<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to________________________
Commission file number: 0-27882
CRAIG CONSUMER ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4228391
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation
13845 ARTESIA BOULEVARD, CERRITOS, CALIFORNIA 90703-9000
(Address of principal executive offices) (Zip Code)
(310) 926-9944
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. [ ] Yes [X] No
As of August 9, 1996 the Registrant had 3,434,441 shares of common stock
outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Balance sheets 1
- Statements of operations 2
- Statements of cash flows 3
- Notes to financial statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
</TABLE>
<PAGE> 3
CRAIG CONSUMER ELECTRONICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current Assets:
Cash $ 71,654 $ 220,756
Accounts Receivable, net 12,390,699 13,189,981
Inventory, net 14,931,911 14,557,239
Supplies and prepaid expenses 844,642 220,981
Other current assets 2,110,013 2,063,014
----------- -----------
Total current assets 30,348,919 30,251,971
----------- -----------
Property and Equipment, net 573,552 555,716
----------- -----------
Investment in Chinese Joint Venture 974,315 --
Other Assets 873,108 1,722,042
----------- -----------
$32,769,894 $32,529,729
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Note payable under revolving line of credit $11,685,036 $15,530,076
Accounts payable 9,637,479 9,773,820
Accrued liabilities 738,880 1,102,028
Income taxes payable -- 118,569
Current maturities of capital lease obligations 23,782 22,768
----------- -----------
Total current liabilities 22,085,177 26,547,261
----------- -----------
Capital Lease Obligations 54,241 66,220
----------- -----------
Subordinated promissory notes to Officers and a Director 22,978 --
----------- -----------
Subordinated Debt 1,031,059 981,961
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
--- ---
Common stock: $.01 par value ---
Authorized --- 15,000,000 shares
Issued and outstanding --- 3,434,441 and
2,134,441 at June 30 ,1996 and December 31, 1995,
respectively; par value $.01 per share 34,344 21,344
Additional paid-in capital 9,070,360 3,358,016
Retained earnings 471,735 1,554,927
----------- -----------
9,576,439 4,934,287
----------- -----------
$32,769,894 $32,529,729
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
<PAGE> 4
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 11,790,621 $ 19,165,643 $ 25,180,479 $ 36,898,064
Cost of sales 9,823,952 16,495,265 21,282,719 32,121,516
------------ ------------ ------------ ------------
Gross Profit 1,966,669 2,670,378 3,897,760 4,776,548
------------ ------------ ------------ ------------
Operating Expenses:
Selling 834,166 966,840 1,584,203 1,952,654
General and administrative 1,367,618 1,670,455 2,788,453 3,041,254
Product development 30,082 35,668 67,173 71,781
------------ ------------ ------------ ------------
Total operating expenses 2,231,866 2,672,963 4,439,829 5,065,689
------------ ------------ ------------ ------------
Loss from operations (265,197) (2,585) (542,069) (289,141)
------------ ------------ ------------ ------------
Other expense:
Interest expense 378,842 485,030 761,409 1,021,579
Other -- 5,955 -- 5,955
------------ ------------ ------------ ------------
Total other expense 378,842 490,985 761,409 1,027,534
------------ ------------ ------------ ------------
Loss before provision for income taxes (644,039) (493,570) (1,303,478) (1,316,675)
Income tax benefit (108,841) (83,413) (220,286) (222,517)
------------ ------------ ------------ ------------
Net loss ($ 535,198) ($ 410,157) ($ 1,083,192) ($ 1,094,158)
============ ============ ============ ============
Net loss per share ($ 0.20) ($ 0.19) ($ 0.45) ($ 0.51)
============ ============ ============ ============
Weighted average shares outstanding 2,720,155 2,134,441 2,427,298 2,134,441
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
---------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,083,192) ($1,094,158)
Adjustments to reconcile net loss to net cash
provided by
(used in) operating activities ---
Depreciation and amortization 163,275 128,753
Decrease in accounts receivable, net 799,282 6,571,775
(Increase) decrease in inventory, net (374,672) 6,231,629
Increase in supplies, prepaid expenses and
other current assets (670,660) (783,196)
Decrease in other assets 848,934 969,132
Decrease in accounts payable and accrued liabilities (499,489) (4,806,520)
Decrease in income taxes payable (118,569) (38,020)
----------- -----------
Net cash provided by (used in) operating activities (935,091) 7,179,395
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (181,111) (38,883)
Investment in Chinese joint venture (974,315) --
----------- -----------
Net cash used in investing activities (1,155,426) (38,883)
----------- -----------
Cash flows from financing activities:
Net repayments on notes payable under
revolving line of credit (3,845,040) (7,504,685)
Promissory notes issued 22,978 --
Net proceeds received from stock issuance 5,725,344 --
Interest accrued on subordinated debt 49,098 --
Decrease in capital lease obligation (10,965) (10,713)
----------- -----------
Net cash provided by (used in) financing activities 1,941,415 (7,515,398)
----------- -----------
Net decrease in cash (149,102) (374,886)
Cash, beginning of period 220,756 455,494
----------- -----------
Cash, end of period $ 71,654 $ 80,608
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for ---
Interest $ 808,010 $ 1,124,401
=========== ===========
Income taxes $ 139,077 $ 51,800
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Craig Consumer
Electronics, Inc. (referred to herein as "the Company") reflect all adjustments
(which include only normal recurring adjustments) considered necessary to
present fairly the financial position, results of operations and cash flows of
the Company for the periods presented. It is suggested that the accompanying
unaudited financial statements and footnotes thereto be read in conjunction with
the December 31, 1995 financial statements and footnotes included in the
Company's prospectus dated May 21, 1996, on pages F-1 through F-13.
The results of operations for the periods presented are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 1996.
2. CERTAIN ACCOUNTING POLICIES
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 not expected to have a material impact on the
Company's financial statements.
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.
3. INITIAL PUBLIC OFFERING
The Company successfully completed its initial public offering of its
common stock on May 21, 1996, with the sale of $1.3 million shares. In
connection with the Offering, the holders of Series A Preferred Stock executed
agreements under which their shares were automatically converted into 1,733,330
shares of Common Stock. In addition, a 3.81-to-one reverse stock split of the
Common Stock was completed upon the effectiveness of the Offering.
4. LOSS PER SHARE
Loss per share equals net loss, divided by the weighted average number
of common shares outstanding, after giving effect to the conversion of preferred
and common shares referred
4
<PAGE> 7
to in Note 3 above. Inclusion of stock options in the calculation of loss per
share would be anti-dilutive, and therefore, outstanding stock options are
excluded from the calculation.
5. ACCOUNTING FOR CHINESE JOINT VENTURE
The Company has entered into a joint venture partnership with an entity
in China to establish and operate a product reconditioning and manufacturing
facility located in Shenzhen, PRC. The investment in the 50% owned operation is
accounted for using the equity method. Funds invested in the Chinese Joint
Venture totalled $974,000 during the six months ended June 30, 1996, as the
Company supplied cash or spare parts, and paid costs on behalf of the Joint
Venture, to establish the facility and commence operations. Inventory with a
carrying amount of approximately $4 million has been shipped to the Shenzhen
factory through June 30, 1996. The Company retains title to its inventory in the
physical custody of the Joint Venture, and such is included under "Inventory" on
the accompanying balance sheet at June 30, 1996. To the extent that costs
incurred in the Shenzhen factory apply to reconditioned product that the Company
re-imports and sells in the second half of the year, such costs will be included
in the cost of the product. Such costs incurred will be considered a
distribution, and will reduce the balance of the investment.
Product which is returned to the Company from the Joint Venture will be
received into the Company's inventory at an incremental increase in its cost,
reflecting the value of parts, labor and overhead of the Shenzhen factory which
have been added, with the limitation that the original carrying amount, together
with the added costs, will not exceed the net realizable value of the product.
Further, in the event that any operating costs are incurred which cannot be
assigned to product, these will be charged to expense by the Joint Venture, and
accordingly, the Company will recognize its share of the earnings or losses of
its Joint Venture. As of June 30, 1996, such costs assigned to completed
reconditioned product received by the Company from the Joint Venture, and sold
to its customers, were not material, in the opinion of the Company's management.
Management further believes that the Joint Venture had not incurred costs in
excess of those which properly apply to product. The Company has, accordingly,
recognized no net income or loss from its Chinese Joint Venture in the
accompanying Statement of Income for the six months ended June 30, 1996.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table is derived from the Company's Statements of
Operations, and sets forth, for the periods indicated, selected operating
results as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE SIX MONTHS ENDED JUNE
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
AUDIO SALES 102.0% 81.1% 98.7% 77.7%
VIDEO SALES (2.0) 18.9 1.3 22.3
----- ----- ----- -----
TOTAL SALES 100.0 100.0 100.0 100.0
GROSS MARGIN 16.7 13.9 15.5 12.9
OPERATING EXPENSES 18.9 13.9 17.6 13.7
INTEREST EXPENSE 3.2 2.5 3.0 2.8
LOSS BEFORE TAXES (5.5) (2.6) (5.2) (3.6)
NET LOSS (4.5)% (2.1)% (4.3)% (3.0)%
===== ===== ===== =====
</TABLE>
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER FISCAL 1995
The Company's business is highly seasonal, with typically lower sales
in the first half of the year than in the last half. The Company has
historically recognized losses during the first half of each of its past
profitable years.
Sales in the second quarter of 1996 were down $7.4 million compared to
the same quarter of the preceding year, of which decline, $3.9 million is
attributable to the Company's decision to discontinue sales of its lower margin
video products. With video sales virtually ended by the second quarter of 1996,
and some returns of video products still occurring, the effect of the video
business was to reduce overall net sales for the quarter. Audio sales alone
decreased $3.5 million for the quarter. Management believes that this audio
sales decrease is partly attributable to overall weaker sales that prevail
throughout the industry. Additionally, the Company's annual program of
promotions and new product introductions began later in 1996 than in the
preceding year. However, the percentage margin on all sales was higher in the
second quarter of 1996 compared to 1995, by 2.8%, a consequence of concentrating
on the higher margin audio products. As a result, gross margin overall declined
only $704,000, despite lower sales.
6
<PAGE> 9
Operating expenses were lower in the second quarter of 1996 compared to
1995 by $441,000, although higher as a percentage of sales. Of the decline in
expenses, $156,000 is due to lower variable selling expenses. Additionally, the
Company's domestic reconditioning and warehousing operation was dramatically
reduced in size, as the Company transitions to having most reconditioning of
returned goods performed in its Chinese Joint Venture, in Shenzhen, PRC.
Operating expenses for the second quarter of 1996 included
approximately $23,000 in compensation expense resulting from the termination of
the Company's former phantom stock plan. The participants in the terminated
phantom stock plan received promissory notes totalling $206,800, and bearing
interest at eight percent per year. Full payment of the notes is contingent upon
continued service of these individuals in their respective capacities until May
21, 1997. Therefore, the Company will continue to record compensation expense
totalling $206,800 over the period of service. (Payment of the notes will occur
over four years, with semi-annual interest payments commencing November 1, 1996,
and fully amortized, semi-annual principal payments commencing May 1, 1997.)
Interest expense was $106,000 lower in the second quarter of 1996
compared to 1995, a decrease attributable to lower levels of borrowing under the
Company's revolving line of credit. ($6.3 million lower on average for the
second quarter of 1996 compared to 1995.) Factors influencing the Company's
lower level of borrowing include primarily the application of the $5.7 million
in funds received by the Company from its IPO to reduce the debt under the
revolving line. Thereafter, available credit under the line was re-borrowed and
utilized to acquire product or to repay trade debt, in order to open up trade
credit lines and letters of credit to obtain product shipments. In 1996,
subordinated debt interest totalling $49,000 was also accrued but not paid.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $935,000 in the first half of
1996, compared with net cash provided by operating activities of $7.2 in the
same period a year earlier. In the earlier period, operating activities provided
cash despite a net loss of $1.1 million, when higher than usual year-end
inventory and accounts receivable were reduced.
Purchases of property and equipment of $51,000 in the second quarter,
accumulating to $181,000 for the six months ended June 30, 1996, were
principally incurred to complete the consolidation of its facilities from two
buildings to one, and to install upgraded capacity to its management information
systems, including those of the Hong Kong office. These amounts are exclusive of
machinery and equipment acquired by the Chinese Joint Venture entity directly.
Net repayments to the Company's revolving line of credit were $3.8
million in the six months ended June 30, 1996. The Company's credit line is
collateralized by its accounts receivable, and by its inventory. Exclusions from
the borrowing base include any inventory which the Company has transferred to
the Chinese Joint Venture for reconditioning. This exclusion is effective until
the product is in transit on its return to the Company in saleable
7
<PAGE> 10
condition. This excluded inventory, totalling $4.0 million as of June 30, 1996,
explains the reduced use by the Company of its bank line of credit, and
corresponding impact on cash flow.
At June 30, 1996, borrowing availability under the Company's bank line
of credit was $2.6 million. The Company believes that cash generated from
operations, together with bank borrowing, trade credit lines, and other
financing vehicles will be adequate to meet the Company's cash needs for working
capital and capital expenditures through at least the next 12 months. No
significant debt payments are anticipated to be made until May 1, 1997, when the
first semi-annual principal payments totalling approximately $149,000 will
become due under the subordinated debt, and the subordinated promissory notes to
former participants in the terminated Phantom Stock Plan. Under terms of these
debt agreements, 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 bank line of credit agreement. Management believes that
the cash requirements of the Chinese Joint Venture will begin to be met by its
own operations, as reconditioned product becomes available for sale.
8
<PAGE> 11
PART II
Item 1. Legal Proceedings
The Company has, from time to time, engaged a Hong Kong firm known as
Birdy Electronics, Inc. ("Birdy") to manufacture certain products for and on
behalf of the Company. The Company had ordered products from Birdy and commenced
to distribute those products through the Company's ordinary channels. Currently,
the Company has unpaid invoices that it has received from Birdy totaling
approximately $4 million. The Company has booked these invoices as a trade
payable, however, the Company does not believe the invoices are valid, due to
failure of consideration and other causes, including the failure of Birdy to
deliver products confirming to the purchase orders for them.
The Company has attempted to negotiate a resolution of its dispute with
Birdy, however, on July 24, 1996 Birdy filed an action in the United States
District Court for the Central District of California, styled Birdy Electronics
Company Ltd., a Hong Kong corporation, v. Craig Consumer Electronics, Inc., a
Delaware corporation, and Does 1 through 50, inclusive, alleging breach of
contract, account stated, and suit on open account, among other allegations in
the pursuit of the collection of the amounts allegedly owed. The Company has not
yet responded to the complaint, but has retained counsel to vigorously defend
against the complaint and to prosecute the Company's counter-claims associated
with the failure of Birdy to deliver conforming products among other claims.
Settlement discussions have been undertaken. However, it is unclear
whether any significant progress toward an amicable resolution of the matter
will be obtained prior to the date that the Company is required to respond to
Birdy's complaint -- August 14, 1996.
In connection with the Birdy litigation, Birdy is pursuing a writ of
attachment which the company will vigorously defend. Because the Birdy invoices,
in the ordinary course of the Company's business, have been booked as a payable
(although the Company vigorously disputes whether it owes all or any substantial
portion of the amounts to Birdy, particularly after applying all available
offsets that the company intends to assert), the Birdy litigation is not, in
management's view, material to the Company's financial condition.
The Company will assert reasonable defenses and pursue all claims in
this litigation, if it is not amicably resolved.
9
<PAGE> 12
Item 6. Exhibits and Reports on Form 8-k filed during the quarter ended June
30, 1996
Exhibit 27 Financial Data Schedule
There were no reports on Form 8-K filed during the reporting period.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CRAIG CONSUMER ELECTRONICS, INC.
- --------------------------------
(Registrant)
Date: August 13, 1996
RICHARD I. BERGER
----------------------------------------
Richard I. Berger
Chairman of the Board of Directors and
President (Principal Executive Officer),
Director
Date: August 13 , 1996
DONNA RICHARDSON
----------------------------------------
Donna Richardson
Treasurer and Chief Financial Officer
(Principal Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 71,654
<SECURITIES> 0
<RECEIVABLES> 13,047,076
<ALLOWANCES> (656,377)
<INVENTORY> 14,931,911
<CURRENT-ASSETS> 30,348,919
<PP&E> 1,738,928
<DEPRECIATION> (1,165,376)
<TOTAL-ASSETS> 32,769,897
<CURRENT-LIABILITIES> 22,085,177
<BONDS> 0
0
0
<COMMON> 9,104,704
<OTHER-SE> 471,735
<TOTAL-LIABILITY-AND-EQUITY> 32,769,894
<SALES> 25,180,479
<TOTAL-REVENUES> 25,180,479
<CGS> 21,282,719
<TOTAL-COSTS> 21,282,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,403
<INTEREST-EXPENSE> 761,409
<INCOME-PRETAX> (1,303,478)
<INCOME-TAX> (220,286)
<INCOME-CONTINUING> (1,083,192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,083,192)
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
