<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1996.
REGISTRATION NO. 333-1868
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO.2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CRAIG CONSUMER ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3651 95-4228391
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
RICHARD I. BERGER, PRESIDENT
CRAIG CONSUMER ELECTRONICS, INC.
13845 ARTESIA BOULEVARD
CERRITOS, CALIFORNIA 90703-9000
(310) 926-9944
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF PRINCIPAL EXECUTIVE OFFICE AND AGENT FOR SERVICE)
COPIES TO:
JEFFREY D. WARREN, ESQ.
KEESAL, YOUNG & LOGAN
400 OCEANGATE
LONG BEACH, CALIFORNIA 90802
(310)436-2000
STEVEN J. INSEL, ESQ.
ROBERT M. STEINBERG, ESQ.
JEFFER, MANGELS, BUTLER & MARMARO LLP
2121 AVENUE OF THE STARS, 10TH FLOOR
LOS ANGELES, CALIFORNIA 90067
(310) 203-8080
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
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TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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Common Stock ($0.01 par value).... 1,162,500(2) $ 7.50 $8,718,750 $3,006.58
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Representative's Warrants......... 100,000 $.0005 $ 50 $ 0.02
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Shares of Common Stock Underlying
Representative's Warrants......... 100,000 $ 9.00 $ 900,000 $ 310.36
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TOTAL............................. $9,618.800 $3,316.96
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</TABLE>
(1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
registration fee.
(2) Includes 150,000 shares which may be purchased by the Underwriters to cover
over-allotments, if any.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
CRAIG CONSUMER ELECTRONICS, INC.
CROSS REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM IN FORM S-1 LOCATION IN PROSPECTUS
--------------------------------------- --------------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................. Facing Page; Cross-Reference Sheet; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges..... Prospectus Summary; Risk Factors
4. Use of Proceeds........................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........ Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution............................... Dilution
7. Selling Security Holders............... Principal and Selling Stockholders; Underwriting
8. Plan of Distribution................... Outside Front Cover Page of Prospectus; Prospectus Summary;
Underwriting
9. Description of Securities to Be
Registered............................. Prospectus Summary; Dividend Policy; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and
Counsel................................ Not Applicable
11. Information with Respect to
Registrant............................. Prospectus Summary; Risk Factors; The Company; Use of
Proceeds; Dividend Policy; Capitalization; Dilution; Selected
Financial Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations; Business;
Management; Certain Transactions; Principal and Selling
Stockholders; Description of Capital Stock; Shares Eligible
for Future Sale; Additional Information; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED , 1996
PROSPECTUS
1,012,500 SHARES
LOGO
COMMON STOCK
------------------------------
All of the shares of Common Stock, par value, $.01 per share ("Common
Stock"), offered hereby are being offered by Craig Consumer Electronics, Inc.
(the "Company"). Prior to this offering, there has been no public market for the
Company's Common Stock and there can be no assurance that such a market will
exist. It is currently anticipated that the initial public offering price will
be between $6.50 and $7.50 per share. The initial public offering price of the
shares of Common Stock offered hereby has been determined by negotiation between
the Company and The Boston Group, L.P. (the "Representative"), as representative
of the several underwriters (the "Underwriters"). See "Underwriting" for
information relating to the determination of the initial public offering price.
The Common Stock has been approved for listing, subject to official notice of
issuance, on the Nasdaq National Market under the symbol "CREG."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.......................... $ $ $
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Total(3)........................... $ $ $
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</TABLE>
(1) Does not include (a) a non-accountable expense allowance payable to the
Representative, and (b) the value of the five-year Warrants granted to the
Representative to purchase up to 100,000 shares of Common Stock at 120% of
the initial public offering price per share of Common Stock
("Representative's Warrants"). For indemnification and contribution
arrangements with the Underwriters, see "Underwriting."
(2) Before deducting estimated expenses of approximately $685,000 payable by the
Company, including the Representative's non-accountable expense allowance.
(3) Certain stockholders of the Company (the "Selling Stockholders") have
granted the Underwriters a 45-day option to purchase an aggregate of up to
150,000 additional shares of Common Stock, solely to cover over-allotments,
if any. See "Underwriting." If all such shares of Common Stock are
purchased, the Total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to the Selling Stockholders will be $ ,
$ and $ , respectively.
The Common Stock is offered by the several Underwriters when, as and if
delivered to and accepted by them and subject to their right to withdraw,
cancel, or modify the offering and reject any order in whole or in part. It is
expected that delivery of the certificates for the shares of Common Stock will
be made on or about May , 1996.
------------------------------
THE BOSTON GROUP, L.P.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and financial statements and related
notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted,
all information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option or the Representative's Warrants, and (ii) assumes no
exercise of options to purchase up to 525,000 shares of Common Stock which have
been reserved for issuance under the Company's 1996 Plan and Non-Statutory Plan
(as defined herein), and 382,928 shares issuable to Richard Berger and Richard
Miller pursuant to outstanding options. In addition, unless otherwise indicated,
all share and per-share data in this Prospectus has been adjusted to reflect the
recapitalization of the Company resulting from the conversion of 250,000 shares
of Series A Preferred Stock into 1,300,052 shares of Common Stock and a
3.64-to-one reverse stock split of the Common Stock to be effected on the date
of this Prospectus (the "Recapitalization"). Prospective investors should
carefully consider the information discussed under "Risk Factors."
THE COMPANY
Craig Consumer Electronics, Inc. (the "Company") designs and markets brand
name consumer electronic products under its trademark, "Craig."(R) The Company
offers value-oriented products with features that the Company believes are
comparable to those of its higher-priced competitors. The Company's products are
sold through over 200 retailers with approximately 15,000 retail outlets,
including major retail chains, such as Best Buy, Circuit City, Thrifty Payless,
Rex, Incredible Universe, Nobody Beats the Wiz, and Rite Aid, and other mass
merchandisers, such as Montgomery Ward and Price Costco. The Company also sells
through catalog and direct marketing organizations, such as QVC Network, Spiegel
Catalog, and Amway.
In recent years, the Company has emphasized the design and marketing of
home and mobile audio electronic products (such as compact music centers and car
stereos) and portable audio products (such as "boom boxes" and small personal
stereos). The Company has realized gross margins (net sales less the cost of
goods sold) exceeding 17% in each of the last three years on sales of its audio
electronic products. By contrast, the Company has experienced lower and
declining gross margins on sales of its video electronic products over the past
three years. As a result, the Company severely limited sales of video products
during 1995 and does not anticipate substantial sales of video products in 1996
or for the foreseeable future. The Company will instead devote the principal
portion of its resources to the design, sourcing, distribution and sale of audio
electronic and related products.
Primarily due to its increasing focus on the sale of audio products, the
Company's gross profit increased from approximately $11.9 million to $14.3
million to $14.4 million in 1993, 1994, and 1995, respectively, although overall
sales were $12.5 million and $16.9 million lower in 1995, when compared to 1993
and 1994, respectively. In spite of the increase in gross profits resulting from
the Company's shifting emphasis on audio products, net income went from $1.1
million to $533,000 to $791,000 in 1993, 1994, and 1995, respectively. The
failure of net income to increase along with gross profits was primarily due to
relatively high levels of general and administrative expenses associated with
the expansion of the Company's quality control operations, establishment of a
Cerritos reconditioning facility and the establishment of the Hong Kong office,
as well as increased interest expense. The following graphs demonstrate the
Company's increasing emphasis on sales of audio electronic products:
AUDIO PRODUCTS ("000") VIDEO PRODUCTS ("000")
Sales and Related Gross Profit Sales and Related Gross Profit
1993 1994 1995 1993 1994 1995
------ ------ ------ ------ ------ -----
Gross Profit 9,113 12,230 14,461 Gross Profit 2,742 2,075 (110)
Net Sales 53,029 71,432 80,710 Net Sales 48,186 34,207 7,966
3
<PAGE> 5
The Company's objective is to establish itself as one of the leading
suppliers of value-oriented audio electronic and related products. To achieve
this objective, the Company intends, to the extent the Company's financial
condition allows, to (i) expand the Company's distribution, targeting other
channels of distribution; (ii) continue its international expansion; (iii)
reduce its higher interest rate indebtedness in order to decrease overall
interest expense and enhance cash flow through the application of the proceeds
of this Offering; (iv) expand the Company's consumer product lines into
telephones and telephone products, and potentially other items; and (v) decrease
the costs of reconditioning goods and attempt to increase profitability and cash
flow through the use of a Chinese joint venture facility. No assurance can be
given that any of these initiatives can be implemented successfully.
THE OFFERING
Common Stock Offered by the
Company............................ 1,012,500 shares(1)
Common Stock to Be Outstanding
After the Offering................. 3,129,572 shares
Use of Proceeds.................... Substantially all of the net proceeds of
this Offering will be used for the
repayment of debt. See "Use of Proceeds."
Risk Factors....................... An investment in the shares of Common
Stock offered hereby involves a high
degree of risk. Prospective investors
should carefully review and consider the
risk factors set forth in the section of
this Prospectus entitled "Risk Factors,"
as well as the other information set
forth in this Prospectus, before
investing in any of the Common Stock
offered hereby.
Proposed Nasdaq National Market
Symbol............................. CREG(2)
- ---------------
(1) Certain stockholders (the "Selling Stockholders") have granted to the
Underwriters a 45-day option to purchase up to 150,000 shares of Common
Stock, solely to cover over-allotments, if any. See "Underwriting."
(2) While the Common Stock has been approved, subject to official notice of
issuance, for listing on the Nasdaq National Market, there is no assurance
that a public trading market will develop, or, if developed, will be
sustained. See "Risk Factors -- No Prior Public Market for Common Stock;
Risk of Limited Market."
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Summary Financial Data is qualified by reference to the
audited financial statements and related notes thereto appearing at page F-1 of
this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Audio sales............................... $26,897 $34,052 $ 53,029 $ 71,432 $80,710
Video sales............................... 18,791 45,256 48,186 34,207 7,966
------- ------- -------- -------- -------
Net sales................................. $45,688 $79,308 $101,215 $105,639 $88,676
Gross profit.............................. 7,673 10,016 11,856 14,305 14,352
Operating income.......................... 1,296 2,198 2,331 2,296 3,152
Net income................................ 517 937 1,073 533 791
Pro-forma net income per share(1)......... $ 0.33
Pro-forma weighted average number of
shares outstanding(2)................... 2,399
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
ACTUAL AS ADJUSTED(3)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................... $3,705 $ 9,505
Total assets....................................................... 32,530 32,530
Note payable under revolving line of credit........................ 15,530 9,730
Subordinated debt and capital lease obligations, net of current
portion.......................................................... 1,048 1,048
Stockholders' equity............................................... 4,934 10,734
</TABLE>
- ---------------
(1) Pro-forma net income per share gives pro-forma effect to the
Recapitalization. See Note 10 to the financial statements.
(2) Pro-forma weighted average number of shares outstanding is calculated based
on the number of shares outstanding after the Recapitalization, while giving
effect to the sale of the shares of Common Stock sold in this Offering and
the dilutive effect of outstanding stock options.
(3) Adjusted to reflect the sale by the Company of 1,012,500 shares of Common
Stock at an assumed offering price of $7.00 per share, and the application
of the estimated net proceeds therefrom. See "Use of Proceeds."
------------------------
CRAIG(R) is a registered trademark of the Company. All other trademarks or
service marks used in this Prospectus are the property of their respective
holders.
------------------------
The Company was incorporated in 1989 in Delaware under the name Berel
Industries, Inc. The Company's principal executive offices are located at 13845
Artesia Boulevard, Cerritos, California 90703-9000 and its telephone number is
(310) 926-9944.
5
<PAGE> 7
RISK FACTORS
Investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
the following factors should be considered carefully by potential purchasers in
evaluating an investment in the Common Stock offered hereby. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results of operations could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
Competition. The consumer electronics industry is intensely competitive.
Pricing is aggressive and the Company expects pricing pressure to continue.
Consumers expect lower-cost, higher-quality products from year to year and, as a
result, the Company must be able to produce progressive, low-cost products, or
its ability to compete will be adversely affected. The Company competes with the
entire consumer electronics industry for consumer dollars, shelf space for
products, cooperative and other advertising, sales support, and other resources.
Many of the Company's competitors are better capitalized, have greater financial
resources, are significantly larger than the Company, and may not rely on
external financing or relationships with third-party contract manufacturers to
the same extent as the Company. The Company has adopted a marketing strategy
intended to exploit the lower-priced end of the consumer electronics market,
particularly emphasizing the mobile, portable, and home audio categories for the
foreseeable future. There are many competitors in each of the Company's product
and price categories, including Emerson, RCA, Audiovox, Sanyo, GPX, and
International Jensen. In addition, although large consumer electronic brands
such as Sony, Panasonic, JVC, Kenwood, Aiwa and similar companies do not
currently emphasize products in the lower end of the price spectrum, the Company
competes with these companies for consumer dollars, retail shelf space, and
other resources. To the extent that these larger brands enter into direct price
competition with the Company, or otherwise reduce the price of products
generally, the Company's ability to market and sell competitive products could
be severely impacted, which would have a material adverse effect on the
Company's business and financial condition. See "Business -- Business Strategy,"
"-- Competition," and "-- Marketing and Customers."
Dependence on Available Credit and Leverage. The Company's business is
capital intensive in that the Company is required to maintain a continuous
supply of products and inventory in order to meet the seasonal demands of its
various customers. Because of the Company's inventory needs and the borrowing
necessary to acquire inventory in advance of sales, the Company has a relatively
high ratio of debt to equity, which at December 31, 1995 was 3.4 to 1. In order
to obtain necessary capital, the Company relies primarily on lines of credit
that are collateralized by accounts receivable and inventory. As a result, the
amount of credit available to the Company may be adversely affected by factors
such as delays in collection or deterioration in the quality of the Company's
accounts receivable, economic trends in the consumer electronics industry,
interest rate fluctuations, and the lending policies of the Company's lenders.
Many of these factors are beyond the Company's control. The Company also uses
financing from suppliers and other third parties that result in interest charges
that are substantially higher than the cost of funds from its principal lenders.
Any decrease or material limitation on the amount of capital available to the
Company will limit the Company's ability to fill existing or projected sales and
to expand its sales levels and, therefore, would have a material adverse effect
on the Company's business and financial condition. In addition, any significant
increase in interest rates or increased utilization of higher-interest loans
from third-party lenders will increase the overall cost of financing to the
Company and would have a material adverse effect on the Company's business and
financial condition. No assurance can be given that, even with the proceeds of
this Offering, the Company will have access to sufficient capital to finance its
sales. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Inventory Risks. The Company is subject to significant risks in connection
with its inventory management. Particularly, in order to assure an adequate
supply of products to meet the relatively high demand for products during the
third and fourth quarter of each year, the Company must commit to acquire
products six to nine months in advance of delivery, which commitment is based on
the Company's forecast of its customers' orders. If the Company underestimates
its need for inventory, the Company may have to pay a significant premium to
obtain necessary manufacturing time or may be unable to provide customers with
the
6
<PAGE> 8
desired products in the quantities requested. In such event, profit margins,
sales and/or customer relationships could be materially adversely affected.
Similarly, if the Company overestimates its inventory needs, the Company will be
required to reduce prices in order to dispose of such inventory, thereby
adversely affecting its profit margins, if any. In order to operate
successfully, the Company must adequately plan, time, and budget its acquisition
of inventory in each product category so as to avoid the need for significant
cost increases or price reductions in any product or product category. To the
extent the Company is unable to do so or incurs delays in delivery, or fails to
adequately forecast prices and demand or reduce costs when necessary, the
Company's business and financial condition could be materially adversely
affected.
Seasonality and Fluctuations in Quarterly Performance. The Company's
business is highly seasonal, with operating results varying substantially from
quarter to quarter. Sales tend to be lowest in the first and second quarters and
highest in the third and fourth quarters of the calendar year. The Company has
experienced losses during the first quarter in the past and will likely
experience such seasonal losses in the future, including the first quarter of
1996, during which the Company will realize losses. In order to facilitate sales
during the year-end buying season, the Company must make financial commitments
and pay for product inventory well in advance of any sales of such inventory. As
a result, if the timing or amount of customer orders, neither of which the
Company can control, fall below the Company's expectations, operating results
and cash flow could be materially adversely affected if expenses based on these
expectations have already been incurred. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Interest Rate Fluctuations. Because of the Company's reliance on credit
lines and other sources of borrowing to finance inventory acquisitions, interest
rate fluctuations could have an adverse impact on the Company's results of
operations. An increase in the various interest rate indices to which the
Company's interest rate is tied under its principal credit line would also
increase the Company's interest expense, which could have an adverse impact upon
the Company's results of operations and financial condition. Additionally,
conditions resulting in interest rate increases would also affect the interest
rate charged by certain suppliers who finance some of the Company's inventory
acquisitions, which would adversely impact the Company's results of operations
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Concentration of Customers and Credit Risk. The Company has been and is
highly dependent upon its largest customers and has derived and is expected to
derive a substantial percentage of its revenues from such customers. In
particular, during fiscal 1993, 1994, and 1995, sales to the Company's top five
customers accounted for approximately 44%, 47%, and 59% of net sales,
respectively. The loss of any one of the Company's largest customers or the
failure of any one of such customers to pay its accounts receivable on a timely
basis could have a material adverse effect on the Company's business and
financial condition. The Company's largest customer, Best Buy Co., Inc. ("Best
Buy"), accounted for 24% and 35% of the Company's net sales during the years
ended December 31, 1994 and 1995, respectively. In addition, as of December 31,
1995, Best Buy accounted for approximately $3.7 million, or 26.3%, of the
Company's accounts receivable. In January, 1996, Best Buy announced that it
would be seeking more favorable terms for the payment of its obligations to its
suppliers (including the Company) and the Company has made the accommodation to
Best Buy. The Company has certain borrowing limitations which are based on the
concentration of its receivables in any of a group of its largest customers.
Under these limitations, a maximum of 30% of the Company's total receivables
upon which borrowings are based may, at any given point in time, be attributable
to the accounts receivable of Best Buy. Under these limitations, Best Buy must
be rated in certain categories by Moody's Investor Services ("Moody's") or the
North American Insurance Commissioners ("NAIC"). If Best Buy's credit is not
rated in the agreed-to categories by one of the foregoing rating agencies, the
availability of borrowings attributable to the Best Buy receivables are limited
to a maximum of 10% of the Company's total receivables (unless the receivables
are supported by a letter of credit or otherwise). There are similar
concentration limits for the Company's other customers. Like Best Buy, certain
of these customers must also have an agreed to credit rating assigned by Moody's
or NAIC. Therefore, a downgrade in Best Buy's or any other major customer's
credit rating is likely to adversely affect the Company's ability to borrow and,
therefore, its business and financial condition. See "Business -- Marketing and
Customers" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
7
<PAGE> 9
Risk of Product Returns and Other Liabilities. As is typical of the
consumer electronics industry, the Company incurs expenses as a result of
product returns. Such returns may result from defective goods, inadequate
performance relative to customer expectations, improper packaging, liberal
retailer return policies, and other causes which may be outside the Company's
control. Regardless of the reason for such returns, products that are returned
may generally be repackaged and resold only as "B goods" in accordance with
applicable law, including regulations imposed by the Federal Trade Commission
and similar state authorities regulating consumer trade. Such "B goods" are
typically reconditioned and sold at lower prices than comparable non-returned
goods. During the three years ended December 31, 1993, 1994, and 1995, product
returns were approximately 10.4%, 13.5%, and 13.4% of units shipped. Although
the Company attempts to recondition and remarket returned goods, only a portion
of the cost and expense associated with product returns is recovered through the
sale of such reconditioned goods. Any significant increase in the rate of
product returns could have a material adverse effect on the Company's business
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Design and Manufacture of
Products."
Product Liability. Although certain of the Company's products is approved
through Underwriters' Laboratories or similar testing agencies, any product
defect that results in personal injury that is not covered by the Company's
insurance policies could have a material adverse effect upon the Company's
business and financial condition. The Company maintains insurance to cover such
risks; however, the adequacy of coverage in certain events may not be adequate
to insure against all catastrophic product liability claims.
Technological Availability and Limitations. The Company does not market
high-end consumer electronic products, but instead relies upon sales of
value-oriented products. The Company currently has no intention of expanding the
Company's business into development of technology or other areas that would
attempt to develop or exploit "cutting-edge" technological advances in the audio
market. The Company does not and cannot devote a substantial portion of its
funds to research and development with a view toward creating proprietary
technology or advanced products. Instead, the Company relies on existing
technology and on stylistic and performance-based variations applying available
technologies in the conduct of its business. The Company is always subject to
the risk that a technological development will result in the obsolescence of
various of its products, including computer-based sound recording and
duplicating equipment, or other technological developments that may result in
competitive advantages to the developers of such technology. The Company is also
subject to the risk that some technological or new product development will not
be available, either due to third-party proprietary protection, cost, or
otherwise, which could render the marketing of the Company's products difficult
or not profitable due to competitive pressure from the new development. The
Company is also subject to the risk that some technological advances will be
achieved at a time when the technology is not available for incorporation into
the products manufactured for the Company. In addition, the Company's success in
the value-oriented niche of the consumer electronics market is dependent in part
upon the continued development of advanced products and features by its larger
competitors. In the event that such competitors do not develop, market, and sell
advanced products (with the advanced technology, or versions thereof, eventually
made available to the Company for inclusion in its own products) and, instead,
devote their resources to the development and sale of products incorporating
established technologies and features, the Company will be forced to compete
directly with such larger competitors, which would have a material adverse
effect on the Company's business and financial condition.
Risk of Doing Business with China; Risk of Import Limitations. The
Company's products are principally manufactured in the People's Republic of
China (the "PRC") and elsewhere in Asia by contract manufacturers. The Company
does not have long-term contracts with any of its manufacturers. Because the
Company is reliant upon various foreign manufacturers for the design, sourcing,
and manufacture of its products, the Company's business is subject to certain
risks that are not inherent in businesses that rely principally upon domestic
sources of supply. Manufacturing in the PRC and in other foreign countries is
subject to a number of risks, including but not limited to transportation delays
and interruptions, political and economic disruptions, the imposition of tariffs
and import and export controls, loss of property or revenue from expropriation
or political demands, and changes in governmental policies. While the Company to
date has not experienced any material adverse effects due to such risks, there
can be no assurance that such events will not
8
<PAGE> 10
occur in the future and possibly result in increases in costs and delays of, or
interference with, product deliveries resulting in losses of sales and damage to
customer relationships. Further, in 1996 the United States government must
determine whether to continue to grant "most favored nation" status to the PRC.
If the most favored nation status of the PRC were to terminate, or if changes in
diplomatic relations between the United States and the PRC otherwise limit the
ability to conduct business in the PRC and such termination or changes result in
increased costs of production which reduce margins or sales volume, the
Company's business could be materially adversely affected. The Company believes
that alternate sources of manufacturing are available if the need to change its
sources were to arise, although there can be no assurance that shifting
production to alternative facilities would not disrupt the Company's operations.
Generally, the PRC and other countries in which the Company does business may
not offer legal mechanisms to redress an unfair trade practice, contract breach,
or other problem requiring the enforcement of contractual provisions or other
redress. In the event of any damage to the Company resulting from the breach of
a contract, the failure to fulfill manufacturing commitments, the taking of
Company property, or other similar event creating a loss for the Company or
interruption of its business, there may not be an adequate avenue of recourse
against the parties responsible for such damages.
The Company is party to a joint venture (the "Chinese Joint Venture") with
a Chinese entity known as Chinese Southwest Computing Center (also known as
Shenzhen Zhong Mao Yuan Industry Development Co. Ltd.). With respect to this
Chinese Joint Venture, the Company is heavily dependent for management of the
operation of the manufacturing facility upon third parties who are subject to
domestic controls in the PRC. Additionally, labor practices in China vary
substantially from the labor practices in the United States and in many other
countries, and the imposition of those labor practices could have an effect on
the ability of the Company to adequately operate the manufacturing facility. To
the extent any political body, buying group, Company customer or other person
with a material interest in the Company's products, or regulators responsible
for oversight of the Company's business find any labor practice objectionable,
either because of the perception that labor practices in a given country are
inherently objectionable or otherwise, a boycott of the Company's products,
regulatory action, or similar undertaking could adversely affect the Company's
business. Further, because the Company's products are principally manufactured
overseas and include product content that is primarily composed of components
and materials from foreign sources, the Company is continually subject to the
risk that consumers, retailers, and others will prefer one of the Company's
competitors to the Company due to the source of the Company's products.
Additionally, regulations could be imposed limiting the content of products or
the source of their manufacture, which could adversely affect the Company's
ability to import products into the United States or other countries in which
the Company sells its products.
Currency Risks. Although the Company currently effects most transactions
in United States dollars and most of its sales are made in the United States, if
the Company is able to expand its international operations to include sales in
other countries, there may be situations where the Company is exposed to the
risks associated with the fluctuation of foreign currencies relative to the
United States dollar. Given the Company's plans for expansion into foreign
markets, protecting the Company from currency fluctuations through currency
hedging or otherwise could become a material part of the Company's financial
planning. Further, general risks include currency instability and currency
exchange losses when transactions are completed in currencies other than
dollars, and the ability to repatriate earnings under existing exchange control
laws. The Company attempts to effect all transactions in United States dollars
to avoid the risk of currency fluctuations. However, the Company's Chinese
operations could involve production of products and other business operations
that rely upon a currency other than the United States dollar. No assurance can
be given that an effective currency hedging policy could offset these currency
risks. The Company will effect sales in Canada in Canadian dollars. Therefore,
since most of the Company's products are purchased and financed with United
States dollars, the Company must be attentive to the risk of relative
fluctuations in these two currencies. As the Company's plans for increasing
sales in Canada evolve, if at all, the relationship of the Canadian dollar to
the U. S. dollar could have a material effect on the Company's business, and
extreme currency fluctuations in these two currencies, relative to each other,
could affect the Company's margins on products sold in Canada, absent an
effective hedging policy.
9
<PAGE> 11
Bankruptcy of Bercor. The Company acquired the Craig brand name and
certain other assets from Bercor, Inc. ("Bercor") in 1989. Bercor operated the
business currently conducted by the Company as its Craig Consumer Electronics
Division, which the Company believes comprised approximately 20% of Bercor's
overall business. In 1988, Bercor sought protection under the United States
Bankruptcy Code and ceases to exist today. Although the Company purchased the
Craig brand name and other assets and not the entire business of Bercor, the
Company believes that Bercor's insolvency was due in part to certain of the
business risks that continue to affect the business of the Company. In the case
of Bercor, the events that led to its insolvency included the inability to
obtain suitable financing for products and diminished margins due to extreme
competitive pressures, among other causes or risks that the Company confronts in
conducting business as a value-oriented designer and marketer of consumer
electronic products. Richard Berger, the Company's President, Chief Executive
Officer and Chairman, was a founder, executive officer, and director of Bercor.
See "The Company" and "Management."
Reliance on Proprietary Protection; Risk of Infringement. The Company's
ability to compete successfully is highly dependent upon the Company's continued
ability to exploit the name CRAIG(R) under which the Company's products are
branded and sold. The Company has registered its trademarks for each of its
brand names in the United States and believes that such trademarks are valid and
provide the Company with the right to exploit those trade and brand names.
However, in the event that the Company's trade or brand names are successfully
contested, the Company could be enjoined or restricted in its use of such trade
and brand names or required to pay damages, either of which would have a
material adverse effect on the Company's business and financial condition. The
Company also maintains trademarks in several foreign countries. The Company's
ability to exploit foreign markets using the Craig name will be highly dependent
upon the proprietary protection available in these various foreign countries.
Among the countries in which the Company intends to expand its business and
distribution, the Company has registered its trademarks and is not aware of any
dispute with respect to those marks except disputes pending in Paraguay and
Argentina. The Company's inability to perfect or exploit its trade name in any
particular country could limit or prohibit the Company from entering into any
such country's market with such trade name. See "Business -- Proprietary
Protections and Trademarks."
Although the Company believes that its product designs have been
independently developed, there can be no assurance that such designs do not or
will not infringe on the proprietary rights of others. In the event that a
Company product infringes on the proprietary rights of others, the Company could
be enjoined from selling particular products and be required to pay damages,
either of which could have a material adverse effect on the Company's business
and financial condition. The Company relies generally upon its contract
manufacturers to attempt to assure that the proprietary rights in components
included in the Company's products belong or are appropriately licensed to its
manufacturers. Because the Company has no patents pertaining to its products, it
may be possible for third-parties to copy certain portions of the Company's
product designs to the Company's detriment. See "Business -- Proprietary
Protections and Trademarks."
Risk of Retail Sales. The Company is subject to the same economic factors
that impact virtually any designer or manufacturer of retail-oriented products.
Particularly, costs of materials, insurance, inflation, currency fluctuations
(with respect to international sales), transportation (and thereby fuel),
obsolescence, and retail sector and general economic conditions can impact
consumer demand in general and for the Company's products in particular. These
factors could have a material adverse effect on the Company's margins, business,
and financial condition.
Key Personnel. The Company is highly dependent on the services of Richard
Berger, its Chairman of the Board, President, and Chief Executive Officer.
Particularly, the Company is presently dependent upon Mr. Berger and his
relationships with foreign manufacturers to continue an uninterrupted supply of
the Company's products and to engage the appropriate personnel to design and
manufacture the Company's products at prices that enable the Company to compete
within the consumer electronics industry. Timing with respect to specific
products or product categories can be critical, and the Company currently relies
on Mr. Berger to direct the quantity and timing of each product or line of
products acquired. Although the Company believes it has an experienced and
talented management group, the loss of Mr. Berger could have a material adverse
effect on the Company's business and financial condition. The Company has
entered into a
10
<PAGE> 12
three-year employment agreement with Mr. Berger. Although the Company maintains
key man life insurance in the face amount of $1,000,000 on the life of Mr.
Berger, the amount of such insurance and the timing of payment thereunder may
not be adequate to offset the business interruption that could be associated
with the loss of Mr. Berger's services. See "Management."
Control by Management and Existing Stockholders. Upon consummation of this
Offering, the present directors, executive officers and principal stockholders
of the Company and their affiliates will, in the aggregate, beneficially own in
excess of 65% of the outstanding Common Stock. These stockholders, acting
together, will have the ability to control the election of the Company's
directors and most other stockholder actions and, as a result, direct the
Company's affairs and business. Such concentration may have the effect of
delaying or preventing a change of control of the Company. See "Principal and
Selling Stockholders."
Immediate Substantial Dilution. Purchasers of the shares of Common Stock
offered hereby will experience immediate substantial dilution of $3.57 per
share, or 51% of their investment, based upon the net tangible book value of the
Company at December 31, 1995. As a result, the purchasers of the shares of
Common Stock offered hereby will bear a disproportionate part of the financial
risk associated with the Company's business while effective control will remain
with the existing stockholders and management. See "Dilution."
No Prior Public Market for Common Stock; Risk of Limited Market. Prior to
this Offering, there has been no public market for the Common Stock, and there
can be no assurance that an active trading market will develop or be sustained
after this Offering or that the market price of the Common Stock will not drop
below the initial public offering price. In the absence of an active trading
market, stockholders may not have the liquidity necessary to readily dispose of
their shares of Common Stock. See "Underwriting."
No Correlation Between Offering Price and Value of Shares. The initial
public offering price of the Common Stock has been determined by negotiation
between the Company and the Representative and does not necessarily bear any
relationship to the Company's book value, assets, past operating results,
financial condition, or any other established criteria of value. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. There can be no assurance that the Common Stock
will trade at market prices in excess of the initial public offering price, as
prices for the Common Stock in any public market which may develop will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the Common Stock, investor perception
of the Company, quarter-to-quarter variations in operating results, changes in
earnings estimates by analysts following the Company, if any, and general
factors affecting the consumer electronics industry, as well as general
economic, political, and market conditions. In addition, stock prices of many
companies in the consumer electronics industry may fluctuate widely for reasons
which may be unrelated to operating results. Due to analysts' expectations of
continued growth, if any, and the high price/earnings ratio at which the Common
Stock may trade, any shortfall in expectations could have an immediate and
significant adverse effect on the trading price of the Common Stock.
No Dividends. The Company's current policy will be to retain earnings, if
any, to increase its available equity and borrowings for the expansion of the
Company's business and for other corporate purposes. The Company does not intend
to pay any cash dividends in respect to the Common Stock for the foreseeable
future. The payment of cash dividends by the Company on its Common Stock is
restricted by the terms of the Company's current credit facility. Future
borrowings may contain similar restrictions. See "Use of Proceeds" and "Dividend
Policy."
Representative's Potential Influence on the Market. It is anticipated that
a significant number of the shares of Common Stock being offered hereby will be
sold to clients of the Representative. Although the Representative has advised
the Company that it currently intends to make a market in the Common Stock
following this Offering, it has no legal obligation, contractual or otherwise,
to do so. The Representative, if it becomes a market maker, could be a
dominating influence in the market for the Common Stock, if one develops. The
prices and the liquidity of the Common Stock may be significantly affected by
the degree, if any, the Representative participates in such market. There is no
assurance that any market activities of the Representative, if commenced, will
be continued.
11
<PAGE> 13
Recently Formed Representative May be Unable to Complete Offering or Make a
Market. The Representative was formed in March 1995 and has limited prior
experience with public offerings. However, the Chairman, the Vice Chairman, the
Senior Vice President, and the Director of Corporate Finance of the
Representative have prior experience with public offerings. The Chairman of the
Representative has been in the securities industries for more than 11 years. He
was associated with various national financial firms, including as a registered
principal and a registered representative. The Vice Chairman of the
Representative has been in the securities industry for over 20 years, during
which time he served in various capacities, including executive officer and
registered principal and representative, of various firms providing back office
and related services to the securities industry, and was employed in various
capacities by the National Association of Securities Dealers, Inc. Nonetheless,
due to the Representative's limited history, there is no assurance that the
Offering will be completed or, if completed, that an active trading market for
the Common Stock will develop. The Representative is not affiliated with the
Company or any controlling person of the Company. See "Underwriting."
Shares Eligible for Future Sale. Although the principal stockholders of
the Company have agreed not to sell their shares for one year following the date
of this Prospectus, at that time the shares owned by such principal stockholders
will be eligible for sale in the public market, subject to the volume and other
limitations of Rule 144 adopted under the Securities Act of 1933 ("Securities
Act") by the Securities and Exchange Commission. Additionally, because the
principal stockholders have the ability to elect a majority of the Board of
Directors of the Company, such stockholders could cause the Company to register
the shares owned by the principal stockholders under the Securities Act and
thereby make them available for distribution without regard to the volume and
other limitations imposed under Rule 144. Any substantial offering by the
principal stockholders or sale of substantial amounts of unregistered shares
under Rule 144 could have a material adverse effect on the market price of the
Company's Common Stock. See "Shares Eligible for Future Sale."
12
<PAGE> 14
THE COMPANY
In 1989, the Company acquired certain assets of an operating division of
Bercor, Inc. ("Bercor"), a publicly-owned company. Bercor was, in turn, the
successor to Craig Corporation, which began to market and sell consumer
electronics products under the "Craig" brand name during the late 1950's. Craig
Corporation went public during 1968 and was listed on the New York Stock
Exchange.
In 1985, Craig Corporation sold its consumer electronics division, along
with the rights to use the name "Craig" to Bercor, a publicly-owned distribution
company which distributed numerous products for other manufacturers, including
appliances, toys, hair care products, stationery, and other products that are
not sold by the Company. Bercor continued to distribute other manufacturers'
products and other non-proprietary and other non-branded products as an
independent distributor and reseller. The Company believes that the business
currently conducted by the Company constituted approximately 20% of the business
of Bercor by 1988. During the late 1980's, Bercor suffered from the growth of
mass merchandising and increasing direct sales by manufacturers as well as other
pressures endemic to independent distribution businesses during such period.
Bercor filed for bankruptcy protection pursuant to Chapter 11 of the United
States Bankruptcy Code on June 23, 1988.
Bercor, of which Richard Berger was a founder, executive officer, and
director, attributed its need to file for bankruptcy to an unwillingness of
major suppliers to extend credit, difficulties in obtaining necessary capital
for operations from its principal secured lenders (a function of the
collectability of receivables, excess inventory in certain product categories,
and obsolescence), and excessive operating expenses given the cash flow impact
of the receivable and inventory problems that affected product supply and, in
turn, sales, in addition to the aforementioned problems endemic to the
independent distribution business.
The Company acquired the assets of what was then the Craig Consumer
Electronics Division of Bercor pursuant to a Plan of Reorganization dated June
20, 1989 (the "Plan of Reorganization"). Since 1989, the Company has continued
to operate the business formerly conducted by the Craig Consumer Electronics
Division of Bercor. As part of the Plan of Reorganization, certain creditors of
Bercor received shares of capital stock of the Company. The shares of Common
Stock held by the Company's four principal stockholders (including the shares
distributed to former creditors of Bercor) were acquired by BJRM, Inc., an
affiliate of such stockholders, which was merged with the Company in December of
1992. The merger resulted in the four principal stockholders owning all of the
capital stock of the Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,012,500 shares
offered by the Company hereby at an assumed offering price of $7.00 per share,
are estimated to be approximately $5,800,000 after deducting underwriting
discounts and commissions and estimated offering expenses, and a $50,000 fee
payable to Alan Wishnow upon consummation of the Offering. See "Underwriting."
The Company currently intends to use substantially all of the estimated net
proceeds of this Offering to pay down its existing revolving credit line.
The Company maintains a $40 million revolving line of credit secured by
inventory and receivables which is provided by a syndicate of banks led by BT
Commercial Corporation ("BTCC"), as agent. The other banks in the syndicate
include NationsBank of Texas, Sanwa Business Credit, and LaSalle National Bank.
Under the terms of the credit line with BTCC, interest accrues at alternative
rates depending upon an election by the Company. The Company has undertaken to
make the "LIBOR" election and pays interest on the BTCC loan at the rate of the
London Interbank Offered Rate, plus 2.75%, although a rate tied to the prime
rate may be elected from time to time. The Company's loan agreement and the term
of the loan expire on August 5, 1997, although they are renewable for two
one-year terms if no event of default shall have occurred and be continuing. The
loan agreement with BTCC includes various covenants including those related to
the financial condition of the Company. These financial covenants include a
covenant to maintain a certain tangible net worth (which required tangible net
worth was $5.9 million at December 31, 1995), an acceptable ratio of funded debt
to earnings before interest, taxes, depreciation and amortization (which
required ratio was 6.9 to 1 at December 31, 1995), and an interest coverage
ratio of earnings to interest expense (which required ratio
13
<PAGE> 15
was 1.5 to 1 at December 31, 1995). Additionally, the loan agreement imposes
restrictions on capital expenditures, the incurrence of additional indebtedness,
and the imposition of liens, and restricts the payment of dividends. The Company
believes that it is in compliance or has obtained waivers with respect to any
violations of the financial and other material covenants set forth in its loan
agreement with BTCC. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources."
The foregoing represents the Company's best estimates of its use of the net
proceeds of this Offering based upon its present plans, the state of its
business operations, and current conditions in the consumer electronics
industry. The Company reserves the right to change the use of the net proceeds
if unanticipated developments in the Company's business or business
opportunities, or changes in economic, regulatory or competitive conditions in
the industry, make shifts in the allocations of net proceeds necessary or
desirable. Pending such uses, the net proceeds will be invested in investment
grade, short-term, interest-bearing securities.
DIVIDEND POLICY
Since its inception, the Company has not declared or paid any dividends on
shares of its Common Stock. The Company has previously paid dividends on its
outstanding Series A Preferred Stock, and has accrued dividends on the Series A
Preferred Stock during the years ended December 31, 1994 and 1995. On the date
of this Prospectus and prior to completion of any sales of Common Stock in this
Offering, the 250,000 outstanding shares of Series A Preferred Stock are being
converted into 1,300,052 shares of Common Stock. Prior to the conversion, the
four holders of the Company's Common Stock owned all of the Series A Preferred
Stock. The conversion of the shares of Series A Preferred Stock is being
undertaken at an assumed price of $7.00 per share. To the extent the price is
other than $7.00 per share, there will be a minor variation in the number of
shares of Common Stock into which the Series A Preferred Stock will be
converted. Immediately prior to such conversion, the Company will deliver
separate Subordinated Notes for a total of $780,798, reflecting the Company's
long-term obligation to pay accumulated, unpaid dividends on its Series A
Preferred Stock to its four preferred stockholders. These Subordinated Notes
bear interest at the rate of 10% per annum. Under the terms of the Subordinated
Notes, the four holders of the Series A Preferred Stock will agree to
subordinate the Company's obligation to pay the accumulated dividend to payment
of all amounts owing to any secured lenders, and all trade vendors of the
Company, and acknowledge that no payment will be made to the extent that such
payment would cause any violation or default of any material agreement to which
the Company is a party, including its existing loan agreement with BTCC. See
"Principal and Selling Stockholders" and "Certain Transactions."
The Company's loan agreement with BTCC limits the payment of dividends. The
Company intends to retain all available funds for use in its business and
therefore does not expect to pay any cash dividends in the foreseeable future.
Any future determination relating to dividend policy will be made at the
discretion of the Board of Directors of the Company and will depend on a number
of factors, including future earnings, capital requirements, financial
condition, future prospects of the Company and such other factors as the Board
of Directors may deem relevant.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of December 31, 1995, and (ii) the as adjusted capitalization of the Company
after giving effect to the Recapitalization and sale of the 1,012,500 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $7.00 per share, after deducting underwriting discounts and commissions
and the estimated expenses of the Offering, and the application of the net
proceeds therefrom as set forth in "Use of Proceeds." The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
(IN THOUSANDS)
--------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
Short-term debt, including line of credit......................... $15,531 $ 15,531
======= ===========
Long-term debt, including capital leases.......................... 88 88
Notes payable to related parties.................................. 982 982
Total long-term debt.............................................. 1,070 1,070
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
250,000 shares of Series A Preferred Stock issued and
outstanding, none issued or outstanding, as adjusted(2)...... 2,500 --
Common stock, $.01 par value, 15,000,000 shares authorized;
6,405,995 shares issued and outstanding, 3,129,572 shares
issued and outstanding, as adjusted(2)....................... 64 31
Additional paid in capital...................................... 815 9,148
Retained earnings............................................... 1,555 1,555
------- -----------
Total equity................................................. 4,934 10,734
------- -----------
Total capitalization....................................... $ 6,004 $ 11,804
======= ===========
</TABLE>
- ---------------
(1) Adjusted to reflect the sale by the Company of 1,012,500 shares of Common
Stock at an assumed offering price of $7.00 per share, and the application
of the estimated net proceeds therefrom.
(2) On the effective date of this Prospectus, the Company is effecting a
recapitalization resulting in the conversion of 250,000 shares of Series A
Preferred Stock into 1,300,052 shares of Common Stock and a subsequent
3.64-to-one reverse stock split resulting in the conversion of 7,706,047
shares of Common Stock into 2,117,072 outstanding shares of Common Stock.
See "Certain Transactions" and "Description of Capital Stock."
15
<PAGE> 17
DILUTION
The net tangible book value of the Company's Common Stock at December 31,
1995 was approximately $4,934,000, or $2.33 per share. Net tangible book value
per share represents the amount of total tangible assets less liabilities,
divided by the number of shares of Common Stock outstanding. After giving effect
to the sale of the 1,012,500 shares of Common Stock offered hereby at an assumed
price of $7.00 per share (after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company) and the
application of the net proceeds therefrom, the pro forma, net tangible book
value of the Company at December 31, 1995 would have been approximately
$10,734,000, or $3.43 per share. This represents an immediate dilution in net
tangible book value of $3.57 per share to purchasers of shares of Common Stock
offered hereby and an immediate increase in net tangible book value of $1.10 per
share to existing stockholders. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $7.00
Net tangible book value per share at December 31, 1995............. $2.33
Increase in net tangible book value per share attributable to new
investors....................................................... 1.10
-----
Pro forma, as adjusted, net tangible book value per share after
Offering........................................................... 3.43
-----
Dilution per share to new investors.................................. $3.57
=====
</TABLE>
The following table summarizes, as of December 31, 1995, the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price per share paid by existing stockholders and by purchasers
of the shares of Common Stock offered hereby (at an assumed initial public
offering price of $7.00 per share before deducting the underwriting discounts
and commissions and the estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL INVESTMENT AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1).......... 2,117,072 68% $3,379,360 32% $1.60
New Stockholders.................. 1,012,500 32 7,087,500 68 $7.00
--------- ------- ----------- ---- ---
Total........................... 3,129,572 100% $10,466,860 100%
========= ======= =========== =======
</TABLE>
- ---------------
(1) Excludes 327,000 shares of Common Stock issuable upon exercise of
outstanding stock options, 382,928 shares issuable to Messrs. Berger and
Miller pursuant to outstanding stock options and the 100,000 shares of
Common Stock issuable upon exercise of the Representative's Warrants. See
"Management" and Note 7 of Notes to Financial Statements.
16
<PAGE> 18
SELECTED FINANCIAL DATA
The following selected statement of income data for each of the three years
in the period ended December 31, 1995, and the balance sheet data as of December
31, 1994, and 1995, are derived from and qualified by the audited financial
statements and the related notes thereto included elsewhere in this Prospectus
that have been audited by Arthur Andersen LLP, independent public accountants,
as set forth in their report. The statement of income data set forth below with
respect to the years ended December 31, 1991 and 1992 and the balance sheet data
as of December 31, 1993, are derived from audited financial statements of the
Company not included in this Prospectus. The data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the financial statements and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Audio sales................................. $26,897 $34,052 $53,029 $71,432 $80,710
Video sales................................. 18,791 45,256 48,186 34,207 7,966
------- ------- ------- ------- -------
Net sales................................... 45,688 79,308 101,215 105,639 88,676
Cost of goods sold.......................... 38,015 69,292 89,359 91,334 74,324
------- ------- ------- ------- -------
Gross profit................................ 7,673 10,016 11,856 14,305 14,352
------- ------- ------- ------- -------
Selling expenses.......................... 2,818 3,361 4,809 5,165 4,664
General and administrative expenses....... 3,235 4,111 4,611 6,681 6,336
Product development expenses.............. 324 346 105 163 200
------- ------- ------- ------- -------
Operating expenses.......................... 6,377 7,818 9,525 12,009 11,200
------- ------- ------- ------- -------
Operating income............................ 1,296 2,198 2,331 2,296 3,152
Interest expense, net....................... 740 1,029 1,221 1,692 2,200
------- ------- ------- ------- -------
Income before provision for taxes........... 556 1,169 1,110 604 952
Provision for taxes......................... 39 182 37 71 161
Extraordinary item.......................... -- 50 -- -- --
------- ------- ------- ------- -------
Net income.................................. $ 517 $ 937 $ 1,073 $ 533 $ 791
======= ======= ======= ======= =======
Pro-forma net income per share (1).......... $ 0.33
Weighted average shares outstanding (2)..... 2,399
=======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................ $ 4,533 $ 3,528 $ 3,705
Total assets................................................... 33,716 41,145 32,530
Notes payable under revolving line of credit................... 14,478 20,914 15,530
Subordinated debt and capital lease obligations, net of current
portion...................................................... -0- 634 1,048
Stockholders' equity........................................... 4,486 4,581 4,934
</TABLE>
- ---------------
(1) Pro-forma net income per share reflects the pro forma effect of the
Recapitalization undertaken upon the effectiveness of this Prospectus and
prior to consummation of sales of Common Stock in this Offering. See Note
10 to the Notes to Financial Statements.
(2) Pro-forma weighted average number of shares outstanding is calculated based
on the number of shares outstanding after the Recapitalization, while
giving effect to the sale of the 1,012,500 shares of Common Stock sold in
this Offering and the dilutive effect of the outstanding stock options.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this Prospectus.
OVERVIEW AND OPERATING HIGHLIGHTS
The Company derives substantially all of its revenues from sales of
consumer electronics products, including audio electronic products such as home
and mobile sound systems and, previously, video products such as televisions and
video cassette recorders. Because the Company has experienced lower and
declining gross margins on sales of video products, the Company's current
strategy is to curtail sales of its video products and focus its resources on
sales of audio products, which have generated higher gross margins than video
items. The Company does not anticipate substantial sales of video products for
the foreseeable future.
The Company attempts to order products and maintain inventory controls in
an effort to control the costs and risks of inventory obsolescence and the
retention of significant inventories, either of which results in financing and
other costs. This inventory management philosophy is frequently difficult to
implement. Such difficulty is increased by the relatively long product
development and ordering cycle and the unpredictability of consumer demand.
Maintaining inventory levels at or just above normal demands throughout the year
is critical, given the Company's capital requirements and limitations.
The Company is subject to significant risks in connection with its
inventory management. Particularly, in order to assure an adequate supply of
products to meet the relatively high demand for products during the third and
fourth quarter of each year, the Company must commit to acquire products six to
nine months in advance of delivery, which commitment is based on the Company's
forecast of its customers' orders. If the Company underestimates its need for
inventory, the Company may have to pay a significant premium to obtain necessary
manufacturing time or may be unable to provide customers with the desired
products in the quantities requested. In such event, profit margins, sales
and/or customer relationships could be materially adversely affected. Similarly,
if the Company overestimates its inventory needs, the Company will be required
to reduce prices in order to dispose of such inventory, thereby adversely
affecting its profit margins, if any. In order to operate successfully, the
Company must adequately plan, time, and budget its acquisition of inventory in
each product category so as to avoid the need for significant cost increases or
price reductions in any product or product category. To the extent the Company
is unable to do so or incurs delays in delivery, or fails to adequately forecast
prices and demand or reduce costs when necessary, the Company's business and
financial condition could be materially adversely affected.
The Company's business is highly seasonal, with operating results varying
substantially from quarter to quarter. Sales tend to be lowest in the first and
second quarters and highest in the third and fourth quarters of the calendar
year. The Company has experienced losses during the first quarter in the past
and will likely experience such seasonal losses in the future. The Company will
experience losses during the first quarter of 1996. In order to facilitate sales
during the year-end buying season, the Company must make financial commitments
and pay for product inventory well in advance of any sales of such inventory. As
a result, if the timing or amount of customer orders, neither of which the
Company can control, fall below the Company's expectations, operating results
and cash flow could be materially adversely affected if expenses based on these
expectations have already been incurred.
The Company's product development activities generally involve designing
products from various prototypes manufactured by large consumer electronics
manufacturers. These designs generally involve the modification and application
of existing available technologies. The Company's product development is
therefore generally focused on selection of features, cosmetic design, and
obtaining a cost-effective means to incorporate available technology into the
Company's products rather than attempting to develop new technology. Product
development costs are those costs typically associated with the Company's
cosmetic design, testing, and features of its products.
18
<PAGE> 20
Net sales represent gross sales after excluding product returns, but
include the resale of reconditioned products. For 1993, 1994, and 1995, product
returns approximated 10.4%, 13.5%, and 13.4%, respectively, of total units
shipped. Any increase in the rate of product returns would have a material
adverse effect on the Company's business and financial condition.
The Company's sales are concentrated among its largest customers. During
1993, 1994, and 1995, sales to the Company's top five customers accounted for
approximately 44%, 47%, and 59% of net sales, respectively. Approximately 25%,
24%, and 35% of net sales were attributable to Best Buy, during such periods.
The Company is therefore highly dependent upon its largest customers, and its
business and financial condition could be adversely affected to the extent that
any of its largest customers discontinued the purchase of the Company's products
for any reason, including general economic conditions affecting the demand for
products at the Company's price point or other conditions affecting business of
any particular retail chain or other large customer. The Company expects that
concentration of sales will continue.
The Company's selling expenses are composed of both variable expenses,
which generally correlate to sales levels, and non-variable expenses. Variable
expenses averaged approximately 70% of selling expense over the past three
years, and include primarily commissions, freight, and promotional expenses.
Non-variable expenses include, among other customary selling expenses, the costs
of attendance at the Consumer Electronics Show and other trade shows. General
and administrative expenses typically include office and warehouse space and
payroll, among other customary general and administrative expenses.
The Company opened an office in Hong Kong in February 1994, to facilitate
acquisition of products in a timely fashion and to promote the Company's
relationships with its contract manufacturers. In August 1995, the Company
entered into a Chinese Joint Venture, of which it is a 50% owner. The Chinese
Joint Venture operates a reconditioning and assembly facility in Shenzhen, PRC.
The facility is currently intended to serve only as a reconditioning facility.
In January 1996, the PRC reconditioning facility began operations. The Company
made a capital investment in the Chinese Joint Venture of approximately
$350,000.
Taxes were not material to the Company's financial condition during the
years ended December 31, 1993 and 1994, due to the ongoing availability of a net
operating loss ("NOL") carryforward. During the year ended December 31, 1995,
the Company applied a portion of its NOL carryforward to the reduction of its
federal income taxes. The State of California, the Company's principal place of
business, also has an income tax imposed on corporations subject to its
jurisdiction. In California, the availability and use of NOL carryforwards has
been severely limited, and during the year ended 1995, the Company incurred
state income taxes of $146,077 that were not subject to any reduction by reason
of the availability of NOL carryforwards. When reviewing the financial
statements and related notes thereto appearing elsewhere in this Prospectus,
provision for state income taxes should be taken into account inasmuch as it is
not anticipated that the NOL carryforwards will be available to reduce tax
liabilities to the State of California. There can be no assurance that the
availability and use of NOL carryforwards to reduce federal tax liabilities will
be continued in the future or that future legislation or the sale of securities
will not limit or eliminate the Company's use of NOL carryforwards. As of
December 31, 1995, the Company had an NOL carryforward for federal income tax
purposes of approximately $5,101,000.
On the date of this Prospectus and prior to the completion of any sales of
Common Stock in this Offering, the Company will effect a recapitalization
pursuant to which 250,000 outstanding shares of Series A Preferred Stock will be
converted into 1,300,052 shares of the Company's Common Stock. Immediately upon
conversion of the Series A Preferred Stock, the Company will effect a
3.64-to-one reverse stock split resulting in the 2,117,072 shares of Common
Stock issued and outstanding immediately prior to the completion of the Offering
(the "Recapitalization").
19
<PAGE> 21
RESULTS OF OPERATIONS
The following tables set forth various items both in dollars and as a
percentage of net sales for the five years ended December 31, 1991, 1992, 1993,
1994, and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Audio sales................................. $26,897 $34,052 $53,029 $71,432 $80,710
Video sales................................. 18,791 45,256 48,186 34,207 7,966
------- ------- ------- ------- -------
Net sales................................... 45,688 79,308 101,215 105,639 88,676
Cost of goods sold.......................... 38,015 69,292 89,359 91,334 74,324
------- ------- ------- ------- -------
Gross profit................................ 7,673 10,016 11,856 14,305 14,352
------- ------- ------- ------- -------
Selling expenses............................ 2,818 3,361 4,809 5,165 4,664
General and administrative expenses......... 3,235 4,111 4,611 6,681 6,336
Product development expenses................ 324 346 105 163 200
------- ------- ------- ------- -------
Operating expenses.......................... 6,377 7,818 9,525 12,009 11,200
Operating income............................ 1,296 2,198 2,331 2,296 3,152
Interest expense, net....................... 740 1,029 1,221 1,692 2,200
------- ------- ------- ------- -------
Income before provision for taxes........... 556 1,169 1,110 604 952
Provision for taxes......................... 39 182 37 71 161
Extraordinary item.......................... -- 50 -- -- --
------- ------- ------- ------- -------
Net income.................................. $ 517 $ 937 $ 1,073 $ 533 $ 791
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1991 1992 1993 1994 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Audio sales................................. 58.9% 42.9% 52.4% 67.6% 90.8%
Video sales................................. 41.1 57.1 47.6 32.4 9.2
----- ----- ----- ----- -----
Net sales................................... 100.0 100.0 100.0 100.0 100.0
Cost of goods sold.......................... 83.2 87.4 88.3 86.5 83.8
----- ----- ----- ----- -----
Gross profit................................ 16.8 12.6 11.7 13.5 16.2
Selling expenses............................ 6.2 4.2 4.7 4.9 5.3
General and administrative expenses......... 7.1 5.2 4.6 6.3 7.1
Product development expenses................ 0.7 0.4 0.1 0.1 0.2
----- ----- ----- ----- -----
Operating income............................ 2.8 2.8 2.3 2.2 3.6
Interest expense, net....................... 1.6 1.3 1.2 1.6 2.5
----- ----- ----- ----- -----
Income before provision for taxes........... 1.2 1.5 1.1 0.6 1.1
Provision for taxes......................... 0.1 0.2 -- 0.1 .20
Extraordinary item.......................... -- 0.1 -- -- --
----- ----- ----- ----- -----
Net income.................................. 1.1% 1.2% 1.1% 0.5% 0.9%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995
Net sales. Net sales decreased by $16.9 million, or 16.0%, from $105.6
million in 1994 to $88.7 million for 1995. The decrease is primarily a function
of the planned reduction in sales of video products. Due to the Company's
efforts to reduce the sales of lower-margin video products, sales of such video
products decreased by $26.2 million, or 76.6%, from $34.2 million in 1994 to
$8.0 million in 1995. Home and portable audio and mobile audio sales increased
by $9.3 million, or 13%, from $71.4 million in 1994 to $80.7 million in 1995.
20
<PAGE> 22
Gross profit. Gross profit increased by $0.1 million, or 1.0%, from $14.3
million in 1994 to $14.4 million for 1995. As a percent of sales, gross profit
increased from 13.5% in 1994 to 16.2% in 1995. The increase in the gross profit
margin is directly attributable to increased sales of higher-margin audio
products and a decrease in sales of lower-margin video products.
Selling expenses. Selling expenses decreased $0.5 million, or 9.6%, from
$5.2 million in 1994 to $4.7 million in 1995. The reduction in selling costs is
directly attributable to the corresponding decrease in net sales.
General and administrative expenses. General and administrative expenses
decreased $0.4 million, or 6.0%, from $6.7 million in 1994 to $6.3 million in
1995. The decrease in general and administrative expenses is primarily due to an
increase in operating efficiencies in the Company's reconditioning operations.
Product development expenses. Product development expenses, which are not
included in the foregoing discussion with respect to selling or general and
administrative expenses, increased $37,000, or 22.7%, from $163,000 in 1994 to
$200,000 in 1995.
Interest expense. Interest expense increased $0.5 million, or 29.4%, from
$1.7 million for 1994 to $2.2 million in 1995. Interest expense increased both
in absolute numbers and as a percentage of sales as a result of higher average
interest rates paid on the Company's borrowings.
Net income. Net income increased from $533,000 in 1994 to $791,000 in
1995. As in prior years, net income was affected by the application of the
Company's NOL carryforward, which resulted in a federal tax savings of
approximately $389,000 in 1995. During 1995, the NOL carryforward, by reason of
changes
in California law, could not be applied to reduce California income taxes to
which the Company is subject by reason of its principal business location in
that state. During 1994, net income was increased by reason of the application
of the NOL to both federal and California state taxes, totalling $329,000 in tax
savings for that year. The Company does not anticipate and cannot assure that
the NOL carryforward will have a material beneficial effect on the Company's
financial condition and results of operations in the future.
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1994
Net sales. Net sales increased by $4.4 million, or 4.3%, from $101.2
million in 1993 to $105.6 million in 1994. The increase in net sales was
primarily due to increased audio sales, increased marketing efforts, and
increased dealer and consumer acceptance of the Company's audio products. During
this time period, video sales decreased by $14 million, or 29.1%, from $48.2
million to $34.2 million, while audio sales increased $18.4 million, or 34.7%,
from $53.0 million to $71.4 million.
Gross profit. Gross profit increased $2.4 million, or 20.2%, from $11.9
million in 1993 to $14.3 million in 1994. Gross profit for 1994 increased in
both absolute numbers and on a percentage-of-sales basis as compared to 1993.
The Company realized a 20.2% increase in gross profit in 1994 although revenues
increased by only 4.3%. As a percentage of sales, gross profit was 11.7% for
1993 and 13.5% for 1994. This increase in gross profit is primarily attributable
to the greater margins obtained as a result of the Company's product mix away
from video products, and a focus on higher-margin audio products.
Selling expenses. Selling expenses increased $0.4 million, or 8.3%, from
$4.8 million in 1993 to $5.2 million in 1994. The increase is attributable to
increased variable selling expenses due to increased sales. Selling expense
remained essentially the same as a percentage of sales in 1993 as compared to
1994.
General and administrative expenses. General and administrative expenses
increased $2.1 million, or 45.7%, from $4.6 million in 1993 to $6.7 million in
1994. This increase is primarily due to the expansion of the Company's quality
control operations, the establishment of the reconditioning facility in
Cerritos, and the establishment of the Hong Kong office.
Product development expenses. Product development expenses increased
$58,000, or 55.2%, from $105,000 in 1993 to $163,000 in 1994.
21
<PAGE> 23
Interest expense. Interest expense increased $0.5 million, or 41.7%, from
$1.2 million in 1993 to $1.7 million in 1994. The increase was primarily due to
the Company's increased borrowings on its lines of credit, as well as a higher
average interest rate on the Company's borrowings.
Net income. Net income decreased from $1.1 million in 1993 to $533,000 in
1994. An NOL carryforward was applied to achieve a tax savings of $578,000
during 1993 and $329,000 during 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since 1989, the Company has financed its operations, inventory needs, and
other capital requirements through a combination of bank borrowings, vendor
financing, and internally generated cash flow. The Company's inventory and
receivable line of credit is currently made available by a syndicate of banks
led by BTCC. Under the Company's loan agreement (the "Loan Agreement") with BTCC
and the syndicate members, borrowings are secured by inventory and receivables,
and the amount of available credit is based on the eligible amount of inventory
and receivables. The portion of inventory purchases that is not financed through
the BTCC line of credit is financed by suppliers or other third-party financing
sources and the Company's equity and cash flow. This line of credit allows
maximum borrowings of $40 million, the exact amount dependent upon the amount of
receivables and inventory meeting certain criteria. As of January 31, 1996, the
Company had borrowed approximately $13,932,000, which was the maximum available
amount it could borrow at that date under the BTCC line of credit. The interest
rate on such line of credit may, at the Company's option, be tied to either the
London Interbank Offered Rate ("LIBOR") plus 2.75% or the prime rate plus 1.25%
quoted by Bankers Trust Company, New York. For 1995, the Company elected to
utilize the LIBOR rate (which was 5.83% at December 31, 1995) plus 2.75%. The
Company also periodically finances its inventory acquisitions through supplier
or other third-party financing that is generally unsecured short-term financing,
for which the Company pays significantly higher interest rates than it pays
under its available line of credit with BTCC. The rate for vendor and other
third-party financing for the Company's products ranged from approximately 6.8%
to 18.0% during 1995.
Significant deterioration in prevailing industry conditions or receivable
quality, through payment delay or other credit risks associated with the
Company's customers, could affect the Company's ability to finance inventory
acquisitions at any given point in time, which could materially adversely impact
the Company's business and financial operations. The Company cannot anticipate
the contingencies to borrowing availability, nor can management predict the
assessment of the contingencies by BTCC, acting as the agent on behalf of the
syndicate of banks that participates in the Company's loan, or any other
financing sources.
The Company is subject to several affirmative and negative covenants
imposed pursuant to its loan agreement with BTCC. Such covenants include
covenants to provide quarterly and annual financial statements and to affirm the
"borrowing base" calculations (the formula of inventory and receivables applied
to determine the maximum of available borrowings). The Company is also subject
to various negative financial covenants that require the Company to maintain a
certain consolidated tangible net worth, a ratio of funded debt to earnings
before interest, taxes, depreciation and amortization and a ratio of earnings
before interest, taxes, depreciation and amortization to interest expense, among
others. Additionally, the Company is limited in the amount of additional
indebtedness it may incur, including indebtedness for equipment and other
capital expenditures, the granting of liens, and other limitations which are
intended to preserve the integrity and value of the assets of the Company that
are pledged to secure the borrowings from BTCC. The Company is also limited in
the amount of borrowings it may secure with the receivables from certain of its
largest customers, including, most notably, Best Buy. There can be no assurance
that borrowing availability will continually be made available if one or more of
these significant customers is perceived as a credit risk. See "Risk
Factors -- Concentration of Customers and Credit Risk." Certain financial
covenants may have been violated by the Company in connection with the provision
for accrued dividends payable on the Preferred Stock and the accrued bonus
payment to Richard Berger prior to this Offering. BTCC has waived such
violations.
The Company also maintains various unsecured credit lines and unsecured
vendor financing with its principal product suppliers, in addition to the
Company's principal credit line with the BTCC syndicate. Until
22
<PAGE> 24
August 31, 1995, the Company maintained a credit line with Heller Financial
Corp. and additional credit provided by other third-party lenders for borrowings
of between approximately $500,000 and $2,000,000 during 1995. These financings
were not renewed when they matured in August of 1995 and the Company believes
the inability to renew this financing had an adverse impact on the Company's
ability to acquire inventory during 1995.
The Company's cash flow and the ability to finance inventory acquisitions
is affected by its concentration of customers. Particularly, the Company relies
on its five largest customers for a significant portion of its sales. The
Company's largest customer, Best Buy, accounted for 24% and 35% of net sales
during 1994 and 1995, respectively. In addition, as of December 31, 1995, Best
Buy accounted for approximately $3.7 million, or 26.3%, of the Company's
accounts receivable. To the extent the credit quality of any of the Company's
significant customers, including Best Buy, is significantly diminished or in the
event of the loss of any of these significant customers, the Company's financial
condition and cash flow could be materially adversely affected. Best Buy has
recently announced plans to temporarily defer payment to certain vendors,
including the Company, or seek other concessions and may be considered by the
Company's financing sources to be an unacceptable credit risk for the Company,
given the Company's substantial reliance upon Best Buy. To the extent that Best
Buy or any other major customer is unable to pay for products sold by the
Company at a point in time when a significant percentage of the Company's sales
is attributable to Best Buy or such other customers, the Company's ability to
finance inventory acquisitions and its results of operations could be materially
and adversely affected.
The Company used net cash in operating activities and did not generate cash
flows from operations during 1993 and 1994. Particularly, net cash used in
operating activities increased $1.6 million, or 35.6%, from $4.5 million in 1993
to $6.1 million in 1994. Increases in inventory financed by the Company's line
of credit during 1993 and 1994 are the predominant reason for the increase in
net cash used during such time. Additionally, during 1994 the Company incurred
significant expenses associated with the implementation of its credit line with
BTCC.
Net cash used in operating activities was $6.1 million in 1994 as compared
to net cash provided by operating activities of $5.3 million in 1995. The
increase in cash provided by operating activities was predominantly due to a
reduction in inventory and accounts receivable. The Company's net cash and
borrowing availability as of December 31, 1995 was improved over the prior two
fiscal years. Net cash flow from operating activities was applied to the
repayment and reduction of the outstanding balance of the Company's principal
credit line with BTCC and other vendors. Specifically, $5.4 million of the
increased cash flow was used to pay down the Company's indebtedness to the
syndicate of banks led by BTCC.
In connection with the termination of the Company's phantom stock plan, the
Company is obligated to deliver subordinated notes aggregating $312,400 if the
initial public offering price is $7.00 per share. If the price exceeds $7.00 per
share, the principal amount of these notes will also increase. See "Certain
Transactions".
The Company believes the proceeds of the Offering, together with amounts
available from bank borrowings and cash generated by operations, will be
adequate to meet the Company's anticipated cash needs for working capital and
capital expenditures through at least the next 12 months. The Company's
long-term capital requirements will depend on numerous factors, including the
rate of increases in revenues, if any, accounts receivable aging, interest rate
fluctuations, and the rate of product returns. The Company's need for capital
arises primarily from the acquisition of inventory and related operational
expenses. The Company does not have significant capital expenditures, other than
the expenditure for the Company's share of improvement costs and related
equipment for the Chinese Joint Venture reconditioning facility. The Company
anticipates that its future capital needs will be met with additional bank and
supplier borrowings and the equity made available by this Offering.
23
<PAGE> 25
BUSINESS
OVERVIEW
Craig Consumer Electronics, Inc. (the "Company") designs and markets brand
name consumer electronic products under its trademark, "Craig."(R) The Company
offers value-oriented products with features that the Company believes are
comparable to those of its higher-priced competitors. The Company's products are
sold through over 200 retailers with approximately 15,000 retail outlets,
including major retail chains, such as Best Buy, Circuit City, Thrifty Payless,
Rex, Incredible Universe, Nobody Beats the Wiz, and Rite Aid, and other mass
merchandisers, such as Montgomery Ward and Price Costco. The Company also sells
through catalog and direct marketing organizations, such as the QVC Network,
Spiegel Catalog, and Amway.
In recent years, the Company has emphasized the design and marketing of
home and mobile audio electronic products (such as compact music centers and car
stereos) and portable audio products (such as "boom boxes" and small personal
stereos). The Company has realized gross margins exceeding 17% over the last
three years on sales of its audio electronic products. By contrast, the Company
has experienced lower and declining gross margins on sales of its video
electronic products over the past three years. As a result, the Company's recent
strategy has been to curtail sales of video products, and the Company does not
anticipate substantial sales of video products during 1996. The Company will
instead devote the principal portion of its resources to the design and
distribution of audio electronic and peripheral products. Primarily due to its
increasing focus on the sale of audio products, the Company's operating income
increased from $2.3 million in 1994 to $3.2 million in 1995, although overall
sales were $16.9 million lower in 1995 than in 1994.
According to data compiled by the Consumer Electronics Manufacturers
Association ("CEMA"), it is estimated that total factory sales of consumer
electronics products were $62.3 billion during 1995. During 1995, according to
CEMA data, it is estimated that approximately 7 million audio systems, 32
million compact disc ("CD") players (including portables and home CD players),
and 32 million tape players were sold. According to the CEMA sales outlet
figures, the estimated average price for these products during the 1995 year is,
in each category, greater than the Company's average price for the same product
categories.
BUSINESS STRATEGY
In recent years, the Company has emphasized the design and marketing of
brand name audio products, including specifically products designed for the home
or mobile and portable audio products, including "boom boxes" and personal
stereos. The Company has experienced lower and declining gross margins in the
video product categories and due to returns, component supply, and associated
problems. As a result, the Company severely limited sales of video products
during 1995, does not anticipate substantial sales of video products during
1996, and will devote the principal portion of the Company's resources to the
design, sourcing, sale, and distribution of audio electronic, and related
products. The following table demonstrates the Company's increasing emphasis on
audio electronic products:
NET SALES BY PRODUCT CATEGORIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Audio and audio peripherals............... $26,897 $34,052 $ 53,029 $ 71,432 $80,710
Video..................................... 18,791 45,256 48,186 34,207 7,966
------- ------- -------- -------- -------
Total................................... $45,688 $79,308 $101,215 $105,639 $88,676
======= ======= ======== ======== =======
</TABLE>
24
<PAGE> 26
The Company's objective is to establish itself as a leading supplier of
value-oriented audio electronic and peripheral products. The Company has
conceived various strategies to achieve this primary objective. In addition to
the following strategies, the Company must continue to be responsive to consumer
demand in the design and marketing of its audio and other products and be able
to introduce them in a timely fashion. In addition to the Company's current
business, future strategies include all of the following:
- Expand Distribution. The Company intends to expand domestic distribution
channels and outlets. In this regard, during the fourth quarter of 1995 and the
first quarter of 1996, the Company has established new distribution
relationships with K mart and Fred Meyer. The Company is also restructuring its
Canadian distribution relationships and will sell direct to merchandisers in
Canada, rather than through a third-party distributor.
- Expand Internationally. The Company currently sells its products in
Australia, Mexico, Germany, and the Philippines. However, less than 2% of 1995
net sales were in these foreign countries. The Company believes that with
additional capital provided by this Offering, the Company will have the ability
to enhance its sales and marketing efforts in these countries, as well as to
market products in other countries throughout the world.
- Reduce Interest Expense. The Company has frequently paid relatively high
interest rates on the unsecured portion of its borrowings. The Company expects
to experience a significant reduction in its need for such high interest rate
financing and, as a result, its average interest rate due to the application of
the proceeds of this Offering. Particularly, the Company anticipates that the
proceeds of the Offering will enable it to finance more of its inventory
acquisitions with borrowings under its existing revolving line of credit (by
increasing credit availability as a result of the ratios and credit availability
formulae), which borrowings bear lower effective interest rates than vendor and
other unsecured borrowings historically utilized by the Company, assuming that
the BTCC loan agreement and the borrowing availability formula remain in effect,
of which there can be no assurance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
- Expand Consumer Product Lines. The Company intends to introduce several
consumer telephone products during 1996. These products will include a line of
cordless telephones, "feature" telephones, answering machines, and other
telephones and telephone-related products. The Company is exploring the market
potential for other product lines such as audio home theater enhancements,
microwave ovens, citizens' band radios, mobile security systems, youth
electronics, and clocks and watches. Entry into these product categories may be
implemented through business acquisitions or direct entry.
- Increase Margins, Improve Cash Flow by Reconditioning at the Chinese
Joint Venture Facility. The industry, in general, and the Company, in
particular, incur costs of returned products, due to liberal return policies of
retailers and other causes. The Company has generally accepted products for
return and reconditioning at its Cerritos facility (or returned them to vendors
at Company expense). In 1995, the Company entered into a joint venture known as
Shenzhen Kuoli Electronics, Ltd. (the "Chinese Joint Venture"), of which it is a
50% owner, for the purpose of establishing and operating a facility to
recondition the Company's products. The Company commenced processing products at
the Chinese Joint Venture facility, located in Shenzhen, PRC, in January, 1996.
Although the Company does not intend to use the joint venture facility in the
immediate future for purposes other than reconditioning, it is possible that the
Chinese Joint Venture could be used to assemble original products that are
currently outsourced to other vendors and could recondition products for other
manufacturers. The Company intends to conduct reconditioning of product returns
and other ancillary manufacturing services predominantly at a facility leased in
the PRC by the Chinese Joint Venture. Although there can be no assurances, the
Company believes that reconditioning products in the PRC will enhance cash flow
by enhancing its ability to more quickly and efficiently process and sell
reconditioned goods. Generally, the Company cannot borrow the same percentage of
value on "B goods" as it can against new inventory and receivables. Therefore,
quicker turnaround and sale of reconditioned goods will generate greater
borrowing availability under the Company's secured line of credit.
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PRODUCT LINES
The Company's core business currently and for the foreseeable future will
consist primarily of the sale of audio products. The Company designs and sells
products targeted to value-oriented consumers who are reluctant to pay a premium
for brand name products or highly advanced product features. In 1996, the
Company will offer approximately 125 different products ranging in suggested
retail price from approximately $7.00 to $200.00, depending upon the features
employed. Among the Company's products are the following:
Home and Portable Audio Products.
- Home audio systems
- Portable CD systems with detachable speakers
- Portable CD systems with single cassette decks
- Portable CD systems with dual cassette decks
- Portable CD players
- Personal CD players
- Portable single cassette players
- Portable dual cassette players
- Personal electronic devices
- Personal sports electronics products designed for use when exercising or
traveling
- Electronic clock radios
- Hand-held microcassette recorders for voice-operated recording
Mobile Audio Products.
- CD player radios with detachable face-plates
- CD changers that hold six and ten CDs
- Cassette players, including those with detachable face-plates
- Amplifiers
- Speakers
Telephone Products.
- Corded and cordless telephones
- "Feature" telephones
- Answering machines
The Company's philosophy is to market products that are designed to be
attractive to the consumer seeking an alternative to higher-priced audio
products. The Company believes the Craig brand name is well accepted among the
value-oriented retail consumer group based on the Company's ability to provide
an attractive combination of price and performance. The Company believes that
engineering controls help the Company maintain its competitiveness relative to
other entities that sell products in the same product categories. Timely
response to market demand for design changes, selection of features, and
relationships with manufacturers are critical to maintaining the quality of the
Company's products and its ability to compete.
The Company offers, at any given point in time, between six and ten
separate models of home audio systems. Typically these are compact systems that
include compact disc players, cassette players, tuners and amplifiers, and
speakers. In addition, the Company markets and sells a wide variety of portable
stereo models, including portable compact disc and cassette players. The
Company's portable systems include compact audio systems containing CD players,
tape players, and stereo radios. The Company markets and sells approximately 54
portable audio systems including portable CD, cassette, and/or radio players
commonly known as "boom boxes." The Company also offers personal CD players in a
variety of models that are adaptable for inclusion in a larger stereo system or
may be used in conjunction with automobile sound systems.
In the mobile audio category, the Company currently markets approximately
24 models of cassette stereos and CD players for automobiles. The Company
believes that its price for these automobile stereo
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systems is competitive given the features employed in each device. The Company
also markets a variety of amplifiers and speakers to complement its mobile audio
products.
MARKETING AND CUSTOMERS
The Company sells its products through multiple channels such as large mass
merchandising retailers, including major retail chains (such as Best Buy,
Circuit City, Thrifty Payless, Rex, Incredible Universe, Nobody Beats the Wiz,
and Rite Aid) and general mass merchandisers (such as Montgomery Ward and Price
Costco). Additionally, the Company offers its products through direct marketing
organizations such as QVC Network, Spiegel Catalog, and Amway and through
independent distributors.
The Company has four regional vice presidents who are responsible for sales
in various geographic regions throughout the United States. Additionally, the
Company has 20 independent sales organizations that are paid commissions based
on the amount of their net sales. Certain of the Company's material accounts are
serviced directly by the regional vice presidents and others are served by
independent sales organizations.
The Company does not undertake any direct independent advertising.
Advertising is undertaken by the Company's retail dealers and large retail
chains, frequently at the request of the Company or in consideration for
payments or other concessions. Advertising undertaken by the Company's customers
generally tends to promote the Company's brand name by advertising in newspapers
and other publications, catalogs, flyers, and by display point-of-purchase
advertising.
The Company markets its products through regional distribution channels and
its sales staff and by appearance at trade shows, including the annual Consumer
Electronics Show in Las Vegas, Nevada in January. The Company does not market
its products at "boutique" stereo stores or attempt to compete with products at
significantly higher price points. The Company does not have any long-term
commitments from its customers for the purchase of products on an ongoing basis.
The Company's largest customers account for a significant portion of the
Company's sales. The Company's largest customer, Best Buy, accounted for
approximately 24% and 35% of the Company's sales during 1994 and 1995,
respectively. No other single customer accounted for more than 10% of the
Company's sales in either year. The Company's top five customers accounted for
approximately 59% of total sales during 1995. The Company believes its
relationship with these significant customers continues to be good. However, the
Company is attempting to diversify the Company's customer base, including
diversification into other geographic markets.
DESIGN AND MANUFACTURE OF PRODUCTS
The Company is responsible for the final design and manufacturing
specifications of its products. Actual assembly, utilizing components specified
by the Company, is outsourced to third-party manufacturers in accordance with
specifications mandated by the Company. The Company determines the specific
options desired on each product and product line and makes decisions about the
functional and cosmetic features to be employed in each product. The Company's
Hong Kong office implements the selection and acquisition process and attempts
to oversee product sourcing and the design and development that is undertaken in
conjunction with the Company's contract manufacturers. Personnel at the Hong
Kong office also enable the Company to monitor quality control and timeliness of
product deliveries. The Company believes that such oversight by its Hong Kong
office will help the Company achieve its goal to increase overall average
margins for the Company's products, although no assurances can be given that
these objectives are obtainable.
The Company's strategy does not involve extensive research and development
or significant marketing expenditures, which are typically associated with
bringing new technology to consumer markets at a price point that would allow
the Company to compete effectively. The Company believes that product
development employing technologically advanced "state of the art" products such
as digital audio tape or mini disc players are not an effective use of the
Company's resources. The Company has relied instead upon design and
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<PAGE> 29
acquisition of its products and employment of currently available technology, to
bring products to market in an expedient fashion. The Company is dependent upon
technological developments in adding features and additional stylistic
modifications to its products in order to continue to grow the business and
effect sales of products that satisfy consumer demand. The Company hopes to
continue to explore evolving technology without the expenditure of funds for
progressive research and development. Instead, the Company intends to focus its
product development efforts (including design, testing, and feature selection)
on the design and refinement of basic audio products that do not involve
significant technological advances.
In designing products, the Company attempts to select features and cosmetic
characteristics that will enable the Company to compete at its price point.
Given the Company's technological limitations, selection of features and
appearance of the Company's products can be critical. Typically, the Company's
contract manufacturers produce prototypes that are examined and tested by the
Company's design team, modifications are made, and manufacturing time is
committed to create the number of products in each product category selected by
the Company's management.
The Company's three largest manufacturers/suppliers are Hong Kong companies
with facilities located in the PRC. During 1995, these manufacturers supplied
over 50% of the Company's total product supply. Other manufacturers utilized by
the Company are located in South Korea and elsewhere in Asia. To the extent any
of these significant suppliers were unable to devote the necessary manufacturing
capacity to the production of the Company's products or to the extent the
Company suffered any other limitation on its ability to manufacture products
using these manufacturers, the Company's business could be interrupted and
adversely affected. Currently, the Company is purchasing product from
approximately 25 suppliers and plans to purchase from up to five to ten new
suppliers to limit the risk of supply concentration. The Company changes
suppliers from time to time as market conditions require. Substantially all of
these suppliers assemble products with components manufactured by third parties.
The Company believes that this is the standard method of operating and
contracting for the manufacture of products in the consumer electronics
industry. The Company has on-site personnel to monitor and facilitate timely
manufacture and delivery of products produced to the Company's specifications.
The Company does not have long-term contractual relationships with its
manufacturers in the PRC and elsewhere. Instead, the Company must design and
source these products on a case-by-case basis in an attempt to meet the demand
of its customers. The Company imports product by ocean freight, typically to Los
Angeles, and stores the product in a warehouse for shipment to customers.
The Company considers its relationships with its overseas manufacturers to
be good and believes that, absent extreme circumstances affecting the supply of
materials or the demand on manufacturing time, the supply of products should be
available when needed. Although the Company does believe that there are
alternative sources of supply, should the Company be required to obtain a
commitment for manufacturing time from a new manufacturer due to the failure of
any manufacturer to satisfactorily meet its commitments, it may be difficult to
produce and import products in a timely fashion that could be sold profitably.
PRODUCT DEVELOPMENT
The Company does not devote a substantial amount of its resources to
research and development in order to create completely new products, but instead
devotes its resources to quality assurance, the upgrading of design of the
Company's products, and the testing and packaging of the Company's products. The
Company adopts existing technologies which are generally available to the
manufacturers with whom the Company contracts for production of its products. In
establishing the specifications for the Company's contract manufacturers, the
products must be engineered and tested to produce cost-effective products which
adapt and implement the available technology and features that the Company
believes to be marketable to its target consumers. The Company utilizes various
processing laboratories, such as Underwriters Laboratories and other testing
agencies, to obtain laboratory approvals for its products as required by the
majority of the Company's customers and, in certain circumstances, by applicable
state laws relating to consumer protection.
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PRODUCT RETURNS AND RECONDITIONED PRODUCTS
As is typical of the consumer electronics industry, the Company incurs
expenses in connection with the return of products. Such returns may result from
defective goods, inadequate performance relative to customer expectations,
improper packaging, liberal retailer return policies and other causes which may
be beyond the Company's control. During 1994 and 1995, the Company received
product returns totaling approximately 13.5% and 13.4% of total units shipped,
respectively. Although the Company experiences returns due to product defects,
the Company believes that the majority of returns are the result of liberal
return policies by retailers and are beyond the control of the Company. The
Company attempts to minimize returns due to product defects by attempting to
impose quality assurance standards in order to limit the effect of returns for
manufacturing or other defects or operational problems. The Company's presence
in Hong Kong enables the Company to review and have input into the quality
controls of its various manufacturers. As a proposal to make a line of products
is evolving, the Company reviews the process and attempts to impose quality
assurance standards upon the manufacturers. The Company will discontinue the use
of a manufacturer if that manufacturer fails to satisfy the Company's
specifications or if excessive returns result from a given product or line of
products despite a manufacturer's apparent compliance with these quality control
standards.
At the Company's Cerritos, California headquarters and main operating
facility, the Company devotes a limited portion of its space to reconditioning
returned products for resale as "B goods" (specifically, goods manufactured,
reconditioned, and sold "as is" or with a limited warranty). Regardless of the
reason for product returns, products that are returned may only be reconditioned
and resold as "B goods" in accordance with applicable Federal and State laws
regulating consumer trade. Such "B goods" are typically reconditioned and sold
at lower prices than comparable non-returned goods. The Company markets "B
goods" in the United States and to a lesser extent in Mexico and elsewhere in
Central and South America. The Company is attempting to phase out reconditioning
on any significant scale at its Cerritos facility in favor of using the Chinese
Joint Venture. The Company expects that the Chinese Joint Venture will allow the
Company to recondition returned products at a lower cost and to resell those
products more quickly and in certain cases, at higher prices than previously
realized on reconditioned goods.
The Company entered into the Chinese Joint Venture for the operation of a
reconditioning and assembly facility in the area of Shenzhen, PRC. The Chinese
Joint Venture will recondition products for the Company and may eventually be
used as a manufacturing facility to manufacture certain audio products for the
Company. The Company's Chinese Joint Venture operates an 86,000 square foot
factory with an adjoining 38,000 square foot dormitory and canteen for local
employees working in the facility. The facility has the capacity to recondition
up to approximately 70,000 units per month, and the Company believes that, given
its current staffing, this capacity far exceeds the amount of product to be
reconditioned at the Chinese facility. The Chinese Joint Venture facility
commenced reconditioning products in January 1996, and as of March 31, 1996, had
effectively reconditioned approximately 10,000 units for return to the Company.
Although the Company cannot estimate with any certainty the cost savings
associated with the operation of the Chinese Joint Venture facility, the Company
believes that there will be significant cost savings associated with the
reconditioning of products in China, assuming that product returns continue to
represent the same percentage of total units shipped, and assuming a moderate
amount of sales growth after giving effect to the proceeds of this Offering. The
Company anticipates that certain of the products will be capable of being
reconditioned at the Chinese Joint Venture facility and sold in the United
States and elsewhere as original goods, not subject to the significant reduction
in price associated with "B goods." The Company's ability to sell reconditioned
goods in the United States as anything other than "B goods" is likely to be
limited to goods that have only cosmetic or packaging defects that can be
corrected by complete replacement of the affected part or packaging. The Company
cannot anticipate what percentage of these returned products can be sold in the
U.S. or elsewhere as other than "B goods."
The Company's inventory of "B goods" has increased from 2.9% at December
31, 1994 to 5.4% at December 31, 1995. This increase is a result of a decrease
in inventory levels as of year-end 1995 and of the Company's own efforts to
minimize the amount of products that are returned to vendors for repair
(generally undertaken at the Company's expense). The Chinese Joint Venture
facility should allow the Company to employ new components and other materials
in the remanufacturing process, which will hopefully accelerate
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the processing of returned goods and enable the Company, in certain instances,
to sell these products as other than "B goods."
The Company generally provides warranties on certain of its products which
range in duration from three months to one year. The Company does not currently
offer an extended service contract. The Company receives limited product support
from various of its manufacturers, although Starlight Electronics, Great Wall
Electronics and the Company's other current major suppliers provide certain
product support or arrangements pursuant to which the Company may receive
arrangements that generally involve credits for defective merchandise. The
Company processes warranty claims through its main office and accepts returned
merchandise and reconditions that merchandise as an incident to the Company's
warranties. Certain of the Company's products are approved through Underwriters'
Laboratories or similar testing agencies. See Note 4 to the financial statements
included herewith.
BACKLOG
The Company's larger customers typically place firm orders only 30 to 90
days in advance of the anticipated delivery date. Additionally, these customers
may from time to time publish forecasts for 90 days in advance of their
particular product needs. The Company, due to its method of designing and
supplying products, frequently obtains inventory in advance of orders to fill
forecasted demand. However, the Company periodically receives orders for
products for which the Company does not have supply commitments or inventory.
The Company's failure to fulfill an order in such a situation could result in a
loss of a significant customer or extraordinary expense in supplying the
particular product. The Company's attempt to obtain manufacturing commitments
based on the forecasted demand of its customers and consumer demand for the
Company's products does not generally create what in most industries would be
considered backlog that is material to the Company's business. The Company does
receive orders for which supply commitments must be obtained. However, any
substantial backlog is eliminated at the end of the Company's fourth quarter.
PROPRIETARY PROTECTIONS AND TRADEMARKS
The Company has eight registered trademarks in the United States. The most
critical trademark owned by the Company is the name "Craig" and the associated
script logo. The name CRAIG(R) has been trademarked or a trademark application
is pending in more than 40 countries. The Company believes that the CRAIG(R)
trademark is critical in order to continue to effectively market the Company's
products. The Company does not consider the other Company trademarks material to
its business, although the Company intends to protect its interest in those
trademarks.
The Company believes that it has proprietary protection for the CRAIG(R)
trademark in those foreign countries in which sales of the Company's products
are currently targeted, with the exception of Argentina and Paraguay. In
Argentina, the Company is party to a dispute with an individual who has
evidently trademarked the name "Craig," but not for consumer electronics
purposes. The Company is unable to predict the outcome of this trademark
dispute. Additionally, the Company's trademark has not been perfected in
Paraguay.
COMPETITION
The consumer electronics industry is extremely competitive and is dominated
by well-capitalized and diverse companies. The Company faces competition from
both foreign manufacturers and importers of products made by third-party
manufacturers at its price point. The most significant competitors to the
Company are Emerson, RCA, Audiovox, Sanyo, GPX, and International Jensen. Other
competitors include the major brands such as Sony, Panasonic, JVC, Kenwood, and
Aiwa, and other companies that do not necessarily emphasize the price point in
which the Company attempts to sell its products.
Because the Company does not have the resources to undertake the research
necessary to implement significant technological advances, the Company is
dependent upon its ability to select products applying available technology and
to timely deliver them to market in order to maintain its competitive advantage
and margins. Although the capital requirements of the business and the ability
to obtain consumer electronic
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products do not provide a significant barrier to entry, product and name
recognition are likely to have a material impact on the ability to effectively
enter the market due to the associated marketing costs.
At the price point at which the Company competes, several of the Company's
competitors have, and future potential competitors may have, substantially
greater financial, marketing, distribution, and other resources than the Company
and have, or may have, greater name recognition and market acceptance of their
products. There can be no assurance that product developments and technological
advances will not reduce the cost of higher-end products that would not directly
compete with the Company's products but for such advances which would adversely
affect the Company's ability to market its products in the value-oriented niche.
Notwithstanding the risk that technological developments will result in products
that the Company cannot effectively acquire and market, the Company is at the
same time dependent upon technological advances in order to continue to market
products that continue to evolve in a manner that makes the products appealing
to consumers on a year-to-year basis. See "Risk Factors--Competition" and
"Technological Availability and Limitations."
GOVERNMENT REGULATION
The Company is subject to numerous tariffs, duties, charges and assessments
on the import of its various products. The Company retains import agencies and
expediters to facilitate the import of its products and the payment of these
charges and duties. Although these duties and charges have not substantially
impacted the ability of the Company to market its products for delivery in the
United States and elsewhere, regulations affecting these charges and duties are
subject to change, which could have the effect of increasing the cost of goods
imported and sold by the Company. Currently, because the bulk of the Company's
products are manufactured in the PRC, the continual availability of "most
favored nation" status for the PRC pursuant to treaties with the United States
and stable diplomatic relations with the PRC are critical to the ongoing and
continuous supply of products. Additionally, the Company's investment in the
Chinese Joint Venture could be impacted by the loss of most favored nation
status by the PRC or adverse changes in diplomatic relations between the United
States and the PRC. Additional regulation implemented in the United States or
elsewhere could also limit the ability to manufacture, transport, or import
goods.
The Company is subject to disclosure obligations associated with the sale
of B goods in accordance with the regulations of the Federal Trade Commission
and various state consumer protection laws. The Company undertakes to comply
with all fair pricing and consumer protection laws with respect to the resale of
the goods, and the Company believes that its procedures for complying with these
laws are adequate to assure continuing compliance with them.
LEGAL PROCEEDINGS
The Company is not currently a party to any pending legal proceedings, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the business, financial condition or results of
operations of the Company. The Company is from time to time involved in various
legal proceedings, including collection matters and disputes over product
defects, individual employment disputes, and similar matters. The Company
maintains insurance to attempt to insure against liability associated with a
product defect. However, to the extent that any such defect were pervasive in
any particular product or line of products, the Company could be required to
undertake to recall those products or could be subject to significant exposure
with respect to the institution of legal proceedings.
EMPLOYEES
As of May 7, 1996, the Company had a total of 86 full-time employees. Among
these employees, 58 were located in the Cerritos, California facility, three
were located elsewhere in the United States, and 25 were residing in Hong Kong
or China. Of the employees in the Cerritos facility, 15 were in management, 20
were clerical or administrative employees, five were in sales and marketing, and
18 were in warehouse, manufacturing, or quality assurance operations. All United
States employees located outside of Cerritos, California, are sales and
marketing personnel. The Hong Kong employees consist of three in management and
the balance in
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product design, quality control, product development and support, export, and
administrative functions. The Company believes that its relationships with its
employees are good. During May 1996, the Company, in connection with the
reduction of reconditioning activity at its Cerritos, California facility, laid
off six quality control/assembly employees. The Company believes termination of
these employment arrangements was appropriately undertaken and will have no
material adverse impact on the Company's business. The Company is not party to
any collective bargaining agreement, nor is the Company aware of any effort to
organize employees of the Company into any union or similar labor organization.
The Chinese Joint Venture, in which the Company is a 50% partner, employs
approximately 60 persons, most of whom are factory workers engaged in the
reconditioning and manufacturing processes conducted at the facility. The
Chinese Joint Venture is obligated to provide dormitory space and board to these
employees, and the Chinese Joint Venture has 38,000 square feet of dormitory
space and a canteen for the provision of these services to the Chinese
employees.
FACILITIES
The Company's main office, administrative, warehouse, and reconditioning
facilities have been located in 68,200 square feet of space in two separate
buildings located in Cerritos, California. The Company's lease for this space
expired on March 31, 1996. Rent for such space was $28,000 per month. Due to the
reduced space required for reconditioning goods and related warehousing in the
United States, the Company has reduced the space leased at the Cerritos location
to approximately 45,000 square feet in one building. The lease provides for
monthly rent of $19,193 per month. The lease expires in the year 2000.
The Company's Hong Kong facilities consist of office space totaling 3,032
square feet located in Kwai Fong, Hong Kong. Monthly rental on the Hong Kong
office facility is approximately $10,000 (U.S.) per month. The Company also
leases an apartment in Hong Kong provided to Bonnie Metz the Company's Vice
President-Managing Director, Hong Kong. The monthly rental is approximately
$6,400 (U.S.).
The Company's Chinese Joint Venture's facilities consist of an 86,000
square foot manufacturing facility with an adjoining 38,000 square foot
dormitory and canteen. The Company pays the entire rent at this facility,
$16,000 per month. The Company does not assert any direct ownership interest in
the Chinese Joint Venture facilities, and the Company's investment in those
facilities will be lost to the extent that the Company ceases to conduct active
business in the PRC through the Chinese Joint Venture.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ---------------------------------------------
<S> <C> <C>
Richard I. Berger(1)............. 52 President, Chief Executive Officer and
Chairman of the Board
Donna Richardson................. 40 Treasurer, Secretary, and Chief Financial
Officer
Anthony Mirando.................. 49 Senior Vice President
Bonnie Metz...................... 46 Vice President-Managing Director, Hong Kong
Richard A. Miller(2)............. 53 Director
Peter Behrendt(1)................ 68 Director
Bernard Taran(1)(2).............. 57 Director Nominee
James Koblensky(2)............... 61 Director Nominee
</TABLE>
- ---------------
(1) Proposed member of the Compensation Committee.
(2) Proposed member of the Audit Committee.
Richard I. Berger is one of four individuals who provided the initial
capital to acquire the assets of what is now the Company from Bercor out of
Bercor's Chapter 11 bankruptcy reorganization. Mr. Berger has served as the
Chief Executive Officer of the Company and as its Chairman of the Board of
Directors since its formation in 1989 and has served as its President since
1991. Mr. Berger was employed by Corwin Hall as a salesperson and was also
employed by Newcraft Corporation, an affiliate of Corwin Hall, for a combined
total of 12 years. These companies were engaged in the distribution of Panasonic
Consumer Electronics. Mr. Berger ultimately became the president of Newcraft and
a vice president of Telecor (a New York Stock Exchange traded company which was
the parent company of Newcraft).
On April 1, 1979, Mr. Berger formed Bercor. Bercor was engaged in the
distribution of various products, including consumer electronics and household
appliances. Bercor became a public company in 1985, and primarily due to
competitive pressures and problems associated with the distribution of certain
non-proprietary product lines, Bercor filed a petition on June 23, 1988 and was
subsequently reorganized under Chapter 11 of the United States Bankruptcy Code.
Mr. Berger, together with Messrs. Rollnick, Johannsmeier, and Miller, formed a
group to acquire the consumer electronics assets, including the "Craig" brand
name, from Bercor on June 20, 1989.
The United States Securities and Exchange Commission undertook an
investigation and commenced a proceeding in 1988 to consider possible violations
of federal securities laws by Bercor and certain of its personnel (including Mr.
Berger), specifically alleging that the Company improperly claimed tax
carryforward benefits in a manner inconsistent with generally accepted
accounting principles and that the Company improperly reserved for inventory
obsolescence. Mr. Berger was alleged to have aided those violations. Mr. Berger
neither admitted nor denied these violations, but entered into a consent decree
in order to forego the time and expense of litigation, on the advice of counsel.
Bercor entered into a similar consent decree, which did not result in any
administrative finding or other determination of liability of Bercor. Mr.
Berger, as an incident to the consent decree, was enjoined from future
violations of provisions of the Securities Exchange Act of 1934. No private
civil cause of action was commenced in connection with these alleged violations.
Donna Richardson is the Company's Treasurer, Secretary, and Chief Financial
Officer and has served as the chief accounting officer of the Company since
1989. Prior to employment by the Company in 1989, Ms. Richardson held several
management and accounting positions with Wang Laboratories Inc., a computer
products company, and eventually served as the Western Federal Systems District
Controller for several Western states with that company.
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Anthony J. Mirando has served as the Company's Senior Vice President
responsible for marketing and sales in North and South America since the
Company's organization in 1989. Prior to 1989, Mr. Mirando was employed by one
of Bercor's predecessors and has also served as the National Sales and Marketing
Manager of the Car Audio Division of JVC, a manufacturer of consumer electronics
products.
Bonnie Metz is the Vice President-Managing Director, Hong Kong of the
Company, a position she has held since 1995. Prior to joining the Company, in
1989, Ms. Metz was employed by Bercor prior to its bankruptcy. Ms. Metz served
as the Company's Director of Operations from 1989 to 1993 and as Director of
International Trade from 1994 to 1995.
Richard A. Miller has been a director of the Company since its formation in
1989. Mr. Miller is an attorney and Certified Public Accountant employed in his
own private law practice for over 15 years. Mr. Miller also spent several years
in the Los Angeles office of what is now KPMG/Peat Marwick and has also been
employed by the Internal Revenue Service. Mr. Miller was also a director of
Bercor.
Peter M. Behrendt has served as a director of the Company since 1989. Mr.
Behrendt is currently, and since 1988 has been, self-employed as a management
consultant and has served as a consultant to the Company. Mr. Behrendt has also,
at different times since 1988, served as a consultant to Radix Group
International, a customs broker and freight forwarder, Thomas America, an
importer and specialty electronics products dealer, and Innovative Equipment
Co., an importer of printing equipment.
Bernard L. Taran is a director nominee of the Company. Mr. Taran has been a
contractor to and part-time employee of the Company since January 1995. Mr.
Taran performs insurance reviews and risk management, valuations, evaluation of
executive incentives, and general business management. Prior to this Offering,
Mr. Taran performed such services for the Company as a part-time employee. These
services, if provided, will be performed by Mr. Taran as a consultant in the
future. From 1991 to 1995, Mr. Taran acted as an independent investment,
business, financial, and marketing consultant for several clients, including the
Company and Sunset Paper Products, Inc., a manufacturer of paper baking
products. From 1980 to 1991, Mr. Taran was employed by C.M. Meiers Company,
Inc., a property and casualty insurance agency, as a Vice President responsible
for marketing, sales, and servicing of commercial accounts.
James F. Koblensky is a director nominee of the Company. Since 1993, Mr.
Koblensky has been self-employed as a consultant, operating his consulting
business as N. K. Management Company. In addition to performing consulting
services for the Company, Mr. Koblensky has performed consulting services for
American Greetings Consumer Groups, among others. From 1992 to 1993, Mr.
Koblensky was employed by Thrifty Drug Stores as a Vice President and General
Merchandise Manager. From 1988 to 1992, Mr. Koblensky served Pay'N Save Drug
Stores as its Senior Vice President in charge of merchandising, marketing and
advertising.
Upon consummation of the Offering, the Board of Directors will consist of
five directors. Each director will hold office until the next annual meeting of
stockholders or until his successor is elected and qualified. Officers serve at
the discretion of the Board of Directors. Messrs. Taran and Koblensky have been
nominated by the Board and have agreed to serve as directors of the Company
effective upon the consummation of the Offering.
Effective upon consummation of the Offering, the Company has established an
Audit Committee, which shall consist of Messrs. Miller, Koblensky, and Taran,
and which will review the professional services provided by the Company's
independent auditors, the independence of such auditors from management of the
Company, the annual financial statements of the Company, and the Company's
system of internal accounting controls. The Audit Committee also will review
such other matters with respect to the accounting, auditing, and financial
reporting practices and procedures of the Company as it may find appropriate or
as may be brought to its attention.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Effective upon the consummation of the Offering, the Company has
established a Compensation Committee. The Compensation Committee shall consist
of Messrs. Berger, Taran, and Behrendt, and will
34
<PAGE> 36
review executive salaries and administer any bonus, incentive compensation, and
stock option plans of the Company, including the 1996 Plan. In addition, the
Compensation Committee will consult with management of the Company regarding
pension and other benefit plans, and compensation policies and practices of the
Company. During 1995, all compensation was determined by the Company's Board of
Directors because the Company had not yet established a Compensation Committee.
Richard Berger has historically provided his services pursuant to an
arrangement with Executive Marketing, Inc., an entity controlled by Mr. Berger.
In this regard, the cash compensation for Mr. Berger's services up to and
including the date of this Prospectus has been paid to Executive Marketing, Inc.
During 1995, Mr. Berger made a personal loan to the Company's distribution
agent in Canada, Carr-Tech Distributors. Carr-Tech had certain products for
which it was entitled to invoice the Company during 1995. Carr-Tech reduced the
amount of the invoice by $150,000 and the Company, in turn, is obligated to
discharge the obligation of Carr-Tech to Mr. Berger, repaying in full the
obligation of Carr-Tech and having no net effect on the Company.
Berger Holdings, an affiliated company of Mr. Berger, loaned $265,000 to
the Company on March 28, 1994. This loan was paid in full on January 3, 1995. On
January 11, 1995, Berger Holdings made a subsequent loan to the Company in the
amount of $245,000. Interest on the loan accrues at the same rate of interest
that the Company is charged by its principal lender, BTCC. Interest accrued
through December 31, 1995 on the loan totalled $18,192. The outstanding balance
on the loan as of December 31, 1995 was approximately $68,000 plus accrued
interest. The loan was repaid in full prior to the date of this Prospectus.
Richard Miller, a director of the Company, has provided legal services as
counsel to the Company from time to time. During 1995, Mr. Miller was
compensated for legal services in an amount totaling $12,750. The Company does
not anticipate that Mr. Miller's services to the Company will be substantial in
the future.
Peter Behrendt received a monthly fee of $1,000, for a total of $12,000,
during 1995 in exchange for consulting services. Subsequent to this Offering,
Mr. Behrendt will be paid for consulting services on an hourly basis.
James Koblensky, a nominee for Director and President of N. K. Management,
has provided management consulting services through N. K. Management Company.
During 1995, N. K. Management Company was paid a monthly fee of $1,000, for a
total of $12,000 for the year. Subsequent to this Offering, Mr. Koblensky will
be paid for consulting services on an hourly basis.
Bernard Taran, a nominee for Director, has provided certain services to the
Company from time to time as a part-time employee. After this Offering it is
anticipated that Mr. Taran may provide consulting services on an hourly basis.
During 1995, Mr. Taran was paid approximately $12,000 and was provided with
health insurance as a participant in the Company's group insurance plan. Mr.
Taran provides analyses of the Company's insurance needs and coverage.
DIRECTOR COMPENSATION
During 1995, directors other than Mr. Berger, were each paid a total of
$6,000 for all board meetings. Upon consummation of the Offering, non-employee
directors will receive $7,500 per year for all board and committee meetings
attended, together with reimbursements of actual expenses incurred in connection
with the attendance at such meetings of up to $1,000 per year. Directors who are
also officers or employees of the Company will not be compensated for their
services as directors. Each of the non-employee directors is an eligible
participant in the Non-Statutory Plan. Messrs. Berger and Miller also have
received options for a total of 382,928 shares at an exercise price of $1.82 per
share pursuant to separate option agreements that are not part of any plan. See
"Management -- Other Stock Options."
35
<PAGE> 37
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid by the Company to its Chief Executive Officer and to the other
three most highly compensated executive officers (collectively, the "Named
Executive Officers") who received salary and bonuses in excess of $100,000
during 1995 for all services rendered in all capacities to the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL 1995
ANNUAL COMPENSATION (1)
---------------------------------
SALARY BONUS OTHER
-------- -------- --------
<S> <C> <C> <C>
Richard Berger, President, Chief Executive Officer,
and Chairman of the Board (2)......................... $311,523 $318,000(3) $ 30,000(4)
Bonnie Metz, Vice President -- Managing Director, Hong
Kong.................................................. 109,500 -0- 68,600(5)
Anthony Mirando, Senior Vice President.................. 132,000 -0- 6,600(6)
Donna Richardson, Secretary, Treasurer, and Chief
Financial Officer..................................... 100,000 -0- -0-
</TABLE>
- ---------------
(1) Except where indicated, other than salary, bonus, and other compensation
described herein, the Company did not pay the Named Executive Officers any
compensation, including perquisites, in excess of 10% of such Named
Executive Officer's salary.
(2) Represents compensation paid by Executive Marketing, Inc., an affiliate of
Mr. Berger which contracted to provide Mr. Berger's services to the
Company.
(3) Pursuant to a prior agreement with an affiliate of Mr. Berger for the
provision of Mr. Berger's services, Mr. Berger was entitled to a bonus
equal to 25 percent of the Company's pre-tax profit. For 1995, this bonus
equaled $318,000. Such agreement will terminate on the effective date of
this Prospectus.
(4) Consists of the value of bookkeeping, tax and financial planning services as
well as a car allowance provided to Mr. Berger which had an estimated
aggregate value of $30,000.
(5) Consists of a personal housing allowance for Ms. Metz' residence in Hong
Kong of $62,000, and a car allowance of $6,600.
(6) Consists of a car allowance of $6,600.
EMPLOYMENT AGREEMENTS
Effective on the date of this Prospectus, Richard Berger has entered into
an employment agreement with the Company for a term of three years,
automatically and continuously renewed for three-year terms. Under the terms of
the employment agreement, Mr. Berger is entitled to salary of $375,000 per year
plus annual cost-of-living adjustments, and is entitled to a bonus of 10% of the
amount by which net after-tax income exceeds $2 million, up to a maximum of 50%
of his base salary. Additionally, Mr. Berger is entitled to receive various
other perquisites including a Company vehicle and reimbursement for expenses
incurred on behalf of the Company, and the payment of premiums on a 10 year,
$1,000,000 term life insurance policy. Additionally, Mr. Berger is entitled to
receive the key-man life insurance policy (a whole life policy) the Company
maintains on him, to receive the Company vehicle he is using at that time, and
is entitled to a two-year maximum stipend of $60,000 per year for an office and
secretary, if he is dismissed by the Company for any reason other than his
dismissal for cause. Except in the event of termination for cause, the
compensation payable to Mr. Berger under the agreement shall also be payable to
Mr. Berger for the remaining three year term of the Agreement.
Effective on the date of this Prospectus, Bonnie Metz, Anthony Mirando, and
Donna Richardson have entered into one year employment agreements with the
Company which are automatically renewable for one year terms if not terminated
prior to the expiration of the initial term or any renewal term. These
agreements provide for annual compensation of $126,600 for Ms. Metz, $156,600
for Mr. Mirando, and $115,000 for Ms. Richardson, with increases to be provided
at the discretion of the Compensation Committee or Board of Directors (in the
absence of a Compensation Committee). Ms. Metz also receives a housing
allowance, as
36
<PAGE> 38
long as she serves in the Hong Kong office, which allowance will be $78,000
(U.S.) for 1996. Each such person is entitled to payment of compensation through
the remaining term if such person is terminated for other than cause.
INCENTIVE STOCK OPTION PLAN
In February 1996, the Company adopted an Incentive Stock Option Plan, to
become effective on the effective date of this Prospectus (the "1996 Plan"),
which provides for the issuance of incentive stock options to acquire up to
200,000 shares of the Company's Common Stock. These options are available for
grant under the 1996 Plan to the officers, directors, and certain other
employees of the Company. The 1996 Plan is administered by the Compensation
Committee of the Board of Directors, none of whom is eligible to participate in
the Plan.
Pursuant to the 1996 Plan, the Compensation Committee or the Board of
Directors (in the absence of a Compensation Committee) may grant and issue
options to purchase Common Stock. The purchase price per share shall be set by
the Board of Directors and shall not be less than 100% of the fair market value
of the stock on the date of grant. However, if an option is granted to a person
then owning more than 10% of the voting power of all of the Company's Stock, the
exercise price must be at least equal to 110% of the fair market value of the
Common Stock on the date of grant, and the term of such option will expire no
later than five years after the date of grant. Each option granted pursuant to
the 1996 Plan shall be vested and exercisable one-year after the effective date
of the grant of such option.
Effective on the date of this Prospectus, options under the 1996 Plan have
been granted to three individuals at an exercise price equal to the initial
public offering price, as reflected by the following table:
<TABLE>
<CAPTION>
NAME/POSITION SHARES UNDERLYING
OF OPTIONEE OPTIONS
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Bonnie Metz, Vice President -- Managing Director, Hong Kong.................. 34,000
Anthony Mirando, Senior Vice President....................................... 34,000
Donna Richardson, Treasurer, Chief Financial Officer, and Secretary.......... 34,000
</TABLE>
NON-STATUTORY STOCK OPTION PLAN
The Company has also adopted a Non-Statutory Stock Option Plan (the
"Non-Statutory Plan") pursuant to which certain key executives and directors are
from time to time to be offered options to purchase shares. The Non-Statutory
Plan is also managed by the Compensation Committee or the Board of Directors (in
the absence of a Compensation Committee). Under the Non-Statutory Plan, there
are 325,000 shares reserved for issuance and the exercise price must be at least
equal to 85% of the fair market value of the Common Stock on the date of grant.
Grants of options under the Non-Statutory Plan, if any, to members of the
Compensation Committee will be approved by the disinterested members of the
Board of Directors.
Options granted under the Non-Statutory Plan are vested (and become
immediately exercisable when vested) pursuant to the following schedule: 1) upon
and after the first anniversary of the option, optionee shall have the right to
purchase up to 25% of the aggregate number of shares subject to the option; 2)
upon and after the second anniversary, up to 50% of the aggregate number of
shares subject to the option; and 3) upon and after the third anniversary, up to
100% of the aggregate number of shares subject to the option.
37
<PAGE> 39
Effective on the date of this Prospectus, options under the Non-Statutory
Plan have been granted to approximately 75 persons, at an exercise price equal
to 100% of the initial public offering price, as reflected by the following
table:
<TABLE>
<CAPTION>
NAME/POSITION SHARES UNDERLYING
OF OPTIONEE OPTIONS
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Richard Berger, President, Chief Executive Officer and Chairman of the
Board...................................................................... 75,000
Peter Behrendt, Director..................................................... 10,000
James Koblensky, Director Nominee............................................ 10,000
Richard Miller, Director..................................................... 10,000
Bernard Taran, Director Nominee.............................................. 10,000
Other Non-Executive Employees (70 persons)................................... 110,000
</TABLE>
Under either the 1996 Plan or the Non-Statutory Plan, options granted are
exercisable during the optionee's lifetime only by the recipient and are
non-transferable, except by will under the laws of descent and distribution.
Unexercised options terminate on the date an individual ceases to be an employee
of the Company, or, if exercise rights are vested, for a period of up to three
months following termination if it is voluntary or occurs due to retirement with
the consent of the Board of Directors. Should an optionee become disabled or die
during his or her employment, the option may be exercised by the personal
representative of the optionee for a period of up to 12 months from the date of
his disability or during the stated option period in the event of his death,
provided that the option is otherwise exercisable. The option will in any event
expire on its stated expiration date. Options that expire or become
unexercisable for any reason shall, unless the plan has been terminated, be
available for future grants. The 1996 Plan will terminate in 2006, unless
terminated earlier. The Board of Directors may terminate or amend either plan
without stockholder approval, except (i) amending the 1996 Plan if the amendment
would cause the 1996 Plan to fail to satisfy the Incentive Stock Option
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), and
(ii) as to either plan, if the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, require stockholder approval to amend. No
amendment may materially adversely affect a previously granted option without
the consent of the optionee.
Pursuant to the agreements under which options are issued, in the event
that an optionee voluntarily terminates employment with the Company and
thereafter competes, either directly or indirectly, with the Company, the Board
of Directors, in its sole discretion, has the right to cause the Company to
repurchase from the optionee shares of the Common Stock which the optionee has
acquired upon exercise of options. The repurchase price would be equal to the
price at which the options were exercised by the optionee. This repurchase right
extends for a period of five years from the date the options were exercised.
OTHER STOCK OPTIONS
Upon the effectiveness of this Prospectus, Messrs. Berger and Miller hold
options for 341,724 and 41,204 shares of Common Stock, respectively, under
separate agreements which are not part of the 1996 Plan or Non-Statutory Plan.
These options represent the adjusted options available to Messrs. Berger and
Miller resulting from the options held prior to the Recapitalization that were
granted in 1993. These options are exercisable at any time at a price of $1.82
per share. "Cashless" exercise is available pursuant to which shares may be
acquired by reducing the number of shares acquired by applying the excess value
(market value less exercise price) of the appropriate number of shares subject
to the options to satisfy the exercise price obligation.
38
<PAGE> 40
OPTION GRANTS AND EXERCISES
There were no options granted during 1995. The following table sets forth
certain information with respect to the unexercised options to purchase Common
Stock (including phantom stock shares and related appreciation rights) held by
the Named Executive Officers as of December 31, 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END($)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard I. Berger......................... 341,724 -0- $ 1,770,130(1) $-0-
Anthony Mirando........................... 100,000 -0- 142,000(2) -0-
Bonnie Metz............................... 37,500 -0- 53,250(2) -0-
Donna Richardson.......................... 32,500 -0- 46,150(2) -0-
</TABLE>
- ---------------
(1) Represents the value of the shares underlying stock options at the assumed
offering price of $7.00 per share, less the option exercise price of $1.82
per share.
(2) Fair market value of the shares of "phantom stock" representing appreciation
in value over the $.50 phantom share baseline price, which appreciation is
fixed and the phantom shares eliminated on the effective date of this
Prospectus. See "Certain Transactions."
401(K) BENEFIT PLAN
The Company maintains a deferred compensation plan for its employees under
the Code (the "401(k) Plan"), entitled the "Berel Industries, Inc. Savings and
Investment Plan." The 401(k) Plan was adopted by the Company on January 1, 1993.
The 401(k) Plan covers all of the employees of the Company, including officers,
and the purpose of the 401(k) Plan is to provide retirement, disability, death,
and certain other incidental benefits to participating employees and their
beneficiaries. Employees who have completed one year of service and reached age
21 are eligible to participate in the 401(k) Plan. Under the 401(k) Plan,
eligible employees may elect to defer up to 15 percent of their compensation and
have the Company contribute this deferred amount to the 401(k) Plan on their
behalf, subject to certain maximum dollar limitations. Employees are fully
vested in any salary reduction amounts which are contributed to the 401(k) Plan
on their behalf. The Company may make a matching contribution up to 10 percent
of the amount contributed by the employee up to a maximum of five percent of the
contributing employee's annual earnings. These discretionary contributions are
subject to the profitability of the Company and are subject to certain
limitations under the Code.
Each participant or any beneficiary may elect to invest his or her
voluntary contributions and the matching contributions in one or more investment
funds. Participants are fully vested at all times in a salary reduction
contribution as well as the Company contributions. During 1993, 1994, and 1995,
employee contributions totaled $85,216, $80,746, and $106,738. Matching
contributions by the Company during the same three-year period were $4,578,
$4,690, and $5,976. A participant or his beneficiary may receive his benefits in
the form of an annuity or in the form of a lump sum payment.
39
<PAGE> 41
CERTAIN TRANSACTIONS
Immediately prior to this Offering, the Company terminated its former
phantom stock plan. Bonnie Metz, Anthony Mirando, Donna Richardson, and Peter
Behrendt were participants in that plan. In accordance with such termination,
each such person received a promissory note in consideration for the
cancellation of their phantom shares. The termination of the phantom stock plan
resulted in promissory notes being issued as follows:
<TABLE>
<CAPTION>
NOTE AMOUNT
-----------
<S> <C>
Anthony Mirando............................... $ 142,000
Donna Richardson.............................. $ 46,150
Bonnie Metz................................... $ 53,250
Peter Behrendt................................ $ 71,000
</TABLE>
Each note is a general unsecured obligation of the Company, maturing in
five years and payable in equal quarterly installments commencing on July 1,
1996. The notes bear interest at the rate of eight percent per year.
This Prospectus contemplates an assumed initial public offering price of
$7.00 per share. On the effective date of this Prospectus, that price could
increase. The Recapitalization is being undertaken assuming a price of $7.00 per
share and the number of shares subject to existing stock options owned by Mr.
Berger and Mr. Miller reflect a computation on the basis of a price of $7.00 per
share. Additionally, the valuation computation for determining the amounts owing
in satisfaction of the Company's obligation for phantom stock under its phantom
stock plan applies a $7.00 per share price. To the extent the Offering price
increases, the market value of the Company, for purposes of these computations,
will increase which will (i) result in minor variations in the percentage
ownership allocable among the Selling Stockholders and the number of shares
subject to options held by Mr. Berger and Mr. Miller (although not the total of
2,500,000 fully diluted shares beneficially owned by the Selling Stockholders in
the aggregate upon the Recapitalization), and (ii) increase the amount of the
notes to be issued on the effective date of the Prospectus to the phantom plan
participants, although slightly (particularly, if the initial public offering
price of the Common Stock is $9.00, the total of these notes will be $453,200 as
opposed to $312,400 issued if the price is $7.00). See "Management -- Option
Grants and Exercises."
Mr. Alan Wishnow is being paid a fee of $50,000, upon consummation of this
offering, in consideration for services rendered. See "Underwriting."
The Company believes that the terms of all transactions between the Company
and its stockholders, or any of their affiliates described above, are no less
favorable to the Company than terms that could have been obtained from third
parties. After the consummation of this Offering, all transactions between the
Company and its officers, directors, principal stockholders, or their affiliates
will be subject to approval by the disinterested members of the Board of
Directors. See "Management."
40
<PAGE> 42
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of May 1, 1996 by (i)
each person known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each director of the Company, (iii) each Named Executive Officer,
and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(2) OFFERING(2)
----------------------- -------------------
NAME AND ADDRESS(1) NUMBER PERCENT (3) NUMBER PERCENT(3)
- ---------------------------------------------------- -------- ----------- -------- -------
<S> <C> <C> <C> <C>
Richard Berger (4)(5)............................... 1,187,542 48.30 1,187,542 34.21
Karl Johannsmeier (5)(6)............................ 718,147 33.92 718,147 22.95
William Rollnick (5)................................ 384,548 18.16 384,548 12.29
Richard Miller (5)(7)............................... 209,763 9.72 209,763 6.62
Bonnie Metz (8)..................................... -- -- -- --
Anthony Mirando (8)................................. -- -- -- --
Donna Richardson (8)................................ -- -- -- --
--------- ------ --------- ------
All Current Officers and Directors as a Group (six
persons).......................................... 2,500,000 100.00 2,500,000 71.17
========= ====== ========= ======
</TABLE>
- ---------------
(1) The address of each listed stockholder is c/o the Company, 13845 Artesia
Boulevard, Cerritos, California 90703.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes the right to
exercise voting or investment power with respect to securities. Shares of
Common Stock subject to options that are currently exercisable or
exercisable within 60 days of the date hereof, are deemed outstanding for
computing the percentage of the outstanding Common Stock beneficially owned
by the person holding such options, but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
(3) Applicable percentage of ownership is based on 2,117,072 shares of Common
Stock outstanding prior to the Offering and 3,129,572 shares of Common Stock
outstanding subsequent to the Offering.
(4) Consists of 455,183 shares owned by Berger Holdings, a company controlled by
Mr. Berger, 390,635 owned by EMI Employment Pension Plan, of which Mr.
Berger is trustee, and 341,724 shares of Common Stock which may be acquired
by Mr. Berger upon exercise of stock options which are presently exercisable
or will become exercisable within 60 days of the date hereof.
(5) Richard Berger, Karl Johannsmeier, William Rollnick and Richard Miller (the
"Selling Stockholders") have granted the Underwriters a 45-day option to
purchase up to 150,000 shares of Common Stock to cover over-allotments, if
any. If the option is exercised in full, Messrs. Berger, Johannsmeier,
Rollnick and Miller will beneficially own 1,116,291 (32.16%), 675,052
(21.57%), 361,478 (11.55%) and 197,179 (6.21%), respectively, of the shares
of Common Stock outstanding after completion of this Offering, and all
officers and directors as a group will own approximately 67% of the shares
of Common Stock outstanding after completion of this Offering.
(6) Consists of 518,147 shares owned by Karl H. Johannsmeier, 100,000 shares by
Trust of Klaus D. Johannsmeier, of which Karl H. Johannsmeier is the
trustee, and 100,000 shares by Trust of Hans J. Johannsmeier, of which Karl
H. Johannsmeier is the trustee.
(7) Consists of 64,377 shares owned by RAM Investment Group, a partnership
controlled by Mr. Miller, 104,182 shares owned by Richard Alan Miller
Employee Pension Plan, of which Mr. Miller is trustee, and 41,204 shares of
Common Stock which may be acquired by Mr. Miller upon exercise of stock
options which are presently exercisable or will become exercisable within 60
days of the date hereof.
(8) Each of Ms. Metz, Ms. Richardson, and Mr. Mirando is expected to be issued
options under the 1996 Plan or the Non-Statutory Plan. See "Management".
41
<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, par value $.01 per share. The Company previously had 250,000 shares of
issued and outstanding Series A Preferred Stock, all of which were converted
into Common Stock in connection with the Recapitalization. The following
statements are summaries of certain provisions applicable to the Company's
capital stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. In general and
subject to any voting rights applicable to any shares of Preferred Stock then
outstanding, the approval of proposals submitted to a vote of stockholders
requires a favorable vote of either the majority of the voting power of the
holders of Common Stock or the majority of the voting power of the shares
represented and voting at a duly held meeting at which a quorum is present. The
shares of Common Stock have no conversion rights or redemption provisions and
include no preemptive rights or other rights to subscribe for additional
securities. Subject to preferences that may be applicable to any shares of
Preferred Stock then outstanding, the holders of the shares of Common Stock will
be entitled to receive such dividends, if any, as may be declared by the Board
of Directors out of legally available funds and to share pro rata in any
distribution to the stockholders, including any distribution upon liquidation of
the Company. However, the current policy of the Board of Directors is to retain
earnings for the operation of the Company's business. See "Dividend Policy." All
outstanding shares of Common Stock are, and the shares to be issued in the
Offering will be, upon payment therefor, validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
The Board of Directors may, without further action of the stockholders of
the Company, issue shares of Preferred Stock in one or more series and fix the
rights and preferences thereof, including the dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption (including sinking fund
provisions), redemption price or prices, liquidation preferences, and the number
of shares constituting any series or the designations of such series. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of holders of any Preferred Stock that may be issued in the
future. Issuance of Preferred Stock provides desirable flexibility in connection
with possible acquisitions and other corporate purposes. An issuance could,
however, have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of the Company.
ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
The Company is a Delaware corporation. As such, the Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law ("Section 203"), which restricts transactions and business combinations
between a corporation and an "Interested Stockholder" for a period of three
years from the date the stockholder becomes an Interested Stockholder. An
"Interested Stockholder" is any stockholder owning 15% or more of the Company's
outstanding voting stock. Such a transaction may be effected if the transaction
is approved by the Board of Directors and the holders of at least 66 2/3% of the
outstanding voting stock (excluding shares held by the Interested Stockholder).
Specifically, Section 203 prohibits significant business transactions such as a
merger with, disposition of assets to, or receipt of disproportionate financial
benefits by the Interested Stockholder, or any other transaction that would
increase the Interested Stockholder's proportionate ownership of any class or
series of the corporation's stock. The statutory ban does not apply if, upon
consummation of the transaction in which any person becomes an Interested
Stockholder, the Interested Stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares held by persons who are both
directors and officers or by certain employee stock plans).
Notwithstanding the provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws, as a Company doing business primarily
in California and with more than 50% of the voting securities held of record by
persons with California addresses, certain of these provisions are not
applicable until the Company has outstanding securities qualified for trading on
Nasdaq National Market and has more than 800 stockholders. See "Description of
Capital Stock -- Other Attributes of the Stock of the Company."
42
<PAGE> 44
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a company will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for liability for (i)
any breach of their duty of loyalty to the Company or its stockholders, (ii)
acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law, or (iv) any transaction from which the director derived an
improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted by Delaware law. The Company's Bylaws also permit it to secure
insurance on behalf of any officer, director, employee, or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
The Company has entered into agreements to indemnify its officers and
directors. These agreements, among other things, indemnify the Company's
officers and directors for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as an officer or director of the Company,
any subsidiary of the Company, or any other company or enterprise to which such
person provides services at the request of the Company. The Company believes
that the provisions in its Certificate of Incorporation and its Bylaws and the
indemnification agreements are necessary to attract and retain qualified persons
as officers and directors.
OTHER ATTRIBUTES OF THE STOCK OF THE COMPANY
The Company is a corporation organized under the laws of Delaware and
generally the laws of the state of incorporation govern the corporate operations
of a corporation and the rights of its stockholders. Certain provisions of the
California Corporations Code become applicable to a corporation incorporated
outside of California if (i) the corporation transacts business in California
and the average of its California property, payroll, and sales factors (as
defined in the California Revenue and Taxation Code) with respect to the
corporation is more than 50% during its latest fiscal year, (ii) more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California, and (iii) the corporation is not otherwise
exempt. An exemption is provided, among other things, if the corporation has
outstanding securities qualified for trading as a Nasdaq National Market
Security and has at least 800 holders of its equity securities as of the record
date of its most recent annual meeting of stockholders.
Approximately 60% of the Common Stock will be owned of record upon
completion of this Offering by Messrs. Berger, Johannsmeier, and Miller and
other persons who have addresses in California, so that certain provisions of
California corporate law could apply to the Company, as described below, unless
and until the Company becomes a "listed corporation" (as defined below).
Except as discussed herein, provisions of California law which could be
applicable to the Company if the Company meets the tests and is not exempt
include, without limitation, those provisions relating to the number of
directors to be elected each year (all directors must be elected each year under
California law, while the Delaware law permits staggered election of directors),
the stockholders' right to cumulate votes in elections of directors (cumulative
voting is mandatory under California law), the stockholders' right to remove
directors without cause (which under California law is subject to the
stockholders' right to cumulative votes), and the right of stockholders to call
a special meeting (such right is mandatory under California law if the
requesting stockholder(s) own(s) at least 10% of the voting stock).
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
43
<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,129,572 shares of
Common Stock outstanding. The 1,012,500 shares sold in this offering (1,162,500
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradable without restriction under the Securities Act, except for any
such shares held at any time by an "affiliate" of the Company, as such term is
defined under Rule 144 adopted under the Securities Act. The remaining shares
were issued and sold by the Company in private transactions, are "restricted
securities" as defined in Rule 144, and may be publicly sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration. See "Underwriting."
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least two years, including an "affiliate," as
that term is defined in Rule 144, is entitled to sell, within any three-month
period, a number of "restricted" shares that does not exceed the greater of 1%
of the then outstanding shares of Common Stock or the average weekly trading
volume during the four calendar weeks preceding such sale. Sales under Rule 144
are subject to certain manner of sale limitations, notice requirements, and the
availability of current public information about the Company. Rule 144(k)
provides that a person who is not deemed an "affiliate" and who has beneficially
owned shares for at least three years is entitled to sell such shares at any
time under Rule 144 without regard to the limitations described above. Of the
approximately 2,117,072 shares outstanding immediately prior to the Offering,
affiliates will hold substantially all of them, and will be deemed to have owned
such shares for varying times since 1989. Any employee, officer, or director of
or consultant to the Company who purchased his or her shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act ("Rule 701"), which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation, or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after the commencement of this Offering.
The shares underlying the 1996 Plan and Non-Statutory Plan will be
restricted securities and will be sold only in compliance with Rule 144 if and
when any shares of Common Stock are acquired upon the exercise of any such
options. The Company may, in the future, register shares underlying its stock
option plans, in which case shares held by non-affiliates issued upon exercise
of options will be freely tradable.
The Company and all of the Company's stockholders (other than investors
purchasing shares in this Offering) have agreed with the Underwriters not to
sell or otherwise dispose of any shares of Common Stock for a period of 12
months from the date of this Prospectus without the prior written consent of the
Representative. See "Underwriting."
The Company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing stockholders could adversely affect prevailing market prices.
44
<PAGE> 46
UNDERWRITING
The Underwriters named below, represented by The Boston Group, L.P. (the
"Representative"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions and that the Underwriters are committed to purchase all of such
shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------------ ---------
<S> <C>
The Boston Group, L.P...................................................
---------
Total.............................................................. 1,012,500
========
</TABLE>
The Representative was organized in California and its principal business
function is to underwrite and sell securities. The Representative has been
recently formed and has underwritten only a limited number of public offerings.
After interviewing various underwriters, the Company has advised the
Representative that it chose the Representative based on various factors,
including, the Company's belief that the Representative has an understanding of
the Company and its business.
Mr. Alan Wishnow is being paid, upon consummation of this offering, a fee
of $50,000 out of the proceeds of this Offering, as compensation for services
rendered to the Company. Mr. Wishnow may be deemed to be a finder with respect
to this Offering. The Company and the Representative have been informed that Mr.
Wishnow is not affiliated with any member of the National Association of
Securities Dealers, Inc.
The Company has been advised by the Representative that the Underwriters
propose to offer shares to the public at the initial public offering price set
forth on the cover page of this Prospectus, and to certain securities dealers at
such price less a concession of not more than $ per share, and that the
Underwriters and such dealers may reallot to other dealers, including the
Underwriters, as a discount not in excess of $ per share. After the
initial public offering, the public offering price and concessions and discounts
may be changed by the Representative. No reduction in such terms shall change
the amount of proceeds to be received by the Company as set forth on the cover
page of this Prospectus.
The Company will bear the expenses of the Selling Stockholders in
connection with the registration of shares subject to the Underwriters'
over-allotment option, other than the underwriting discounts and commissions,
and non-accountable expense allowance with respect to the shares subject to the
over-allotment option.
The Selling Stockholders have granted the Underwriters an option,
exercisable within 45 days after the date of this Prospectus, to purchase up to
an aggregate of an additional 150,000 shares of Common Stock, all of which will
be sold by such Selling Stockholders to cover over-allotments, at the same price
per share of Common Stock being paid by the Underwriters for the other shares of
Common Stock offered hereby. Messrs. Berger, Johannsmeier, Rollnick, and Miller,
each of whom has dispositive power over the shares of Common Stock beneficially
owned (for securities law purposes) by him, have agreed to sell 71,251, 43,095,
23,070, and 12,584 shares, respectively, upon the exercise of the over-allotment
option in full. In the event that less than the entire over-allotment is
exercised, such share amounts will be reduced proportionately. None of the
proceeds of sales by Selling Shareholders will be received by the Company.
45
<PAGE> 47
The Representative has informed the Company that it does not expect any
sales of the shares of Common Stock offered hereby to be made by the
Underwriters to any accounts over which they exercise discretionary authority.
The Company's officers, directors and stockholders have agreed not to,
directly or indirectly, offer, offer to sell, sell, grant an option to purchase
or sell, or transfer any shares of Common Stock owned by them for a period of 12
months from the date of this Prospectus without the prior written consent of the
Representative (other than with respect to the over-allotment option).
The officers, directors and stockholders of the Company before this
Offering have granted to the Representative a right of first refusal to effect
any sales made under Rule 144 of the Securities Act by such persons during the
one-year period from the date of this Prospectus.
The Company (and the Selling Stockholders with respect to the proceeds from
the exercise of the over-allotment option) has agreed to pay the Representative
a non-accountable expense allowance of three percent of the gross proceeds from
the sale of all shares of Common Stock offered hereby. To date, the Company has
not paid any of the non-accountable expense allowance to the Representative. The
Representative's expenses in excess of the non-accountable expense allowance,
including its legal expenses, will be borne by the Representative. To the extent
that the expenses of the Representative are less than the non-accountable
expense allowance, the excess shall be deemed to be compensation to the
Representative.
The Company has also agreed to give notice to the Representative of
meetings of the Board of Directors for a period of two years and to provide
copies of all written consents of the Board of Directors to the Representative.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities under the Securities Act or will
contribute to payments the Underwriters may be required to make in respect
thereof. The Company has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
Prior to this Offering, there has not been an established public market for
the Common Stock. The initial public offering price has been determined by
negotiations between the Company and the Representative. Among the major factors
considered in determining the public offering price of the Common Stock were the
prevailing market conditions, the market prices relative to earnings, cash flow
and assets for publicly traded common stocks of comparable companies, the sales
and earnings of the Company and comparable companies in recent periods, the
Company's earning potential, the experience of its management, and the position
of the Company in the industry. The initial public offering price set forth on
the cover page of this Prospectus should not be considered an indication of the
actual value of the Common Stock. Such price is subject to change as a result of
market conditions and other factors and no assurance can be given that the
Common Stock can be resold at the initial public offering price.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Representative, the Company, and the Securities and Exchange Commission. See
"Additional Information."
The Company has agreed to sell to the Representative, for $50,
Representative's Warrants to purchase up to 100,000 shares of Common Stock at an
exercise price per share equal to 120% of the initial public offering price per
share. The Representative's Warrants are exercisable for a period of four years
beginning one year from the date of this Prospectus, and are not transferable
for a period of one year except to the officers or partners of the
Representative or any successor to the Representative or any other member of the
National Association of Securities Dealers, Inc. who participated in the
offering. The Representative's Warrants include a net exercise provision
permitting the holder(s) to pay the exercise price by cancellation of a number
of shares with a fair market value equal to the exercise price of the
Representative's Warrants.
46
<PAGE> 48
The Representative's Warrants provide certain rights with respect to the
registration under the Securities Act of up to 100,000 shares of Common Stock
issuable upon exercise thereof. The holders of the shares issuable upon exercise
of the Representative's Warrants may require the Company to file a registration
statement under the Securities Act with respect to such shares. In addition, if
the Company registers any of its Common Stock for its own account, the holders
of the shares issuable upon exercise of the Representative's Warrants are
entitled to include their shares of Common Stock in the registration.
LEGAL MATTERS
The legality of the Common Stock being offered hereby will be passed upon
for the Company by Keesal, Young & Logan, P.C., Long Beach, California. Certain
legal matters will be passed upon for the Underwriters by Jeffer, Mangels,
Butler and Marmaro LLP, Los Angeles, California.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement, including any
amendments thereto, on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes a part
of the Registration Statement, omits certain information contained in said
Registration Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Securities Act and the rules and regulations of the
Commission thereunder. For further information with respect to the Company and
the Common Stock, reference is made to the registration statement, including the
exhibits thereto. Statements contained in this Prospectus concerning the
contents of any contract or other document filed with the Commission as an
exhibit to the Registration Statement, or otherwise, are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The registration
statement, including exhibits and schedules thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; at the Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and at the New York Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and its
public reference facilities for New York, New York and Chicago, Illinois.
47
<PAGE> 49
CRAIG CONSUMER ELECTRONICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................... F-2
Balance Sheets as of December 31, 1994 and 1995........................................ F-3
Statements of Income for the years ended December 31, 1993, 1994 and 1995.............. F-4
Statements of Shareholders' Equity for the years ended
December 31, 1993, 1994 and 1995..................................................... F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995.......... F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Craig Consumer Electronics, Inc.:
We have audited the accompanying balance sheets of CRAIG CONSUMER
ELECTRONICS, INC. (a Delaware corporation) as of December 31, 1995 and 1994, and
the related statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Craig Consumer Electronics,
Inc. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
February 15, 1996
F-2
<PAGE> 51
CRAIG CONSUMER ELECTRONICS, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1995
---------------------------
1994 ACTUAL PRO-FORMA(1)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Current Assets:
Cash.............................................. $ 455,494 $ 220,756 $ 220,756
Accounts receivable, net.......................... 17,792,721 13,189,981 13,189,981
Inventory, net.................................... 18,663,358 14,557,239 14,557,239
Supplies and prepaid expenses..................... 660,391 220,981 220,981
Other current assets.............................. 1,886,183 2,063,014 2,063,014
----------- ----------- -----------
Total current assets...................... 39,458,147 30,251,971 30,251,971
----------- ----------- -----------
Property and Equipment, net......................... 717,740 555,716 555,716
----------- ----------- -----------
Other Assets........................................ 969,132 1,722,042 1,722,042
----------- ----------- -----------
$41,145,019 $32,529,729 $32,529,729
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable under revolving line of credit....... $20,914,038 $15,530,076 $15,530,076
Accounts payable.................................. 14,256,882 9,773,820 9,773,820
Accrued liabilities............................... 700,697 1,102,028 1,102,028
Income taxes payable.............................. 38,020 118,569 118,569
Current maturities of capital lease obligations... 20,868 22,768 22,768
----------- ----------- -----------
Total current liabilities................. 35,930,505 26,547,261 26,547,261
----------- ----------- -----------
Capital Lease Obligations........................... 89,493 66,220 66,220
----------- ----------- -----------
Subordinated Debt................................... 544,461 981,961 981,961
----------- ----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock................................... 2,500,000 2,500,000 --
Common stock; $.01 par value --
Authorized -- 15,000,000 shares
Issued and outstanding -- 6,405,995 shares at
December 31, 1995 and 1994, respectively;
proforma par value $.01 per share and 2,117,072
shares issued and outstanding.................. 64,060 64,060 21,171
Additional paid-in capital........................ 815,300 815,300 3,358,189
Retained earnings................................. 1,201,200 1,554,927 1,554,927
----------- ----------- -----------
4,580,560 4,934,287 4,934,287
----------- ----------- -----------
$41,145,019 $32,529,729 $32,529,729
=========== =========== ===========
</TABLE>
- ---------------
(1) Not covered by report of independent public accountants.
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 52
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net sales............................................. $101,214,755 $105,638,910 $88,675,516
Cost of sales......................................... 89,359,140 91,333,942 74,323,771
--------- --------- ---------
Gross profit................................ 11,855,615 14,304,968 14,351,745
--------- --------- ---------
Operating expenses:
Selling............................................. 4,809,178 5,164,872 4,663,642
General and administrative.......................... 4,611,278 6,681,030 6,336,398
Product development................................. 104,206 163,562 200,199
--------- --------- ---------
Operating expenses.......................... 9,524,662 12,009,464 11,200,239
--------- --------- ---------
Income from operations...................... 2,330,953 2,295,504 3,151,506
--------- --------- ---------
Other income (expense):
Interest expense.................................... (1,236,724) (1,701,118) (2,193,414)
Other............................................... 15,226 9,104 (5,955)
--------- --------- ---------
Other expense, net.......................... (1,221,498) (1,692,014) (2,199,369)
--------- --------- ---------
Income before provision for income taxes.... 1,109,455 603,490 952,137
Provision for income taxes............................ 36,601 70,960 160,910
--------- --------- ---------
Net income.................................. $ 1,072,854 $ 532,530 $ 791,227
========= ========= =========
Pro-forma net income per share (not covered by report
of independent public accountants).................. $ 0.33
=========
Weighted average shares outstanding................... 2,399,345
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 53
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
SERIES A CUMULATIVE
PREFERRED STOCK COMMON STOCK
-------------------- -------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------- ---------- --------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992....... 250,000 $2,500,000 6,362,082 $63,620 $ 793,783 $ 470,816
Issuance of common stock....... -- -- 43,913 440 21,517 --
Declaration of dividends on
preferred stock............. -- -- -- -- -- (437,500)
Net income..................... -- -- -- -- -- 1,072,854
------- ---------- --------- ------- -------- ----------
Balance, December 31, 1993....... 250,000 2,500,000 6,405,995 64,060 815,300 1,106,170
Declaration of dividends on
preferred stock............. -- -- -- -- -- (437,500)
Net income..................... -- -- -- -- -- 532,530
------- ---------- --------- ------- -------- ----------
Balance, December 31, 1994....... 250,000 2,500,000 6,405,995 64,060 815,300 1,201,200
------- ---------- --------- ------- -------- ----------
Declaration of dividends on
preferred stock............. -- -- -- -- -- (437,500)
Net income..................... -- -- -- -- -- 791,227
------- ---------- --------- ------- -------- ----------
Balance, December 31, 1995....... 250,000 $2,500,000 6,405,995 $64,060 $ 815,300 $1,554,927
======= ========== ========= ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 54
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 1,072,854 $ 532,530 $ 791,227
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization...................... 102,080 214,533 283,331
(Increase) decrease in accounts receivable, net.... (3,807,180) (356,517) 4,602,740
(Increase) decrease in inventory, net.............. (6,359,587) (5,539,231) 4,106,119
(Increase) decrease in supplies and prepaid
expenses and other current assets................ (376,284) (744,190) 262,579
(Increase) decrease in other assets................ 25,000 (969,132) (752,910)
Increase (decrease) in accounts payable and accrued
liabilities...................................... 5,043,529 787,401 (4,081,731)
Increase (decrease) in income taxes payable........ (117,758) 420 80,549
Decrease in note payable to related party.......... (125,165) -- --
----------- ----------- -----------
Total adjustments to net income.................. (5,615,365) (6,606,716) 4,500,677
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................... (4,542,511) (6,074,186) 5,291,904
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................... (234,687) (636,809) (149,951)
Proceeds from sale of property and equipment.......... -- -- 22,689
Loss on disposal of property and equipment............ -- -- 5,955
----------- ----------- -----------
Net cash used in investing activities............ (234,687) (636,809) (121,307)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable under
revolving line of credit........................... 6,160,922 6,436,163 (5,383,962)
Preferred stock dividends paid........................ (582,427) (437,500) --
Proceeds received from stock issuance................. 21,957 -- --
Increase (decrease) in capital lease obligation....... -- 110,361 (21,373)
----------- ----------- -----------
Net cash provided by (used in) by financing
activities.................................... 5,600,452 6,109,024 (5,405,335)
----------- ----------- -----------
Net increase (decrease) in cash......................... 823,254 (601,971) (234,738)
Cash, beginning of year................................. 234,211 1,057,465 455,494
----------- ----------- -----------
Cash, end of year....................................... $ 1,057,465 $ 455,494 $ 220,756
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for --
Interest........................................... $ 1,241,091 $ 1,537,849 $ 2,193,414
=========== =========== ===========
Income taxes....................................... $ 154,359 $ 70,540 $ 71,660
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 55
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Background and Organization
Craig Consumer Electronics, Inc. (the Company), a Delaware corporation
since September 1, 1989, is a designer and marketer of consumer electronic
products under its trademark, "Craig." The Company's principal product lines are
audio electronic and peripheral products sold to wholesale and retail
distributors worldwide. The domestic market is the primary source of sales.
b. Current Vulnerability Due to Certain Concentrations
The Company currently acquires the majority of its products from three
manufacturers located in the People's Republic of China. The Company limits the
number of suppliers producing its goods in order to maintain the quality and
exclusivity of its products. A change in suppliers, however, could disrupt and
adversely affect the business due to the time it would take to contract with a
new vendor. In order to mitigate this risk, the Company has a full-time
operations manager located in Hong Kong to facilitate relationships with
prospective vendors.
Sales to five domestic customers represented 44, 47, and 59 percent of net
sales for the years ended December 31, 1993, 1994, and 1995, respectively. Of
that amount, sales to one customer represented 25 percent, 24 percent, and 35
percent of net sales for the years ending December 31, 1993, 1994, and 1995,
respectively. The loss of any one of the top five customers could have an
adverse affect on the Company's business.
c. Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
d. Accounts Receivable
Accounts receivable at December 31, 1994 and 1995, consist of the
following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Accounts receivable....................................... $18,736,077 $14,260,307
Less -- Allowance for doubtful accounts................... 203,760 387,147
Less -- Allowance for sales returns....................... 739,596 683,179
----------- -----------
$17,792,721 $13,189,981
=========== ===========
</TABLE>
The allowances for doubtful accounts and sales returns include management's
estimate of the amount expected to be lost on specific accounts and for losses
on other as yet unidentified accounts included in accounts receivable at
December 31, 1995. In estimating the potential losses and returns on specific
accounts, management relies on a combination of in-house prepared analysis and
review of available public documents. In estimating the allowance component for
unidentified losses and returns within the portfolio, management relies on
historical experience. The amounts the Company will ultimately realize could
differ materially in the near term from the amounts assumed in arriving at the
allowance for doubtful accounts and sales returns reported in the financial
statements at December 31, 1995.
F-7
<PAGE> 56
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
e. Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using an average cost method, which approximates first-in, first-out.
Inventory consists of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Inventory................................................. $18,801,892 $14,899,697
Less -- Allowance for obsolescence........................ 138,534 342,458
---------- ----------
$18,663,358 $14,557,239
========== ==========
</TABLE>
The allowance for obsolescence is based on management's estimate of the
amount considered obsolete based upon specific reviews of inventory items. In
estimating the allowance, management relies on its knowledge of the industry
(including technological and design changes) as well as its current inventory
levels. The amounts the Company will ultimately realize could differ materially
in the near term from amounts assumed in arriving at the allowance for
obsolescence reported in the financial statements at December 31, 1995.
f. Property and Equipment
Property and Equipment is recorded at depreciated cost and consists of the
following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Machinery and Equipment..................................... $ 741,852 $ 886,188
Furniture and Fixtures...................................... 493,352 498,965
Leasehold Improvements...................................... 50,847 50,847
Automobile.................................................. 42,160 3,100
Capital Leases.............................................. 118,717 118,717
--------- ---------
1,446,928 1,557,817
Less -- Accumulated depreciation and amortization........... 729,188 1,002,101
--------- ---------
$ 717,740 $ 555,716
========= =========
</TABLE>
Maintenance, repairs and minor renewals are charged to expense as incurred.
Additions, major renewals and betterments are capitalized. When assets are
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and any resulting gain or loss is included in operations.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and Equipment............................................... 3-5 years
Furniture and Fixtures................................................ 3-7 years
Leasehold Improvements................................................ Term of lease
Automobile............................................................ 5 years
</TABLE>
g. Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
F-8
<PAGE> 57
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Tax credits are treated as reductions of the federal income tax provision
in the periods in which the credits are realized.
h. Revenue Recognition
Sales and related costs are recorded by the Company upon shipment of
products. The Company records an allowance for estimated returns of products,
using a historical percentage of sales.
i. Long-lived Assets
The Company does not own significant assets which are considered long lived
assets. Accordingly, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of" is expected to have any or a material impact on the Company's
financial statements.
j. Stock-based Compensation
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." Under SFAS No. 123, companies have the option to implement a fair
value-based accounting method or continue to account for employee stock options
and stock purchase plans as prescribed by Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees." SFAS No. 123 is effective for
financial statements for fiscal years beginning after December 31, 1995. The
Company has not made a determination as to whether it will adopt the new fair
value accounting rules. The Company has not assessed the impact on net income
and earnings per share of adopting the new fair value accounting rules.
k. Post-employment and Post-retirement Benefits
The Company does not provide post-employment or post-retirement benefits to
employees. Accordingly, Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Post-Employment Benefits" and Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Post-Retirement
Benefits" have no impact on the Company's financial statements.
2. NOTE PAYABLE UNDER REVOLVING LINE OF CREDIT
On June 1, 1995, the Company amended its existing credit agreement (the
Agreement) with a syndicate consisting of four major financial institutions, one
of which acts as Agent or lead bank. Under the amended credit facility, the
Company can borrow up to a total of $40,000,000 (borrowing capacity was
$50,000,000 in 1994), subject to certain limitations. Borrowings are limited to
the lesser of $40,000,000, or 85 percent of eligible accounts receivable, as
defined, and the lesser of $20,000,000 or the amount of eligible inventory, less
the aggregate amount of reserves, if any, established by the Agent, as defined
in the Agreement. In addition, any amounts outstanding on open letters of credit
reduce the available funds under the Agreement. The Company has borrowing
options available under the line of credit, a variable interest rate or prime
rate option, and a fixed rate or Eurodollar rate option. Borrowings under the
prime rate option bear interest at the Agent's prime rate (eight and one half
percent at December 31, 1995) plus one and one quarter percent. Borrowings under
the Eurodollar rate option bear interest at a fixed Eurodollar interest rate
(five and five-sixths percent at December 31, 1995) plus two and three quarters
percent. By giving adequate notice to the Agent, the Company is permitted to
make up to two conversions to the Eurodollar loan advances, each of which is
limited to a minimum of $5,000,000 aggregate balance with integral multiples of
$1,000,000 in excess thereof. The line of credit expires on August 4, 1997, but
may be extended for two (2) additional one-year periods and contains certain
restrictive covenants.
F-9
<PAGE> 58
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the Company was out of compliance on certain of
its debt covenants. A waiver has been obtained related to these areas of
non-compliance.
The Company purchases certain inventory from overseas vendors on a letter
of credit basis. At December 31, 1994 and 1995, there were $986,500 and
$302,400, respectively, in open letters of credit.
3. SUBORDINATED DEBT
The subordinated debt represents unpaid dividends and bonuses to the
Company's preferred shareholders and an officer. The debt bears interest at ten
percent per year. It is the Company's intention to pay these amounts over the
next three to five years. However, no payments will be made in the event such
payments would result in the violation of a covenant on the Company's note
payable to financial institution (see Note 2).
4. COMMITMENTS AND CONTINGENCIES
a. Operating Leases and Capital Lease Obligations
The Company is committed under noncancelable operating and capital lease
obligations for its facilities and equipment. The equipment related to the
capital leases has an original cost of approximately $119,000 and accumulated
depreciation of approximately $59,500 at December 31, 1995. Rent expense was
$265,368, $334,692, and $332,157 at December 31, 1993, 1994, and 1995,
respectively. Minimum annual payments under noncancelable operating and capital
leases are as follows as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING: CAPITAL OPERATING
-------------------------------------------------------- ------- ---------
<S> <C> <C>
1996............................................... $29,656 $ 101,205
1997............................................... 29,656 19,434
1998............................................... 28,589 16,195
1999............................................... 15,805 --
------- ---------
103,706 $ 136,834
========
Less -- Amount representing interest.................... 14,718
-------
88,988
Less -- Current portion................................. 22,768
-------
$66,220
=======
</TABLE>
b. Warranty
The Company offers warranties on its products which range from three to
twelve months. The Company has not experienced significant warranty charges and
has established an allowance for these costs based on its historical experience.
5. INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the asset-and-liability method of accounting for income taxes.
The Company has recorded a provision for Alternative Minimum Tax and state
income taxes of $36,601, $70,960, and $160,910 for the years ending December 31,
1993, 1994, and 1995, respectively. The Company has not recorded a federal
income tax provision for 1993, 1994, and 1995, as the Company believes that
sufficient net operating loss carryforwards exist to offset any income in those
years. The Company has determined that at December 31, 1995, it had net
operating loss carryforwards of approximately $5,101,000,
F-10
<PAGE> 59
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for financial reporting and federal income tax purposes. These net operating
loss carryforwards expire at various dates through the year 2005.
The components of the Company's deferred tax asset at December 31, 1994 and
1995 were:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Inventory reserves........................................ $ 415,635 $ 420,582
Allowance for returns and doubtful accounts............... 408,473 463,451
NOL carryforwards......................................... 2,082,979 1,693,717
Depreciation.............................................. 98,070 140,562
Miscellaneous............................................. 20,075 69,697
Other..................................................... 124,768 161,991
--------- ---------
3,150,000 2,950,000
Less -- Valuation allowance............................... (3,150,000) (2,950,000)
--------- ---------
Net deferred tax asset.......................... $ -- $ --
========= =========
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current provision:
Federal............................................ $27,778 $41,222 $ 14,833
State.............................................. 8,823 29,738 146,077
------- ------- --------
Total current provision.................... $36,601 $70,960 $160,910
======= ======= ========
</TABLE>
The components of changes to the Company's deferred income tax provision,
which arise from tax credits and timing differences between financial and tax
reporting, are presented below:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Inventory Reserves.............................. $ 179,270 $ 34,117 $ 4,947
Allowance for returns and doubtful accounts..... (74,961) 101,851 54,978
NOL carryforward................................ (577,670) (329,232) (389,262)
Depreciation.................................... 7,911 29,368 42,492
Miscellaneous................................... (18,037) (4,750) 49,622
Other........................................... (166,513) (31,354) 37,223
Valuation allowance............................. 650,000 200,000 200,000
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
Variations from the federal statutory rate are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax rate......................... 34% 34% 34%
Computed taxes @ statutory...................... $ 377,215 $ 205,187 $ 323,727
State income tax, net of federal deductions..... 67,677 36,813 58,080
Utilization of NOL.............................. (577,670) (329,232) (389,262)
Other........................................... 169,379 158,192 168,365
-------- -------- --------
Income tax provision.................. $ 36,601 $ 70,960 $ 160,910
======== ======== ========
3.3% 11.8% 16.9%
======== ======== ========
</TABLE>
F-11
<PAGE> 60
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SERIES A CUMULATIVE PREFERRED STOCK
The Company has outstanding 250,000 shares of Series A Preferred Stock (the
Preferred Stock). Holders of the Preferred Stock are entitled to receive
cumulative dividends at a rate of 17.5 percent of the original issuance price.
Any dividends not paid when due shall continue to accumulate and accrue interest
at a rate equal to the interest rate of the Company's line of credit. In 1994
and 1995, the Company declared but did not pay dividends.
Dividends may be paid in cash or, at the Company's option, in Common Stock
or Series A Cumulative Preferred Stock. Additionally, the provisions of the
Preferred Stock agreement prohibit the declaration or payment of any dividends
on the Company's Common Stock as long as there are any Preferred Stock dividends
in arrears.
In the event of a voluntary or involuntary liquidation of the Company, the
Preferred Stock has a liquidating preference of $10 per share plus accrued
unpaid dividends.
The Company is in the process of an initial public offering of Common
Stock. In the event of the successful completion of the Offering, all of the
outstanding Series A Preferred Stock and existing Common Stock will be converted
into a total 2,500,000 shares of Common Stock (see Note 10).
7. STOCK OPTIONS
In May 1993, the Company's board of directors approved the issuance of
1,394,000 stock options at an exercise price of $.50 (which was determined to
approximate the fair value of the shares at that time) which expire in April
2003. In December 1994, the Company's board of directors approved the issuance
of 220,000 "shares" of phantom stock to certain key employees. The basis for
determining appreciation in phantom stock (subject to several contingencies to
the realization of that appreciation) was fixed at $.50 per phantom share. The
phantom stock results in additional compensation to the key employees in the
event the Company's book value per share exceeds the phantom stock price. There
were no amounts due under this plan in 1994 and 1995.
The Company is in the process of an initial public offering of its Common
Stock. In the event of the successful completion of the Offering, the phantom
stock option plan will be terminated (see Note 10).
8. DEFINED CONTRIBUTION PLAN
Effective January 1, 1993, the Company established a defined contribution
plan (the Plan) under Section 401(k) of the Internal Revenue Code in which all
eligible employees can elect to participate. The employees can elect to have
certain percentages of their pay withheld for contribution to the Plan on a
tax-free basis. The Company will match the first 10 percent of employee
contributions.
9. RECONDITIONING FACILITY
In January 1996, the Company and a Chinese entity opened a facility in the
People's Republic of China which will be used to recondition the Company's
returned products. The Company will pay a fixed fee for each item reconditioned,
which may be reduced subject to the number of items processed in any given year.
There is no contractually agreed upon minimum number of units which the Company
must supply to be reconditioned.
10. CONVERSION OF PREFERRED AND COMMON STOCK (UNAUDITED)
In connection with the initial public offering, the holders of Series A
Preferred Stock have executed agreements under which their shares will
automatically be converted into 1,300,052 shares of Common Stock. In addition, a
3.64-to-one reverse stock split of the Common Stock will be completed upon the
effectiveness
F-12
<PAGE> 61
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Offering. The Company will have $.01 par value Common Stock and will
account for paid in capital in excess of par. The Offering, if successful, is
expected to become effective sometime in April 1996.
The pro-forma balance sheet reflects the conversion of Series A Preferred
Stock and Common Stock. The pro-forma earnings per common share equal net
income, divided by the weighted average number of common shares outstanding,
after giving effect to dilutive stock options.
In addition, in the event of the successful completion of the Offering, the
phantom stock option plan will be terminated, and each participant in the plan
will receive a promissory note in consideration for the cancellation of their
shares. The total of all promissory notes issued will be $312,400, which
represents the book value of the Company assuming a value of $7.00 per share
less the phantom stock strike price of $.50. In addition, in the event the
offering is successful, the Company plans to adopt an Incentive Stock Option
Plan and a Non-Statutory Stock Option Plan which will provide for the issuance
of options to individuals designated by the Compensation Committee of the Board
of Directors.
F-13
<PAGE> 62
=================================================================
NO DEALER, SALES REPRESENTATIVE, OR
OTHER INDIVIDUAL HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES
BY ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
- ---------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
The Company................................. 13
Use of Proceeds............................. 13
Dividend Policy............................. 14
Capitalization.............................. 15
Dilution.................................... 16
Selected Financial Data..................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 18
Business.................................... 24
Management.................................. 33
Certain Transactions........................ 40
Principal and Selling Stockholders.......... 41
Description of Capital Stock................ 42
Shares Eligible for Future Sale............. 44
Underwriting................................ 45
Legal Matters............................... 47
Experts..................................... 47
Additional Information...................... 47
Index to Financial Statements............... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS
AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
====================================================================
====================================================================
1,012,500 SHARES
CRAIG [LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
THE BOSTON GROUP, L.P.
, 1996
=====================================================================
<PAGE> 63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sales of Common Stock described in the Registration Statement.
<TABLE>
<S> <C>
SEC registration fee................................................... $ 3,316.96
NASD filing fee........................................................ 1,461.88
Nasdaq National Market application and registration fees............... 20,647.00
Representative's non-accountable expense allowance*.................... 210,000.00
Legal fees and expenses*............................................... 180,000.00
Accounting fees and expenses*.......................................... 50,000.00
Printing and engraving expenses*....................................... 70,000.00
Blue Sky fees and expenses*............................................ 15,000.00
Transfer Agent's fees*................................................. 10,000.00
Miscellaneous (including fee to Alan Wishnow)*......................... 124,574.16
-----------
TOTAL................................................................ $685,000.00
==========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Seven of the Company's Certificate of Incorporation limits, to the
fullest extent permitted by Delaware law, directors' personal liability to the
Company or its stockholders for monetary damages or breach of fiduciary duty.
Section 102 of the Delaware General Corporation Law, as amended, enables a
corporation to eliminate or limit personal liability of members of its board of
directors for violations of their fiduciary duty of care. However, Delaware law
does not permit the elimination of a director's liability for breaching his duty
of loyalty, failing to act in good faith, engaging in intentional misconduct,
knowingly violating a law, unlawfully paying a dividend or approving a stock
repurchase, or obtaining an improper personal benefit. The limitation of
liability provided by the statute continues after a director has ceased to
occupy such a position. The statute has no effect on the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty. See Exhibits 3A and 3B to this Registration Statement.
Article Eight of the Company's Certificate of Incorporation and Article
Eight of the Company's Bylaws require indemnification of Directors and Officers
of the Company to the full extent permitted by Delaware law for claims against
them in their official capacities, including stockholders' derivative actions.
These provisions require that the Company advance expenses incurred in the
defense of such claims and continue the right of indemnification for persons who
have ceased to be directors or officers and permits the Company to enter into
indemnification agreements with its directors and officers. See Exhibits 3A and
3B to this Registration Statement.
Section 145 of the Delaware General Corporation Law, as amended, applies to
the Company and provides for the indemnification of officers and directors in
specified instances. It permits a corporation, pursuant to a bylaw provision or
an indemnity contract, to pay an officer's or director's litigation expenses in
advance of a proceeding's final disposition, and provides that rights arising
under an indemnity agreement or bylaw provision may continue as to a person who
has ceased to be a director or officer.
II-1
<PAGE> 64
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Recapitalization, the Company has recently
undertaken to cancel certain stock options and terminate its phantom stock plan
in consideration for other options and promissory notes payable by the Company.
As an incident to the implementation of the Company's 1996 Plan and
Non-Statutory Plan discussed in this Prospectus, the Company will grant options
for an aggregate of approximately 327,000 shares to various individuals. Neither
the options nor the shares underlying these option plans have been registered
under the Securities Act of 1933. The grant of options, if and when made, will
be in reliance on the exemption made available by Rule 701 adopted under the
Securities Act of 1933, implementing Section 3(b) of such Act. Additionally, as
an incident to this Offering and predicate to the Offering, outstanding shares
of Preferred Stock and Common Stock held by the four stockholders of the Company
were exchanged for shares of Common Stock of the Company in reliance on the
exemption set forth in Sections 3(a)(9) and 4(2) of the Securities Act of 1933.
Other than as described above, there have been no sales of the capital
stock by the Registrant within the past three years.
II-2
<PAGE> 65
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS:
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
- ------- -------------------------------------------------------------------------- ---------
<S> <C> <C>
1-A Form of Underwriting Agreement *
3-A Restated Certificate of Incorporation of Berel Industries, Inc. **
3-B Bylaws of Berel Industries, Inc. **
3-C Amendment of Articles of Incorporation of Craig Consumer Electronics, Inc. **
4-A Specimen of Common Stock Certificate **
4-B Form of Representative's Warrant Agreement **
5 Opinion and Consent of Keesal, Young & Logan Page
10-A Loan Agreement with BTCC **
10-B Cerritos Lease **
10-C Hong Kong Lease **
10-D Chinese Joint Venture Agreement **
10-E Revised Form of Proposed Employment Agreement -- Richard Berger **
10-F Form of Proposed Indemnity Agreement for Directors **
10-G Revised Form of Proposed Subordinated Note **
10-H Revised Incentive Stock Option Plan **
10-I Revised Non-Qualified Stock Option Plan **
10-J Revised Berger Option Agreement **
10-K Revised Miller Option Agreement **
10-L Employment Agreement of Donna Richardson **
10-M Employment Agreement of Bonnie Metz **
10-N Employment Agreement of Anthony Mirando **
23-A Consent of Arthur Andersen LLP Page
23-B Consent of Keesal, Young & Logan, P.C. (See Exhibit 5) Page
24 Powers of Attorney **
99-A Consent of Bernard Taran **
99-B Consent of James Koblensky **
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
B. FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
- ------- ------------------------------------------------------------------------- ---------
<S> <C> <C>
Schedule for years ended December 31, 1993, 1994, and 1995.
V. Valuation and qualifying accounts **
</TABLE>
- ---------------
** Previously filed
II-3
<PAGE> 66
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
offered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
The undersigned registrant hereby undertakes that:
(i) For purposes of determining liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
a registration statement filed pursuant to Rule 430A and contained in the
form of a prospectus filed by the registrant pursuant to the Rule 424(b)(1)
or (4) or Rule 497(h) under the Securities Act shall be deemed to be part
of the registration statement as of the time it was declared effective.
(ii) For the purpose of determining liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement No. 333-1868 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cerritos, State of California, on May 7, 1996.
CRAIG CONSUMER ELECTRONICS, INC.
BY: /s/ RICHARD I. BERGER
----------------------------------
Richard I. Berger
President
DATED: May 7, 1996
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Amendment No. 1 to Registration Statement No. 333-1868 has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------------------------- ----------------------------------------- --------------
<C> <S> <C>
/s/ RICHARD I. BERGER Chairman of the Board and President, May 7, 1996
- ------------------------------------- (Principal Executive Officer), Director
Richard I. Berger
/s/ DONNA RICHARDSON Treasurer and Chief Financial Officer, May 7, 1996
- ------------------------------------- (Principal Financial and Accounting
Donna Richardson Officer), Secretary
* Director May 7, 1996
- -------------------------------------
Peter Behrendt
* Director May 7, 1996
- -------------------------------------
Richard Miller
</TABLE>
- ---------------
* Executed pursuant to power of attorney by Richard I. Berger.
II-5
<PAGE> 68
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT METHOD
NUMBER DESCRIPTION OF FILING
-------------
<S> <C> <C>
1-A Form of Underwriting Agreement....................................... *
3-A Restated Certificate of Incorporation of Berel Industries, Inc....... **
3-B Bylaws of Berel Industries, Inc...................................... **
3-C Amendment of Articles of Incorporation of Craig Consumer Electronics,
Inc.................................................................. **
4-A Specimen of Common Stock Certificate................................. **
4-B Form of Representative's Warrant Agreement........................... **
5 Opinion and Consent of Keesal, Young & Logan......................... Page
10-A Loan Agreement with BTCC............................................. **
10-B Cerritos Lease....................................................... **
10-C Hong Kong Lease...................................................... **
10-D Chinese Joint Venture Agreement...................................... **
10-E Revised Form of Proposed Employment Agreement -- Richard Berger...... **
10-F Form of Proposed Indemnity Agreement for Directors................... **
10-G Revised Form of Proposed Subordinated Note........................... **
10-H Revised Incentive Stock Option Plan.................................. **
10-I Revised Non-Qualified Stock Option Plan.............................. **
10-J Revised Berger Option Agreement...................................... **
10-K Revised Miller Option Agreement...................................... **
10-L Employment Agreement of Donna Richardson............................. **
10-M Employment Agreement of Bonnie Metz.................................. **
10-N Employment Agreement of Anthony Mirando.............................. **
23-A Consent of Arthur Andersen LLP....................................... Page
23-B Consent of Keesal, Young & Logan, P.C. (See Exhibit 5)............... Page
24 Powers of Attorney................................................... **
99-A Consent of Bernard Taran............................................. **
99-B Consent of James Koblensky........................................... **
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
<PAGE> 1
EXHIBIT 5
[KEESAL, YOUNG & LOGAN LETTERHEAD]
May 7, 1996
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: Craig Consumer Electronics, Inc.
Our File No.: 3764-19
------------------------------------------------------------------------
Ladies and Gentlemen:
This firm is counsel for Craig Consumer Electronics, Inc., a Delaware
corporation (the "Company"). As such, we are familiar with the Certificate of
Incorporation and bylaws of the Company, as well as the resolutions adopted by
its Board of Directors authorizing the issuance and sale of the 1,012,500 shares
of the Company's $.01 per value common stock (the "Shares") which are the
subject of Form S-1 Registration Statement number 333-1868 under the Securities
Act of 1933 (as amended, the "Registration Statement"). We have also acted as
counsel for the Company with respect to certain matters in connection with the
sale of the shares and in preparation of the required filings with the
Securities and Exchange Commission and the various state regulatory agencies
involved. In addition, we have examined such documents and undertaken such
further inquiries we consider necessary for rendering the opinions set forth
below.
<PAGE> 2
Securities and Exchange Commission
May 7, 1996
Page 2
Re: Craig Consumer Electronics, Inc. --
Public Offering
Our File No.: 3764-19
------------------------------------------------------------------
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly existing under
the laws of the State of Delaware.
2. The Shares, when issued for the consideration indicated in the
Prospectus, will be duly and validly issued, fully paid and non-assessable.
We acknowledge that we are referred to under the heading "Legal Matters" of
the prospectus which is part of the Company's Registration Statement relating to
the Shares, and we hereby consent to such use of our name in such Registration
Statement and to the filing of this opinion with state regulatory agencies in
such states as may require such filing in connection with the registration for
offer and sale in such states.
Very truly yours,
KEESAL, YOUNG & LOGAN, P.C.
/s/ Jeffrey D. Warren
--------------------------------------
By: Jeffrey D. Warren, Director
<PAGE> 1
EXHIBIT 23-A
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 15, 1996, and to all references to our firm included in or
made a part of Amendment No. 2 to the Registration Statement on Form S-1 for
Craig Consumer Electronics, Inc.
ARTHUR ANDERSEN LLP
Orange County, California
May 7, 1996
