON RADIO CORP. FUNAI CORPORATION, INC. By: /s/ John J. Raab By: /s/ Masao Suwa Name: John J. Raab Name: Masao Suwa Title: EVP - International Title: President |
Exhibit 10.28
NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
COMMON STOCK PURCHASE WARRANT AGREEMENT
This COMMON STOCK PURCHASE WARRANT AGREEMENT (the "Warrant Agreement") is entered into effective as of the 1st day of August, 2002, by and between EMERSON RADIO CORP., a Delaware corporation (the "Company"), and FURTHER LANE ASSET MANAGEMENT, L.P., a New York partnership ("Further Lane" or "Holder").
WHEREAS, on even date herewith, the Company and Further Lane entered into that certain Consulting Agreement (the "Consulting Agreement") whereby the Company engaged Further Lane to render to the Company certain consulting services more particularly described in Section 2 thereof (the "Consulting Services"); and
WHEREAS, in consideration for the Consulting Agreement and for the Consulting Services to be provided thereunder, the Company has agreed to issue to Further Lane, and/or employees or consultants of Further Lane designated by it upon its execution and delivery of the Consulting Agreement, Common Stock Purchase Warrants (the "Warrants") to purchase an aggregate of 200,000 shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), pursuant to the requirements relating to the exercise thereof set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder, the parties hereto agree as follows:
1. Grant of Warrants. For value received, the Company hereby grants Holder, subject to the terms and conditions hereinafter set forth, the right to purchase up to a maximum of 200,000 shares of the Common Stock of the Company (the "Shares"), subject to adjustment as set forth herein.
2. Exercise of Warrants. (a) Subject to clause (b) below, the Warrants will vest and may be exercised by the Holder as to (i) 50% of the Shares covered hereby at any time after February 1, 2003, and (ii) all or any part of the Shares covered hereby at any time after August 1, 2003 , in either event until August 1, 2005, when such Warrants shall expire, at an exercise price of $2.20 per share ("Warrant Exercise Price"). The Holder shall deliver to the Company written notice of Holder's intent to exercise the Warrants at Nine Entin Road, Parsippany, New Jersey 07054-0430, or at such other address as the Company shall designate in writing to the Holder, together with this Warrant Agreement and a
check payable to the order of the Company for the aggregate purchase price of the Shares so purchased. Upon exercise of the Warrants as aforesaid, the Company shall as promptly as practicable, and in any event within 10 days thereafter, execute and deliver to the Holder a certificate or certificates in the name of the Holder for the total number of whole Shares for which the Warrants are being exercised. If the Warrants shall be exercised with respect to less than all of the Shares, the Holder shall be entitled to receive a similar warrant of like tenor and date covering the number of Shares in respect of which the Warrants were not exercised. The Warrants covered by this Warrant Agreement shall lapse and be null and void if not exercised by the Holder on or before 5:00 p.m., New York City time, on August 1, 2005. (b) In the event (a) the Consulting Agreement is terminated by Consultant (as defined in the Consulting Agreement) for any reason or (b) the Company terminates the Consulting Agreement as a result of Consultant's material default or breach by Consultant under the terms of the Consulting Agreement ("For Cause"), the Holder shall only be entitled to exercise this Warrant (as defined below) with respect to that number of shares of Common Stock of the Company that have vested as set forth in paragraph (a) above as of the date of such termination and (ii) in the event the Company terminates the Consulting Agreement other than For Cause, the Holder shall be entitled to exercise the Warrants for the full number of Shares set forth in paragraph (a) above in accordance with the terms of this Warrant.
3. Covenants of the Company. The Company covenants and agrees that all the Shares which may be issued upon the exercise of the Warrants represented by this Warrant Agreement will, upon issuance, be fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company further covenants and agrees that during the period within which the Warrants represented by this Warrant Agreement may be exercised, the Company will at all times have authorized and reserved a sufficient number of Shares to provide for the exercise of the Warrants represented by this Warrant Agreement.
4. Transactions Involving Sport Supply Group, Inc. Notwithstanding anything herein to the contrary, the Holder agrees that no adjustment shall be made to the Warrant Exercise Price or the number of Shares issuable upon the exercise of this Warrant Agreement upon issuance of Common Stock (or any other securities) of the Company in connection with a transaction concerning or involving Sport Supply Group, Inc.
5. Notice of Certain Events. In the event of any consolidation of the Company with, or merger of the Company into, another corporation, the Company, or such successor corporation, sale of all or substantially all the assets of the Company, or in the event of any distribution of all or substantially all of its assets in dissolution or liquidation, or in the event of any other distribution or dividend (other than cash dividends), the Company shall mail notice thereof by registered mail to the Holder and shall make no distribution to the stockholders of the Company until the expiration of 10 days from the date of mailing of the aforesaid notice; provided, however, that in any such event,
if the Holder shall not exercise the Warrants within 10 days from the date of mailing such notice, all rights herein granted and not so exercised within such 10 day period shall thereafter become null and void. The Company shall not, however, be prevented from consummating any such merger, consolidation, sale or distribution without awaiting the expiration of such 10 day period, it being the intent and purpose hereof to enable the Holder, upon exercise of the Warrants, to participate in the distribution of the consideration to be received by the Company upon any such merger, consolidation, or sale or in the distribution of assets upon any dissolution or liquidation or in the event of any other distribution or dividend (as provided above).
6. No Fractional Shares. The number of Shares subject to issuance upon the complete exercise of the Warrants shall be rounded down to the nearest whole number of Shares so that no fractional Shares shall be issued upon the complete exercise of the Warrants. The Holder shall not be entitled to receive any compensation or property for such fractional Share to which it may have been entitled to in the absence of this provision.
7. Notices. If there shall be any adjustment in accordance with this Warrant Agreement, or if securities or property other than Shares of the Company shall become purchasable in lieu of Shares upon exercise of the Warrants, the Company shall forthwith cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder at its address shown on the books of the Company, which notice shall be accompanied by a certificate of either independent public accountants of recognized standing or the Chairman, President, or any Vice President of the Company setting forth in reasonable detail the basis for the Holder becoming entitled to purchase such Shares and the number of Shares which may be purchased and the exercise price thereof, or the facts requiring any such adjustment, or the kind and amount of any such securities or property so purchasable upon the exercise of the Warrants, as the case may be.
8. Taxes. The issue of any stock or other certificate upon the exercise of the Warrant shall be made without charge to the Holder for any stamp, duty, excise, or similar tax (but not including the Holder's income or similar taxes) in respect of the issue of such certificate. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder, as the registered holder of this Warrant Agreement, and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.
9. Non-transferability of Warrants. The Warrants shall be non-transferable without the express written consent of the Company.
10. Warrant Holder Not Stockholder. This Warrant Agreement does not confer upon the Holder any right to vote or to consent or to receive notice as a stockholder of the Company, as such in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof as provided herein.
11. Investment Representations. The Holder, by acceptance hereof, and with reference to the Warrants and the Shares issuable upon exercise of the Warrants, represents and warrants that:
(a) The Holder is acquiring such securities for investment purposes only, for its own account, and not with a view toward resale or other distribution thereof, and has no present intention of selling or otherwise disposing of such securities.
(b) The Holder is aware that the offer and sale of the securities have
not been registered under the Securities Act of 1933, as amended ("Securities
Act"), or any state securities law, that upon exercise of the Warrants, the
Shares must be held indefinitely unless they are subsequently registered or an
exemption from such registration is available and that the Company is under no
obligation to register the offer and sale of the Shares under the Securities Act
or any applicable state securities laws, except as otherwise set forth in
Section 14 hereof.
(c) The Holder acknowledges that the Warrants may not be made subject to a security interest, pledged, hypothecated, sold, or otherwise transferred in the absence of an effective registration statement for such Warrants under the Securities Act and such applicable state securities laws or there is an applicable exemption therefrom. The Holder further acknowledges that, unless the offer and sale of the Shares issuable upon exercise of the Warrants have been registered under the Securities Act, the Shares issued upon the exercise of the Warrants shall be restricted in the same manner and to the same extent as the Warrants and the certificates representing such Shares shall bear the following legend:
"THE OFFER AND SALE OF THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD, OR TRANSFERRED UNTIL A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR THERE IS AN AVAILABLE EXEMPTION THEREFROM."
In making the above representations and warranties, the Holder intends that the Company rely thereon and understands that, as the result of such reliance, such securities are not being registered under the Securities Act or any applicable state securities laws in reliance upon the applicability of certain exemptions relating to transactions not involving a public offering.
12. Lost Warrants. In case this Warrant Agreement shall be mutilated, lost, stolen, or destroyed, the Company will issue a new Warrant Agreement of like date, tenor, denomination and terms and conditions, and deliver the same in exchange and substitution for and upon surrender and cancellation of the mutilated Warrant Agreement, or in lieu of any Warrant Agreement lost, stolen, or destroyed, upon receipt of evidence satisfactory to the Company of the loss, theft, or destruction of such Warrant Agreement, and upon receipt of indemnity satisfactory to the Company.
13. Applicable Law. This Warrant Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to the conflict of laws provisions thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant Agreement effective as of the day and year first above written.
EMERSON RADIO CORP.
By: /s/ Geoffrey P. Jurick Geoffrey P. Jurick Chairman and Chief Executive Officer |
FURTHER LANE ASSET MANAGEMENT LP
By: /s/ James B. Windle James B. Windle Managing Director |
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Emerson Radio Corp. (the "Company") on Form 10-Q for the quarter ended September 30, 2002 as filed with the Securities and Exchange Commission (the "Report"), I, Geoffrey P. Jurick, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and result of operations of the Company.
Dated: November 8, 2002
/s/ Geoffrey P. Jurick
Geoffrey P. Jurick
Chief Executive Officer
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EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Emerson Radio Corp. (the "Company") on Form 10-Q for the quarter ended September 30, 2002 as filed with the Securities and Exchange Commission (the "Report"), I, Kenneth A. Corby, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and result of operations of the Company.
Dated: November 8, 2002
/s/ Kenneth A. Corby
Kenneth A. Corby
Chief Financial Officer
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