##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  
 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, 2004______ _____________  [  ]
    
    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. 
  DELAWARE
    
    22-3285224(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)9 Entin Road Parsippany, New Jersey
    
    07054(Address of principal executive offices)
    
    (Zip code)
 (973) 884-5800 
     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 by check mark whether the registrant is an accelerated Filer (as
defined in Rule 12b-2 of the Exchange Act).
[  ] Yes   [X] No Indicate the number of shares outstanding of common stock as of November
4, 2004: 27,103,164.




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Results of Operations and Financial ConditionItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II OTHER INFORMATIONITEM 1. Legal ProceedingsITEM 2. Changes in Securities and Use of ProceedsITEM 3. Default Upon Senior SecuritiesITEM 4. Submission of Matters to a Vote of Security HoldersITEM 5. Other InformationITEM 6. Exhibits and Reports on Form 8-KSIGNATURESLease AgreementCommon Stock Purchase Warrant AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906    Table of Contents  
 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 EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Net revenues
    
    $
    83,129
    
    
    $
    78,873
    
    
    $
    156,059
    
    
    $
    133,044Costs and expenses:Cost of sales
    
    
    67,495
    
    
    
    65,422
    
    
    
    124,529
    
    
    
    108,389Other operating costs
and expenses
    
    
    1,377
    
    
    
    1,293
    
    
    
    2,930
    
    
    
    2,549Selling, general and
administrative expenses
    
    
    10,171
    
    
    
    10,081
    
    
    
    20,934
    
    
    
    19,399Acquisition costs
    
    
    (104
    )
    
    
    (29
    )
    
    
    (175
    )
    
    
    614Stock based costs
    
    
    1,563
    
    
    
    19
    
    
    
    1,563
    
    
    
    3780,502
    
    
    
    76,786
    
    
    
    149,781
    
    
    
    130,988Operating income
    
    
    2,627
    
    
    
    2,087
    
    
    
    6,278
    
    
    
    2,056Interest expense, net
    
    
    (381
    )
    
    
    (400
    )
    
    
    (675
    )
    
    
    (822
    )Minority interest in net
(income) loss of
consolidated subsidiary
    
    
    (472
    )
    
    
    136
    
    
    
    (1,078
    )
    
    
    82Income before income taxes and
discontinued operations
    
    
    1,774
    
    
    
    1,823
    
    
    
    4,525
    
    
    
    1,316Provision for income taxes
    
    
    785
    
    
    
    1,042
    
    
    
    1,731
    
    
    
    975Income from continuing
operations
    
    
    989
    
    
    
    781
    
    
    
    2,794
    
    
    
    341Loss from discontinued
operations, net of tax
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    (105
    )Net income
    
    $
    989
    
    
    $
    681
    
    
    $
    2,794
    
    
    $
    236Basic net income (loss)
per share:Continuing operations
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.01Diluted net income (loss)
per share:Continuing operations
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.01Weighted average shares
outstanding:Basic
    
    
    27,076
    
    
    
    27,560
    
    
    
    26,855
    
    
    
    27,488Diluted
    
    
    27,218
    
    
    
    28,428
    
    
    
    27,242
    
    
    
    28,458
 The accompanying notes are an integral part of the interim consolidated financial statements. 2




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EMERSON RADIO CORP. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (In thousands)
 September 30, 2004
    
    March 31, 2004(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    5,078
    
    
    $
    6,369Accounts receivable (less allowances of $4,141 and
$3,653, respectively)
    
    
    37,733
    
    
    
    19,948Other receivables
    
    
    1,883
    
    
    
    2,821Inventories
    
    
    59,665
    
    
    
    46,997Prepaid expenses and other current assets
    
    
    9,947
    
    
    
    5,344Deferred tax assets
    
    
    5,476
    
    
    
    5,887Total current assets
    
    
    119,782
    
    
    
    87,366Property and equipment  (net of accumulated
depreciation
and amortization of $8,364 and $7,442, respectively)
    
    
    7,405
    
    
    
    7,822Deferred catalog expenses
    
    
    1,399
    
    
    
    1,695Trademarks and other intangible assets (net of
accumulated
amortization of $4,073 and $3,845,respectively)
    
    
    4,940
    
    
    
    5,168Deferred tax assets
    
    
    14,279
    
    
    
    15,263Other assets
    
    
    1,294
    
    
    
    1,355Total Assets
    
    $
    149,099
    
    
    $
    118,669LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term borrowings
    
    $
    36
    
    
    $
    58Short-term borrowings
    
    
    14,961
    
    
    
    4,762Revolver  current
    
    
    18,700
    
    
    
    Accounts payable and other current liabilities
    
    
    38,869
    
    
    
    32,787Accrued sales returns
    
    
    2,786
    
    
    
    2,521Income taxes payable
    
    
    819
    
    
    
    509Total current liabilities
    
    
    76,171
    
    
    
    40,637Long-term borrowings
    
    
    4,492
    
    
    
    15,027Minority interest
    
    
    16,872
    
    
    
    15,793Shareholders Equity:Preferred shares  10,000,000 shares authorized,
3,677
shares issued and outstanding
    
    
    3,310
    
    
    
    3,310Common shares  $.01 par value, 75,000,000 shares
authorized; 52,783,131 shares issued and
27,103,164 shares outstanding
    
    
    528
    
    
    
    523Capital in excess of par value
    
    
    117,862
    
    
    
    116,304Accumulated other comprehensive losses
    
    
    (88
    )
    
    
    (83
    )Accumulated deficit
    
    
    (46,216
    )
    
    
    (49,010
    )Treasury stock, at cost, 25,679,967 shares
    
    
    (23,832
    )
    
    
    (23,832
    )Total shareholders equity
    
    
    51,564
    
    
    
    47,212Total Liabilities and Shareholders Equity
    
    $
    149,099
    
    
    $
    118,669
 The accompanying notes are an integral part of the interim
consolidated financial statements. 3




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EMERSON RADIO CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In thousands)
 Six Months EndedSeptember 30, 2004
    
    September 30, 2003Cash Flows from Operating Activities:Income from continuing operations
    
    $
    2,794
    
    
    $
    341Adjustments to reconcile net income to
net cash provided by operating activities:Minority interest
    
    
    1,078
    
    
    
    (82
    )Depreciation and amortization
    
    
    1,474
    
    
    
    1,729Stock based costs
    
    
    1,563
    
    
    
    37Deferred tax expenses
    
    
    1,395
    
    
    
    1,068Asset allowances, reserves and other
    
    
    531
    
    
    
    952Changes in assets and liabilities:Accounts receivable
    
    
    (18,673
    )
    
    
    (13,595
    )Other receivables
    
    
    938
    
    
    
    2,002Inventories
    
    
    (12,404
    )
    
    
    (6,349
    )Prepaid expenses and other current assets
    
    
    (4,307
    )
    
    
    3,840Other assets
    
    
    (156
    )
    
    
    (190
    )Accounts payable and other current liabilities
    
    
    6,323
    
    
    
    8,394Income taxes payable
    
    
    310
    
    
    
    (637
    )Net cash used by continuing operations
    
    
    (19,134
    )
    
    
    (2,490
    )Net cash from discontinued operations
    
    
    24
    
    
    
    1,974Net cash used by operating activities
    
    
    (19,110
    )
    
    
    (516
    )Cash Flows from Investing Activities:Additions to property and equipment (continuing
operations)
    
    
    (523
    )
    
    
    (204
    )Other investing activity of discontinued operations
    
    
    
    
    
    
    Net cash used by investing activities
    
    
    (523
    )
    
    
    (204
    )Cash Flows from Financing Activities:Net short-term borrowings
    
    
    10,199
    
    
    
    2,309Purchase of common stock
    
    
    
    
    
    
    (728
    )Proceeds from exercise of stock options and warrants
    
    
    
    
    
    
    254Long-term borrowings
    
    
    76,689
    
    
    
    54,735Repayments of long-term borrowings
    
    
    (68,546
    )
    
    
    (64,253
    )Net cash provided by financing activities
    
    
    18,342
    
    
    
    (7,683
    )Net decrease in cash and cash equivalents
    
    
    (1,291
    )
    
    
    (8,403
    )Cash and cash equivalents at beginning of year
    
    
    6,369
    
    
    
    11,413Cash and cash equivalents at end of period
    
    $
    5,078
    
    
    $
    3,010
 The accompanying notes are an integral part of the interim
consolidated financial statements. 4




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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  the Company) and its majority-owned
subsidiaries, including Sport Supply Group, Inc. (SSG), which has been 53.2%
owned since February 2002. 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. The Company operates 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 SSG,
manufactures and markets sports related equipment and leisure products to
institutional customers in the United States. From July 2003 through October 2003, certain of SSGs team dealer
locations were discontinued. In November 2003, SSG sold all of the issued and
outstanding capital stock of its wholly-owned subsidiary, Athletic Training
Equipment Company, Inc. (ATEC). Collectively, SSG refers to these operations
as Discontinued Operations and accordingly, the accompanying financial
statements reflect these as discontinued operations. (See Note 11) 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, 2004 and the results of operations for the three and six month periods
ending September 30, 2004 and 2003. 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, 2004 (fiscal 2004), included in
our annual report on Form 10-K for fiscal 2004. Certain reclassifications were made to conform the prior years financial
statements to the current presentation. 5




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Due to the seasonal nature of both segments, the results of operations for
the three and six month periods ending September 30, 2004 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, 2005 (fiscal 2005). Emerson and SSG have elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees: (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25, if
the exercise price of employee stock options equals or exceeds the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. Emerson and SSG have adopted the disclosure-only provisions under
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). For the purposes of SFAS 123 pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options vesting periods. Our pro forma information for the three and
six months ended September 30, 2004 and 2003 is as follows: Three Months Ended
    
    Six Months EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003(Unaudited)
    
    (Unaudited)Net income:(in thousands)As reported
    
    $
    989
    
    
    $
    681
    
    
    $
    2,794
    
    
    $
    236Add: Employee stock-based
compensation expense,
as recorded, net of tax
    
    
    1,247
    
    
    
    8
    
    
    
    1,247
    
    
    
    8Less: Pro-forma employee
stock-based compensation
expense
    
    
    (117
    )
    
    
    (7
    )
    
    
    (119
    )
    
    
    (14
    )Pro forma
    
    $
    2,119
    
    
    $
    682
    
    
    $
    3,922
    
    
    $
    230Net income per common share:Basic  as reported
    
    $
    .04
    
    
    $
    .02
    
    
    $
    .10
    
    
    $
    .01Basic  pro forma
    
    $
    .08
    
    
    $
    .02
    
    
    $
    .15
    
    
    $
    .01Diluted  as reported
    
    $
    .04
    
    
    $
    .02
    
    
    $
    .10
    
    
    $
    .01Diluted  pro forma
    
    $
    .08
    
    
    $
    .02
    
    
    $
    .14
    
    
    $
    .01
 NOTE 2  COMPREHENSIVE INCOME Our comprehensive income for the three and six months ended September 30,
2004 and 2003 is as follows (in thousands): 6




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Three Months Ended
    
    Six Months EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003(Unaudited)
    
    (Unaudited)Net income
    
    $
    989
    
    
    $
    681
    
    
    $
    2,794
    
    
    $
    236Interest rate swap
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )
    
    
    (8
    )Unrealized income (loss) on
securities, net
    
    
    (1
    )
    
    
    1
    
    
    
    (1
    )
    
    
    (3
    )Recognition of unrealized losses
related to investments
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42Comprehensive income
    
    $
    988
    
    
    $
    678
    
    
    $
    2,789
    
    
    $
    267
 NOTE 3  NET EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts): Three
    
    SixMonths Ended
    
    Months EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003(Unaudited)
    
    (Unaudited)Numerator:Net earnings before discontinued
operations for basic and diluted earnings per share
    
    $
    989
    
    
    $
    781
    
    
    $
    2,794
    
    
    $
    341Denominator:Denominator for basic earnings
per share  weighted average
shares
    
    
    27,076
    
    
    
    27,560
    
    
    
    26,855
    
    
    
    27,488Effect of dilutive securities:Options and warrants
    
    
    142
    
    
    
    868
    
    
    
    387
    
    
    
    970Denominator for diluted
earnings per share 
weighted average shares and
assumed conversions
    
    
    27,218
    
    
    
    28,428
    
    
    
    27,242
    
    
    
    28,458Basic and diluted earnings per
share:Continuing operations
    
    $
    .04
    
    
    $
    0.03
    
    
    $
    .10
    
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    Basic and diluted earnings per
share
    
    $
    .04
    
    
    $
    0.02
    
    
    $
    .10
    
    
    $
    0.01
 NOTE 4- SHAREHOLDERS EQUITY Our outstanding capital stock at September 30, 2004 consisted of common
stock and Series A convertible preferred stock in which the conversion feature
expired effective March 31, 2002. At September 30, 2004, Emerson had outstanding approximately 307,000
options with exercise prices ranging from $1.00 to $3.00 and SSG 7




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had outstanding approximately 571,000 options with exercise prices ranging from
$0.95 to $9.44. Subsequent to September 30, 2004, 425,000 options with
exercise prices ranging from $2.97 to $3.26 were granted pursuant to the 2004
Emerson Employee Stock Incentive Plan. On August 1, 2002, in connection with a consulting agreement, Emerson
granted 200,000 warrants with an exercise price of $2.20, of which 100,000
warrants vested after six months and 100,000 warrants vested one year from date
of grant. In February 2003, 100,000 of these warrants were exercised. In
November 2003, the remaining 100,000 of these warrants were exercised under a
cashless exercise and 45,544 shares of common stock were issued. The warrants
were valued using the Black-Scholes valuation model and were charged to
earnings over the related service period of the consulting agreement with
approximately $6,000 and $24,000 being charged to operations for the three and
six months ended September 30, 2003, respectively. Since the warrants were
fully exercised in fiscal 2004, no expense was charged for these warrants in
the current year. In September 2003, the Company publicly announced the Emerson Radio Corp.
common stock repurchase program. The program provides for share repurchase of
up to 2,000,000 shares of Emersons outstanding common stock. As of September
30, 2004, the Company had repurchased 1,111,625 shares under this program,
including no repurchases in the six month period ending September 30, 2004.
During the quarter ended September 30, 2004, there were no shares repurchased
under this program. Repurchase of the Companys shares are subject to certain
conditions under Emersons banking facility. On October 7, 2003, in connection with a consulting agreement, Emerson
granted 50,000 warrants with immediate vesting and an exercise price of $5.00
per share with an expiration date of October 2008. These warrants were valued
using the Black-Scholes valuation model, which resulted in $90,500 being
charged to earnings during the quarter ended December 31, 2003. For the three
and six months ended September 30, 2004, no expense was charged to operations
for these warrants. As of September 30, 2004, these warrants had not been
exercised. On August 1, 2004, in connection with a consulting agreement, Emerson
granted 50,000 warrants with immediate vesting and an exercise price of $3.00
per share. These warrants were valued using the Black-Scholes valuation model,
which resulted in $88,500 being charged to earnings during the quarter ended
September 30, 2004. As of September 30, 2004, these warrants had not been
exercised. During the quarter ended September 30, 2004, 725,000 of Emersons stock
options were exercised in a cashless manner, resulting in 472,781 shares of
Emersons common stock being issued. Such exercises were accounted for in
accordance with Emerging Issues Task Force Issue 84-18: Stock Option
Pyramiding (EITF 84-18), which resulted in a non-cash, pre-tax charge of
approximately $1.5 million in the quarter ended September 30, 2004. 8




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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 average cost method is used for the sporting goods segment. As of
September 30, 2004 and March 31, 2004, inventories consisted of the following
(in thousands): September 30, 2004
    
    March 31, 2004(Unaudited)Raw materials
    
    $
    1,205
    
    
    $
    1,138Work-in-process
    
    
    67
    
    
    
    67Finished goods
    
    
    61,122
    
    
    
    48,87862,394
    
    
    
    50,083Less inventory allowances
    
    
    (2,729
    )
    
    
    (3,086
    )$
    59,665
    
    
    $
    46,997
 NOTE 6  INCOME TAXES We have tax net operating loss carry forwards included in net deferred
tax assets that are available to offset future taxable income and can be
carried forward for 15 to 20 years. Although realization is not assured, we
believe it is more likely than not that all of the net deferred tax assets
will be realized through tax planning strategies available in future periods
and through future profitable operating results. The amount of the deferred
tax asset considered realizable, however, could be reduced or eliminated if
certain tax planning strategies are not successfully executed or estimates of
future taxable income during the carryforward period are reduced. If we
determine that we would not be able to realize all or part of the net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made. NOTE 7  RELATED PARTY TRANSACTIONS 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 for fees at terms which reflect
arms length transactions. These charges have been eliminated in
consolidation, but are included in the determination of net income in the
segment information presented in Note 10. 9




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NOTE 8  BORROWINGS As of September 30, 2004 and March 31, 2004, short-term borrowings
consisted of the following (in thousands): September 30,
    
    March 31,2004
    
    2004(Unaudited)Foreign bank loan
    
    $
    14,961
    
    
    $
    4,762
 As of September 30, 2004 and March 31, 2004, long-term borrowings
consisted of the following (in thousands): September 30,
    
    March 31,2004
    
    2004(Unaudited)Emerson Revolver
    
    $
    18,700
    
    
    $
    8,000Sport Supply Revolver
    
    
    4,467
    
    
    
    6,972Equipment notes and other
    
    
    61
    
    
    
    11323,228
    
    
    
    15,085Less Emerson Revolver  current
    
    
    18,700
    
    
    
    Less current maturities
    
    
    36
    
    
    
    58Long term debt and notes payable
    
    $
    4,492
    
    
    $
    15,027
 Emerson Credit Facility On June 28, 2002, Emerson entered into a $40
million Revolving Credit and Term Loan Agreement (the Emerson Loan
Agreement) with several U.S. financial institutions. The Emerson Loan
Agreement provides for a $25 million revolving line of credit (the Emerson
Revolver). The Emerson Loan Agreement also provided for a $15 million term
loan, which was repaid in full in fiscal 2004. The $25 million revolving
line of credit replaced Emersons $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
as defined in the Emerson Loan Agreement. The Borrowing Base amount is
established by 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 interest rate charged on the Term Loan ranged from prime plus
1.00% to 1.75% or, at Emersons election, LIBOR plus 2.5% and 3.25% depending
on certain financial covenants and amortized over a three-year period.
Pursuant to the Emerson Loan Agreement, Emerson is restricted from, among
other things, paying certain cash dividends, repurchasing Emersons common
stock and entering into certain transactions without the lenders prior
consent and is subject to certain net worth and leverage financial 10




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##### Table of Contents



covenants. Amounts outstanding under the Emerson Loan Agreement are
secured by substantially all of Emersons tangible assets. As of September 30, 2004, there was approximately $18.7 million
outstanding under the Emerson Revolver and Emerson was in compliance with the
covenants contained in the Emerson Loan Agreement. The Emerson Revolver
expires in June 2005, and accordingly, all amounts outstanding under this
facility have been presented as a current liability. Prior to expiration
Emerson intends to renew its banking facility or enter into a new banking
facility with similar or more favorable terms than those presently existing. Sport Supply Credit Facility During the quarter ending December 31,
2003, SSG amended its Loan and Security Agreement (the SSG Loan Agreement)
to finance its working capital requirements through October 31, 2007. Under
this amendment, SSGs line of credit was reduced from $25 million to $20
million; its borrowing rates were reduced from LIBOR plus 2.5% to LIBOR plus
2.25%; and its inventory and accounts receivable borrowing bases were
increased. The SSG Loan Agreement provides for revolving loans and letters
of credit which, in the aggregate, cannot exceed the lesser of $20 million or
a Borrowing Base amount based upon specified percentages of eligible
accounts receivable and inventories. Amounts outstanding under the SSG Loan
Agreement are secured by substantially all of the assets of SSG and its
subsidiaries. Pursuant to the SSG Loan Agreement, SSG is restricted from,
among other things, paying cash dividends and entering into certain
transactions without the lenders prior consent and it is required to
maintain certain net worth levels. The SSG Loan Agreement allows its lender, under certain circumstances,
to accelerate payment upon the occurrence of an event that has a material
adverse affect upon the business, operations, properties, assets, goodwill,
or condition (financial or otherwise) of SSG on a consolidated basis.
Effective February 2004, SSGs lender amended the SSG Loan Agreement to make
this clause effective only in the event that net availability under the
facility falls below a certain level. Additionally, the SSG Loan Agreement
requires SSG to maintain a depository account in favor of SSGs lender. As
of September 30, 2004, there was approximately $4.5 million outstanding under
the SSG Loan Agreement and SSG was in compliance with the covenants in the
SSG Loan Agreement. As of September 30, 2004, the carrying value of these credit facilities
approximated fair value. NOTE 9  SEGMENT INFORMATION The following table presents certain operating segment information for
each of the three and six months ended September 30, 2004 and 2003 (in
thousands): 11




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##### Table of Contents



Three Months Ended
    
    Three Months EndedSeptember 30, 2004
    
    September 30, 2003Consumer Electronics
    
    Sporting Goods
    
    Consumer Electronics
    
    Sporting Goods(Unaudited)
    
    (Unaudited)Net revenues from
external customers
    
    $
    59,880
    
    
    $
    23,249
    
    
    $
    56,440
    
    
    $
    22,433Income (loss) before
income taxes and
discontinued
operations
    
    $
    824
    
    
    $
    950
    
    
    $
    2,141
    
    
    $
    (318
    )Segment assets
    
    $
    106,205
    
    
    $
    42,894
    
    
    $
    80,841
    
    
    $
    53,625
 Six Months Ended
    
    Six Months EndedSeptember 30, 2004
    
    September 30, 2003Consumer Electronics
    
    Sporting Goods
    
    Consumer Electronics
    
    Sporting Goods(Unaudited)
    
    (Unaudited)Net revenues from
external customers
    
    $
    107,706
    
    
    $
    48,353
    
    
    $
    88,090
    
    
    $
    44,954Income (loss) before
income taxes and
discontinued
operations
    
    $
    2,338
    
    
    $
    2,187
    
    
    $
    1,504
    
    
    $
    (188
    )
 NOTE 10  LEGAL PROCEEDINGS Putative Class Actions Between September 4, 2003 and October 30, 2003, several putative class
action lawsuits were filed in the United States District Court for the District
of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth Corby and
John Raab (the Individual Defendants) on behalf of purchasers of our publicly
traded securities who bought shares between January 29, 2003 and August 12,
2003 (the Class Period.) On December 17, 2003, the Court entered a Joint
Stipulation and Order consolidating these putative class actions under the
caption In Re Emerson Radio Corp. Securities Litigation, 03cv4201 (JLL) (the
Consolidated Action.) Further to that Stipulation and Order, lead plaintiff
was appointed and co-lead counsel and co-liaison counsel were approved by the
Court in the Consolidated Action. Consistent with the Stipulation and Order,
the plaintiffs filed an Amended Consolidated Complaint (the Amended
Complaint) that, among other things, added Jerome Farnum, one of Emersons
directors, as a defendant in the litigation. Generally, the Amended Complaint alleges that Emerson and the Individual
Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated there under, by (i) 12




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##### Table of Contents



issuing certain positive statements during the Class Period regarding our
ability to replace lost revenues attributable to our Hello Kitty® license and
(ii) omitting to disclose that Emerson suffered allegedly soured relationships
with its largest retail customers. The Amended Complaint further alleges that
these statements were materially false and misleading when made because Emerson
allegedly misrepresented and omitted certain adverse facts which then existed
and disclosure of which was necessary to make the statements not false and
misleading. The Defendants deny all allegations and have moved to dismiss the
Complaint in its entirety for failure to state a claim. Emerson and the
Individual Defendants intend to defend the lawsuit vigorously. Other Matters The Company is a party to various other litigation matters, in most cases
involving ordinary and routine claims incidental to its business. The Company
cannot estimate with certainty its ultimate legal and financial liability with
respect to such pending litigation matters. However, the Company believes,
based on its examination of such matters, that its ultimate liability will not
have a material adverse effect on its financial position, results of operations
or cash flows. NOTE 11  DISCONTINUED OPERATIONS From July 2003 through October 2003, certain of SSGs team dealer
locations were closed. In November 2003, SSG sold all of the issued and
outstanding capital stock of its wholly owned subsidiary, ATEC. These closures
and sale of stock, and related discontinued operations resulted in a loss of
approximately $100,000 and $105,000 for the three and six months ended
September 30, 2003, respectively. The results of these transactions are
presented as discontinued operations in the accompanying Consolidated Statement
of Operations for the three and six month periods ended September 30, 2003.
(See Note 1) The following table summarizes the results of these discontinued
operations, net of related income taxes, as applicable (in thousands). (See
Note 6) Three Months Ended
    
    Six Months EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003Net revenues-ATEC
    
    $
    
    
    
    $
    2,361
    
    
    $
    
    
    
    $
    4,651Net revenues-Team Dealers
    
    
    
    
    
    
    1,281
    
    
    
    
    
    
    
    2,674Net revenues-Total
    
    $
    
    
    
    $
    3,642
    
    
    $
    
    
    
    $
    7,325Income from operations-ATEC
    
    $
    
    
    
    $
    180
    
    
    $
    
    
    
    $
    296Loss from operations-Team
Dealers
    
    
    
    
    
    
    (280
    )
    
    
    
    
    
    
    (401
    )Total discontinued
operations, net of tax
    
    $
    
    
    
    $
    (100
    )
    
    $
    
    
    
    $
    (105
    )
 13




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##### Table of Contents



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. The following discussion of our operations and financial condition should
be read in conjunction the Financial Statements and notes thereto included
elsewhere in this Quarterly Report on Form 10-Q. In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. Accordingly, all amounts are
approximations. Forward-Looking Information This report contains various forward-looking statements made pursuant to
the safe harbor provisions under the Private Securities Litigation Reform Act
of 1995 (the Reform Act) and information that is based on managements
beliefs as well as assumptions made by and information currently available to
management. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. When used in this report, the words
anticipate, believe, estimate, expect, predict, project, and
similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements
which speak only as of the date hereof, and should be aware that our actual
results could differ materially from those contained in the forward-looking
statements due to a number of factors, including the statements under Risk
Factors set forth in our Form 10-K for the fiscal year ended March 31, 2004
and other filings with the Securities and Exchange Commission (the SEC).
We undertake no obligation to publicly release the results on any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. We make available through our internet website free of charge our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, amendments to such reports and other filings made by us with the SEC, as
soon as practicable after we electronically file such reports and filings with
the SEC. Our website address is www.emersonradio.com. The information
contained in this website is not incorporated by reference in this report. 14




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##### Table of Contents



Consolidated Operations: The following table sets forth, for the periods indicated, certain items
related to our consolidated statements of operations as a percentage of net
revenues for the three and six months ended September 30, 2004 and 2003. A
detailed discussion of the material changes in operating results is set forth
under the discussion of our two operating segments: consumer electronics and
sporting goods. Three Months ended
    
    Six Months endedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Net revenues (in thousands)
    
    $
    83,129
    
    
    $
    78,873
    
    
    $
    156,059
    
    
    $
    133,044100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    81.2
    %
    
    
    83.0
    %
    
    
    79.8
    %
    
    
    81.5
    %Other operating costs and
expenses
    
    
    1.7
    %
    
    
    1.6
    %
    
    
    1.9
    %
    
    
    1.9
    %Selling, general and
administrative expenses
    
    
    12.2
    %
    
    
    12.8
    %
    
    
    13.4
    %
    
    
    14.6
    %Acquisition costs
    
    
    (0.1
    %)
    
    
    
    
    
    
    (0.1
    %)
    
    
    0.5
    %Stock based costs
    
    
    1.8
    %
    
    
    
    
    
    
    1.0
    %
    
    
    Operating income
    
    
    3.2
    %
    
    
    2.6
    %
    
    
    4.0
    %
    
    
    1.5
    %Interest expense
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    0.4
    %
    
    
    0.6
    %Minority interest
    
    
    0.6
    %
    
    
    (0.2
    %)
    
    
    0.7
    %
    
    
    (0.1
    %)Provision for income taxes
    
    
    0.9
    %
    
    
    1.3
    %
    
    
    1.1
    %
    
    
    0.7
    %Loss from discontinued
operations
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %Net income
    
    
    1.2
    %
    
    
    0.9
    %
    
    
    1.8
    %
    
    
    0.2
    %
 Net Revenues  Consolidated net revenues for the three and six month periods
ended September 30, 2004 increased to $83.1 million from $78.9 million ($4.2
million or 5.4%) and to $156.1 million from $133.0 million ($23.1 million or
17.3%) respectively, as compared to the same periods ended September 30, 2003.
The increase for the three month period ended September 30, 2004 is
attributable to increases of $3.4 million in the consumer electronics segment
and $816,000 in the sporting goods segment. The increase for the six month
period ended September 30, 2004 is attributable to increases of $19.6 million
in the consumer electronics segment and $3.4 million in the sporting goods
segment. Increases in both segments for both periods were due primarily to
increases in units sold, and to a lesser degree, higher pricing agreements. Cost of Sales  Cost of sales, as a percentage of consolidated net revenues,
decreased to 81.2% from 83.0% and to 79.8% from 81.5% for the three and six
month periods ended September 30, 2004 as compared to the same period in the
prior year. The decrease in cost of sales as a percentage of net revenues for
both periods were primarily the result of increased licensing revenues in the
consumer electronics segment and higher margin sales in both the consumer
electronics and sporting goods segments. In absolute terms, cost of sales
increased to $67.5 million from $65.4 million ($2.1 million or 3.2%) and to
$124.5 million from $108.4 15




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##### Table of Contents



million ($16.1 million or 14.9%) for the three and six month periods of fiscal
2005 as compared to the same periods in fiscal 2004. The increases for both
segments and periods were primarily due to higher unit volumes. 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 increased to 1.7%
from 1.6% for the three months ended September 30, 2004 as compared to the same
period in the prior year, and was relatively unchanged at 1.9% for the six
month period ended September 30, 2004 as compared to the same period in fiscal
2004. In absolute terms, other operating costs and expenses increased to $1.4
million from $1.3 million ($84,000 or 6.5%) and to $2.9 million from $2.6
million ($381,000 or 14.7%) for the three and six month periods of fiscal 2005
as compared to the same periods in fiscal 2004. Selling, General and Administrative Expenses (S,G&A)   S,G&A, as a
percentage of consolidated net revenues, decreased to 12.2% for the three
months ended September 30, 2004 as compared to 12.8% for the three months ended
September 30, 2003, and decreased to 13.4% from 14.6% for the six month period
ended September 30, 2004 as compared to the same period in fiscal 2004. In
absolute terms, S,G&A expenses increased to $10.2 million from $10.1 million
($77,000 or 0.8%) for the three month period ended September 30, 2004 as
compared to the same period in fiscal 2004, and increased to $20.9 million from
$19.4 million ($1.5 million or 7.8%) for the six month period ended September
30, 2004 as compared to the prior year period. The increases for both the
three and six month periods are due to increases in the consumer electronics
segment, partially offset by decreases in the sporting goods segment. Acquisition Costs  Acquisition costs are associated with the consumer
electronics segment. For the three and six month periods ending September 30,
2004, adjustments to acquisitions costs incurred in the prior year were
recorded in fiscal 2005, resulted in a reduction in such costs of $104,000 and
$175,000, respectively. For the three month period ended September 30, 2003,
there was a reduction to acquisition costs of $29,000, and for the six month
period ended September 30, 2003, acquisition costs totaled $614,000, or 0.5% of
consolidated net revenues. Stock Based Costs  Stock based costs are associated with the consumer
electronics segment and relate to the cost of warrants associated with
consulting service agreements and stock options exercised in a cashless manner
(See Note 4 to accompanying financial statements). In absolute terms, stock
based costs were approximately $1.6 million for the three and six month periods
ended September 30, 2004, as compared to $19,000 and $37,000 for the three and
six month periods ended September 30, 2003, respectively. Interest Expense, Net  Interest expense decreased $19,000 to $381,000 (0.5% of
net revenues) from $400,000 (0.5% of net revenues) for the three months ended
September 30, 2004 as compared to the same period in fiscal 16




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##### Table of Contents



2004. For the six months ended September 30, 2004, interest expense decreased
$147,000, or 17.9%, to $675,000 (0.4% of net revenues) from $822,000 (0.6% of
net revenues) for the same period in fiscal 2004. The decrease in interest
expense was primarily the result of lower average borrowings in the sporting
goods segment. Minority Interest in Net Income of Consolidated Subsidiary  Minority interest
in net income of consolidated subsidiary represents that portion of the
sporting goods segment net income for the three and six month periods ended
September 30, 2004 and 2003 that was attributable to SSG shareholders other
than Emerson, and therefore not included in the consolidated statements of
operations. (See Note 1) Provision for Income Taxes  The provision for income taxes decreased $257,000,
or 24.7%, to $785,000 for the three months ended September 30, 2004 from
approximately $1.0 million for the three months ended September 30, 2003. For
the six months ended September 30, 2004, the provision for income taxes
increased $756,000 to $1.7 million as compared to approximately $1.0 million
for the six months ended September 30, 2003. The increase in the provision for
income taxes for the six month ending September 30, 2004 was primarily due to
an increase in pre-tax profit in the consumer electronics segment. Loss from Discontinued Operations  From July 2003 through October 2003, SSG
ceased operations of several of its Team Dealer locations. In November 2003,
SSG sold all of the issued and outstanding shares of capital stock of its
wholly owned subsidiary  ATEC. There were no amounts recorded for these
operations (the discontinued operations) for the three and six month periods
ended September 30, 2004 as compared to a loss of approximately $100,000 and
$105,000 for the three and six month periods ended September 30, 2003,
respectively. Net Income (Loss)  As a result of the foregoing factors, we earned net income
of $989,000 (1.2% of net revenues) and $2.8 million (1.8% of net revenues) for
the three and six months ended September 30, 2004 as compared to $681,000 (0.9%
of net revenues) and $236,000 (0.2% of net revenues) for the same periods in
fiscal 2004. 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, 2004 and 2003 (in thousands): 17




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##### Table of Contents



Three Months Ended September 30
    
    Six Months Ended September 302004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Net revenues
    
    $
    59,880
    
    
    $
    56,440
    
    
    $
    107,706
    
    
    $
    88,090Cost of sales
    
    
    50,994
    
    
    
    49,054
    
    
    
    90,403
    
    
    
    75,669Other operating
Costs
    
    
    1,377
    
    
    
    1,293
    
    
    
    2,930
    
    
    
    2,549Selling, general and
administrative
costs
    
    
    4,425
    
    
    
    3,861
    
    
    
    9,005
    
    
    
    7,284Acquisition costs
    
    
    (104
    )
    
    
    (29
    )
    
    
    (175
    )
    
    
    614Stock based costs
    
    
    1,563
    
    
    
    6
    
    
    
    1,563
    
    
    
    24Operating income
    
    
    1,625
    
    
    
    2,255
    
    
    
    3,980
    
    
    
    1,950Interest expense, net
    
    
    329
    
    
    
    250
    
    
    
    564
    
    
    
    528Income before
income taxes
taxes
    
    
    1,296
    
    
    
    2,005
    
    
    
    3,416
    
    
    
    1,422Provision for
income taxes
    
    
    785
    
    
    
    1,111
    
    
    
    1,731
    
    
    
    975Net income
    
    $
    511
    
    
    $
    894
    
    
    $
    1,685
    
    
    $
    447
 Net Revenues  Consumer electronics net revenues for the three months ended
September 30, 2004 increased $3.4 million, or 6.1%, to $59.9 million from $56.4
million for the three months ended September 30, 2003. For the six months
ended September 30, 2004, net revenues increased $19.6 million, or 22.3%, to
$107.7 million from $88.1 million for the six months ended September 30, 2003.
Consumer electronics net revenues are comprised of Emerson branded product
sales, themed product sales and licensing revenues. Emerson branded product
sales are earned from the sale of products bearing the Emerson or HH Scott
brand name; themed product sales represent products sold bearing a certain
theme or character; and licensing revenues are derived from licensing the
Emerson and HH Scott brand names to licensees for a fee. The increase in net
revenues for the three and six month periods was comprised of:  i)
    
    An increase in revenues from the sale of Emerson branded product of
$5.2 million, or 10.1%, to $54.2 million from $49.0 million for the
three months ending September 30, 2004 as compared to the same period
in fiscal 2004. Revenues for the six months ending September 30, 2004
of Emerson branded product increased $20.3 million, or 26.2%, to $97.5
million from $77.2 million for the same period in fiscal 2004. These
revenue increases were primarily due to increased orders from our
primary customers associated with an overall improving economy.ii)
    
    A decrease in themed product sales to $3.0 million and $3.5 million
from $5.4 million and $5.7 million for the three and six months ended
September 30, 2004 and September 30, 2003, respectively. These
decreases were primarily due to decreases in the Girlpower themed
products, partially offset by the continued increased sales of
Nickelodeon themed products. 18




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##### Table of Contents



iii)
    
    Licensing revenues increased by approximately $655,000, or 31.9% to
approximately $2.7 million for the second quarter of fiscal 2005 from
$2.1 million in the second quarter of fiscal 2004. Licensing revenues
increased by approximately $1.5 million, or 28.9%, to $6.7 million for
the six months in fiscal 2005 as compared to $5.2 in the same period in
fiscal 2004. Cost of Sales  Cost of sales, as a percentage of consumer electronics net
revenues, decreased for the three months ended September 30, 2004 to 85.2% from
86.9% for the three months ended September 30, 2003. For the six months ended
September 30, 2004 cost of sales decreased to 83.9% from 85.9% for the six
months ended September 30, 2003. In relative terms, the decreases in cost of
sales for the three and six month periods were due to increased licensing
revenues and higher margin sales. Higher margins resulted from a continuing
shift in sales from our direct import to our domestic business. In absolute
terms, costs of sales for the three months ended September 30, 2004 increased
$1.9 million, or 3.9%, to $51.0 million from $49.1 million for the three months
ended September 30, 2003. For the six months ended September 30, 2004, cost of
sales increased $14.7 million, or 19.5%, to $90.4 million from $75.7 million
for the six months ended September 30, 2003. Gross profit margins continue to be subject to competitive pressures arising
from lower pricing of the product categories in the consumer electronics market
in which Emerson competes. Emersons branded products are generally placed in
the low-to-medium priced category of the market. Other Operating Costs and Expenses  Other operating costs and expenses, as a
percentage of consumer electronics net revenues, remained relatively unchanged
at 2.3% for the three month periods ended September 30, 2004 and September 30,
2003, and decreased to 2.7% for the six month period of fiscal 2005 compared to
2.9% for the same period in fiscal 2004. In absolute terms, other operating
costs and expenses increased to $1.4 million from $1.3 million ($84,000 or
6.5%) and to $2.9 million from $2.6 million ($381,000 or 14.7%) for the three
and six month periods ended September 30, 2004 as compared to the same periods
in fiscal 2004. The increase for both the three and six month periods in
absolute terms were primarily due to increased net revenues. Selling, General and Administrative Expenses (S,G&A)    S,G&A, increased
approximately $564,000 or 14.6%, to $4.4 million (7.4% of the consumer
electronics net revenues) from $3.9 million (6.8% of the consumer electronics
net revenues) for the three months ended September 30, 2004 as compared to the
three months ended September 30, 2003. For the six months ended September 30,
2004, S,G&A expenses increased $1.7 million, or 23.6%, to $9.0 million (8.4%
of the consumer electronics net revenues) from $7.3 million (8.3% of the
consumer electronics net revenues). The increases in absolute terms for the
three months ended September 30, 2004, were primarily due to increased
advertising, payroll related and freight 19




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##### Table of Contents



expenditures of approximately $300,000, $340,000 and $225,000, respectively,
partially offset by decreases in various other S,G&A costs. The increase in
absolute terms for the six months ended September 30, 2004, primarily resulted
from: (i) advertising expenses of approximately $560,000; (ii) payroll related
costs of approximately $373,000; (iii) legal fees of approximately $216,000;
and (iv) freight costs of approximately $360,000. Acquisition Costs  Acquisition costs incurred in the fourth quarter of fiscal
2004 were adjusted in the first and second quarters of fiscal 2005, resulting
in a reduction of such costs of $104,000 and $175,000, respectively, as
compared to a credit of $29,000 and expenses totaling $614,000 for the three
and six months ended September 30, 2003. These costs were associated with
contemplated acquisition transactions in fiscal 2004 that were not completed. Stock Based Costs  Stock based costs relate to the cost of warrants issued in
exchange for consulting services and, in the second quarter of fiscal 2005, to
stock options exercised in a cashless manner (See note 4 to accompanying
financial statements). Interest Expense, net  Interest expense increased $79,000, or 31.6%, to
$329,000 for the three months ended September 30, 2004, from $250,000 for the
three months ended September 30, 2003. For the six months ended September 30,
2004, interest expense increased $36,000, or 6.8%, to $564,000 from $528,000
for the same period ended September 30, 2003. The increases in interest
expense for the three and six month periods were the result of higher average
borrowings used for increased inventory in preparation for the traditionally
higher demand holiday season, and increasing inventory balances resulting from
the continuing shift from our direct import to our domestic business. Provision for Income Taxes  The provision for income taxes was approximately
$785,000 and $1.7 million for the three and six months ended September 30,
2004, respectively, as compared to $1.1 million and $975,000 for the three and
six month periods ended September 30, 2003. The increase in the provision for
the six month period ended September 30, 2004 was primarily the result of
higher pre-tax profit as compared to the same periods in fiscal 2004. Net Income (Loss)  As a result of the foregoing factors, the consumer
electronics segment earned net income of $511,000 (0.9% of net revenues) for
the three months ended September 30, 2004 as compared to $894,000 (1.6% of net
revenues) for the three months ended September 30, 2003. For the six months
ended September 30, 2004 the consumer electronics segment earned $1.7 million
(1.6% of net revenues) as compared to $447,000 (0.5% of net revenues) for the
six months ended September 30, 2003. 20




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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 months
ended September 30, 2004 and 2003 (in thousands): Three Months Ended September 30
    
    Six Months Ended September 302004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Net revenues
    
    $
    23,249
    
    
    $
    22,433
    
    
    $
    48,353
    
    
    $
    44,954Cost of sales
    
    
    16,501
    
    
    
    16,368
    
    
    
    34,126
    
    
    
    32,720Selling, general and
Administrative
    
    
    5,746
    
    
    
    6,233
    
    
    
    11,929
    
    
    
    12,128Operating income (loss)
    
    
    1,002
    
    
    
    (168
    )
    
    
    2,298
    
    
    
    106Interest expense, net
    
    
    52
    
    
    
    150
    
    
    
    111
    
    
    
    294Income (loss) before
income taxes and
discontinued operations
    
    
    950
    
    
    
    (318
    )
    
    
    2,187
    
    
    
    (188
    )Provision (benefit) for
income taxes
    
    
    
    
    
    
    (69
    )
    
    
    
    
    
    
    Loss from discontinued
Operations
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    105Net income (loss)
    
    $
    950
    
    
    $
    (349
    )
    
    $
    2,187
    
    
    $
    (293
    )
 Net Revenues  Net revenues increased $816,000, or 3.6%, to $23.2 million from
$22.4 million and increased $3.4 million, or 7.6%, to $48.4 million from $45.0
million for the three and six month periods ended September 30, 2004 and
September 30, 2003, respectively. These increases were primarily the result
of increased sales resulting from our increased marketing and selling efforts
in a very competitive marketplace, and the resulting increases in unit volume. Cost of Sales  Cost of sales increased by approximately $133,000 (0.8%) and
$1.4 million (4.3%) for the three and six month periods ended September 30,
2004 as compared to same periods in the prior fiscal year. As a percentage of
sporting goods net revenues, cost of sales decreased to 71.0% from 73.0%, and
to 70.6% from 72.8% for the three and six month periods ended September 30,
2004 as compared to the same periods in the prior fiscal year. The
improvements in cost of sales as a percentage of net revenues in both periods
were the result of improved product gross margins, as well as pricing
improvements. Selling, General and Administrative Expenses (S,G&A)    S,G&A decreased
approximately $487,000 (7.8%) and $199,000 (1.6%) for the three and six month
periods ended September 30, 2004, respectively. As a percentage of sporting
goods net revenues, SG&A decreased to 24.7% from 27.8% and to 24.7% from 27.0%
for the three and six month periods ended September 30, 2004 as compared to the
same periods of fiscal 2004. The decrease in SG&A expenses for the three month
period were primarily a result of approximately $237,000 in staff related
costs, $140,000 in facility 21




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expenses and $52,000 in computer expenses. The decrease in SG&A expenses for
the six month period were primarily the result of approximately $156,000 in
facility expenses, $84,000 in license and royalty expenses and $84,000 in staff
related costs. These decreases were partially offset by a $126,000 increase in
selling and marketing expenses. Interest Expense, net  Interest expense decreased $98,000 and $183,000 for the
three and six month periods ended September 30, 2004 and 2003, respectively.
The cash received from the sale of SSGs ATEC subsidiary in November 2003
resulted in a reduction of SSGs debt and reduced interest expense. Provision for Income Taxes  For the three and six month periods ended
September 30, 2004, SSG recorded no income tax provision due to the existence
of prior net operating losses to offset current income, and no change in
managements estimate of the extent to which deferred tax assets are
realizable. (See Note 6) Loss from Discontinued Operations  Discontinued operations reflect net
operating losses related to our discontinued and sold team dealer operations,
and the sale of SSGs ATEC subsidiary for the three and six month periods ended
September 30, 2003. (See Note 11) Net Income  As a result of the foregoing factors, the sporting goods segment
earned net income of approximately $950,000, or 4.1% of net revenues, for the
three months ended September 30, 2004 as compared to a net loss of $349,000 for
the three months ended September 30, 2003. For the six months ended September
30, 2004 the sporting goods segment earned net income of $2.2 million, or 4.5%
of net revenues, as compared to a net loss of $293,000 for the six months ended
September 30, 2003. Liquidity and Capital Resources As of September 30, 2004, we had cash and cash equivalents of
approximately $5.1 million compared to approximately $6.4 million at March 31,
2004. Working capital decreased to $43.5 million at September 30, 2004 as
compared to $46.8 million at March 31, 2004. The decrease in cash and cash
equivalents of approximately $1.3 million was primarily due to increases in
cash used by operating activities, partially offset by increases in cash
provided by financing activities, as described below. Cash flows used in continuing operating activities was approximately $19.1
million for the six months ended September 30, 2004,primarily related to
increases in inventory and accounts receivable due to the traditional
seasonality which results in higher levels of sales and higher requirements for
inventory balances, and the continuing shift from the direct import to
domestic business. 22




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Net cash used by investing activities was approximately $523,000 for the
six months ended September 30, 2004, which consisted primarily of machinery and
office equipment fixed asset purchases. Net cash provided from financing activities was approximately $18.3
million for the six months ended September 30, 2004, due primarily to the net
increase in borrowings needed to secure increased inventory levels for the
upcoming holiday selling season. Emerson and SSG maintain credit facilities as described in Note 8 to our
consolidated financial statements  Borrowings. At September 30, 2004, there
were approximately $23.2 million of borrowings outstanding under these
facilities and no letters of credit outstanding. Approximately $18.7 million
of borrowings were outstanding under the Emerson Loan Agreement and $4.5
million of borrowings were outstanding under the SSG Loan Agreement. At
September 30, 2004, Emerson and SSG were in compliance with the covenants in
each of the loan agreements. The Emerson Revolver expires in June 2005, and
accordingly, all amounts outstanding under this facility have been presented as
a current liability. Emerson intends to renew its banking facility or enter
into a new banking facility with similar or more favorable terms then those
presently existing. Our foreign subsidiaries maintain various credit facilities, aggregating
$85.0 million, consisting of the following:  
    
    three letter of credit facilities totaling $30.0 million which is
used for inventory purchases; and
    
    four back-to-back letter of credit facilities totaling $55 million. At September 30, 2004, our foreign subsidiaries pledged approximately $6.9
million in certificates of deposit to these banks to assure the availability of
the $30.0 million of credit facilities. At September 30, 2004, there were
approximately $22.1 million of letters of credit outstanding under these credit
facilities. These letter of credit facilities require the foreign subsidiary
to meet a net worth covenant which was complied with at September 30, 2004. 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. The following summarizes our obligations at September 30, 2004 for the
periods shown (in thousands): 23




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Payment due by periodTotal
    
    Less than 1 year
    
    1  3 years
    
    3  5 years
    
    More than 5 yearsNotes Payable
    
    $
    23,167
    
    
    $
    18,700
    
    
    
    
    
    
    $
    4,467
    
    
    $
    Capital lease
obligations
    
    
    61
    
    
    
    36
    
    
    
    25
    
    
    
    
    
    
    
    Leases
    
    
    7,346
    
    
    
    2,110
    
    
    
    4,542
    
    
    
    694
    
    
    
    Total
    
    $
    30,574
    
    
    $
    20,846
    
    
    $
    4,567
    
    
    $
    5,161
    
    
    $
    
 There were no material capital expenditure commitments and no substantial
commitments for purchase orders outside the normal purchase orders used to
secure product as of September 30, 2004. Critical Accounting Policies For the six month period ended September 30, 2004, there were no
significant changes to our accounting policies from those reported in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2004. Inflation, Foreign Currency, and Interest Rates Neither inflation nor currency fluctuations had a significant effect on
our results of operations during the first and second quarters of fiscal 2005.
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 believe that given the present economic climate,
interest rates, while expected to rise, are not expected to increase
significantly during the coming year. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes from items disclosed in Form
10-K for the fiscal year ended March 31, 2004. 
 Item 4. Controls and Procedures (a) Disclosure controls and procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, we
carried out an evaluation, with the participation of our management, 24




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including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms. (b) Changes in internal controls over financial reporting. There have been no changes in our internal control over financial reporting
that occurred during our last fiscal quarter to which this Quarterly Report on
Form 10-Q relates that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. 
 PART II OTHER INFORMATION 
 ITEM 1. Legal Proceedings. Putative Class Actions Between September 4, 2003 and October 30, 2003, several putative class
action lawsuits were filed in the United States District Court for the District
of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth Corby and
John Raab (the Individual Defendants) on behalf of purchasers of our publicly
traded securities who bought shares between January 29, 2003 and August 12,
2003 (the Class Period.) On December 17, 2003, the Court entered a Joint
Stipulation and Order consolidating these putative class actions under the
caption In Re Emerson Radio Corp. Securities Litigation, 03cv4201 (JLL) (the
Consolidated Action.) Further to that Stipulation and Order, lead plaintiff
was appointed and co-lead counsel and co-liaison counsel were approved by the
Court in the Consolidated Action. Consistent with the Stipulation and Order,
the plaintiffs filed an Amended Consolidated Complaint (the Amended
Complaint) that, among other things, added Jerome Farnum, one of Emersons
directors, as a defendant in the litigation. Generally, the Amended Complaint alleges that Emerson and the Individual
Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated there under, by (i) issuing certain positive
statements during the Class Period regarding our ability to replace lost
revenues attributable to our Hello Kitty® license and (ii) omitting to disclose
that Emerson suffered allegedly soured relationships with its largest retail
customers. The Amended Complaint further alleges that these statements were
materially false and misleading 25




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##### Table of Contents



when made because Emerson allegedly misrepresented and omitted certain adverse
facts which then existed and disclosure of which was necessary to make the
statements not false and misleading. The Defendants deny all allegations and
have moved to dismiss the Complaint in its entirety for failure to state a
claim. Emerson and the Individual Defendants intend to defend the lawsuit
vigorously. For other information on litigation to which the Company is a party,
reference is made to Part 1 Item 3  Legal Proceedings in our most recent
annual report on Form 10-K. 
 ITEM 2. Changes in Securities and Use of Proceeds. In August 2004, in connection with a consulting arrangement, we granted
warrants to purchase 50,000 shares of our common stock with an exercise price
of $3.00 per share. These warrants were issued in a transaction not involving
a public offering and exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. Share Repurchases: For the quarter ending September 30, 2004, we did not repurchase any
shares under the Emerson Radio Corp.s common stock share repurchase program.
The share repurchase program was publicly announced in September 2003 to
repurchase up to 2,000,000 shares of Emersons outstanding common stock. Share
repurchases are made from time to time in open market transactions in such
amounts as determined in the discretion of Emersons management within the
guidelines set forth by Rule 10b  18 under the Securities Exchange Act. Prior
to the September 30, 2004 quarter, we repurchased 1,111,625 shares under this
program. As of September 30, 2004, the maximum number of shares that are
available to be repurchased under Emerson Radio Corps common share repurchase
program was 888,375. 
 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 August 6,
2004, at which time the shareholders (i) elected the following slate of
nominees as the Board of Directors: Robert H. Brown, Jr., Peter G. Bunger,
Jerome H. Farnum, Herbert A. Morey and Geoffrey P. Jurick; (ii) approved
Emersons 2004 Employee Stock Incentive Plan; and (iii) approved Emersons 2004
Non-Employee Outside Director Stock Option Plan. There were 27,037,608 shares
of outstanding capital stock of the company entitled to 26




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##### Table of Contents



vote at the record date for this meeting and there were present at such
meeting, in person or by proxy, stockholders holding 15,832,214 shares of the
Companys Common Stock, which represented 58.6% of the total capital stock
outstanding and entitled to vote. (i) There were 15,832,214 shares voted on the
matter of the election of directors. The result of the votes cast regarding
each nominee for office was: Votes For
    
    Votes WithheldRobert H. Brown, Jr.
    
    
    14,869,824
    
    
    
    962,390Peter G. Bunger
    
    
    13,183,547
    
    
    
    2,648,667Jerome H. Farnum
    
    
    14,868,599
    
    
    
    963,615Herbert A. Morey
    
    
    14,930,013
    
    
    
    902,201Geoffrey P. Jurick
    
    
    15,061,364
    
    
    
    770,850
 (ii) There were 15,832,214 shares voted on the matter of the approval of
Emersons 2004 Employee Stock Incentive Plan, which results were as follows: Votes For
    
    Votes Against
    
    Abstain14,114,479
    
    
    1,688,639
    
    
    
    29,096
 (iii) There were 15,832,214 shares voted on the matter of the approval of
Emersons 2004 Non-Employee Outside Director Stock Option Plan, which results
were as follows: Votes For
    
    Votes Against
    
    Abstain14,475,963
    
    
    1,323,813
    
    
    
    32,438
 
 ITEM 5. Other Information. None 
 ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits:  10.13.3
    
    Lease Agreement dated as of October 8, 2004 between Sealy TA Texas,
L.P., a Georgia limited partnership, and Emerson Radio Corp.*10.18.1
    
    Emerson Radio Corp. 2004 Employee Stock Incentive Plan (incorporated
by reference to Exhibit 1 of Emersons 2004 Proxy Statement).10.18.2
    
    Emerson Radio Corp. 2004 Non-Employee Outside Director Stock Option
Plan (incorporated by reference to Exhibit 2 of Emersons 2004 Proxy
Statement). 27




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##### Table of Contents



10.28.2
    
    Common Stock Purchase Warrant Agreement entered into on August 1,
2004 by and between Emerson Radio Corp. and EPOCH Financial Services,
Inc. *31.1
    
    Certification of the Companys Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of the Companys Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*32
    
    Certification of the Companys Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*(b)
    
    Reports onForm 8-K:Current report on Form 8-K, dated August 2, 2004, furnishing the
press release announcing the Companys financial results for the
quarter ended June 30, 2004.Current report on Form 8-K, dated October 25, 2004,announcing the
appointment of Guy A. Paglinco as Vice President and Chief Financial
Officer.   *
    
    filed herewith 28




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##### Table of Contents



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 15, 2004
    
    /s/ Geoffrey P. JurickGeoffrey P. JurickChairman of the Board,Chief Executive Officer andPresident(Principal Executive Officer)Date: November 15, 2004
    
    /s/ Guy A. PaglincoVice President andChief Financial Officer(Principal Finance andAccounting Officer)
 29