SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 MARCH 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-27882
CRAIG CONSUMER ELECTRONICS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 95-4228391
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13845 ARTESIA BOULEVARD, CERRITOS, CALIFORNIA 90703-9000
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(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code (562) 926-9944
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
<PAGE>
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At May 12, 1997, the number of shares of common stock outstanding was
3,434,441.
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INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets................................ 4
Statements of Operations................................... 5
Statements of Cash Flows................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 14
Item 2. Changes in Securities...................................... 15
Item 3. Defaults Upon Senior Securities............................ 15
Item 4. Submission of Matters to a Vote of Security Holders........ 15
Item 5. Other Information.......................................... 15
Item 6. Exhibits and Reports on Form 8-K........................... 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CRAIG CONSUMER ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(Unaudited) (Audited)
ASSETS:
Current Assets:
<S> <C> <C>
Cash .................................................... $ 22,288 $ 600
Accounts receivable, net ................................ 12,673,988 19,097,313
Inventory, net .......................................... 16,829,369 17,743,453
Supplies and prepaid expenses ........................... 983,165 561,572
Other current assets .................................... 316,073 309,338
Total current assets .................................. 30,824,882 37,712,276
Property and Equipment, net ................................. 507,409 571,300
Other Assets ................................................ 691,174 885,529
$ 32,023,465 $ 39,169,105
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Note payable under revolving line of credit ............. $ 17,421,549 $ 20,713,828
Accounts payable ........................................ 9,607,307 10,912,430
Notes payable - related party ........................... 566,000 --
Bank overdraft .......................................... -- 635,950
Accrued liabilities ..................................... 1,149,971 1,794,127
Taxes payable ........................................... (295,742) 21,486
Current maturities of capital lease obligations ......... 24,842 24,842
Total current liabilities ............................. 28,473,927 34,102,663
Capital Lease Obligations ................................... 35,368 41,377
Subordinated Debt ........................................... 842,040 1,108,339
Commitments and Contingencies
Shareholders' Equity:
Common stock: $.01 par value--
Authorized--15,000,000 shares
Issued and outstanding--3,434,441 and 3,434,441 shares at
March 31, 1997 and December 31, 1996, respectively ...... 34,344 34,344
Additional paid-in capital .................................. 9,070,360 9,070,360
Retained earnings ........................................... (6,432,574) (5,187,978)
2,672,131 3,916,726
$ 32,023,465 $ 39,169,105
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Net Sales .............................................. $ 12,658,877 $ 13,389,858
Cost of sales .......................................... 10,589,863 11,458,767
Gross Profit ....................................... 2,069,013 1,931,091
Operating Expenses:
Selling ............................................ 1,429,635 750,037
General and administrative ......................... 1,463,283 1,420,835
Product development ................................ 48,927 37,091
Operating expenses ............................. 2,941,845 2,207,963
Income (loss) from operations .................. (872,832) (276,872)
Other income (expense):
Interest expense ................................... (440,958) (382,567)
Other .............................................. (152,857) 0
Other expense, net ............................... (593,815) (382,567)
Income (loss) before provision for income taxes... (1,466,647) (659,439)
Provision for income taxes ............................. (222,052) (111,445)
Net income (loss)................................... $(1,244,595) $ (547,994)
Pro-forma net income (loss) per share (not covered by
report of independent public accountants) ............ $ (0.42) $ (0.26)
Weighted average shares outstanding .................... 2,935,811 2,134,441
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
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1997 1996
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(Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss ...................................................... ($1,244,595) ($ 547,994)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities --
Depreciation and amortization ................................. 180,962 164,072
Decease in subordinated debt .................................. (266,299) --
(Increase) decrease in accounts receivables, net .............. 6,423,325 1,891,573
(Increase) decrease in inventory, net ......................... 914,084 2,700,246
(Increase) decrease in supplies and prepaid expenses
and other current assets .................................... (428,328) (447,434)
(Increase) decrease in other assets ........................... 105,824 36,126
Increase (decrease) in accounts payable
and accrued liabilities...................................... (2,585,229) 574,988
Increase (decrease) in taxes payable .......................... (317,228) (118,569)
Total adjustments to net income ............................. 4,027,111 4,801,003
Net cash provided by (used in) operating activities ......... 2,782,516 4,253,009
Cash flows from investing activities:
Purchases of property and equipment ........................... (28,540) (129,731)
Proceeds from sale of property and equipment .................. -- --
Loss on disposal of property and equipment .................... -- --
Net cash used in investing activities ....................... (28,540) (129,731)
Cash flows from financing activities:
Net borrowings (repayments) on notes payable under
revolving line of credit .................................... (3,292,279) (4,194,193)
Notes payable to related party ................................ 566,000 --
Preferred stock dividends paid ................................ -- --
Proceeds received from stock issuance ........................ -- --
Increase (decrease) in capital lease obligation ............... (6,009) (5,336)
Net cash provided by (used in) financing activities ......... (2,732,288) (4,199,530)
Net increase (decrease) in cash ............................... 21,688 (76,252)
Cash, beginning of period ..................................... 600 220,756
Cash, end of period ........................................... $ 22,288 $ 144,504
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for --
Interest .................................................... $ 320,913 $ 341,320
=========== ===========
Income taxes ................................................ $ 0 $ 130,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Craig Consumer
Electronics, Inc. (the "Company") reflect all adjustments (which included only
normal recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows of the Company for the
period presented. The accompanying unaudited financial statements and footnotes
thereto should be read in conjunction with the December 31, 1996 and December
31, 1995 (restated) financial statements and footnotes to be found in the
Company's 10-K report.
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, 1997.
2. NEW ACCOUNTING PRONOUNCEMENTS
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 the Accounting Principles Board
Opinion ("APBO") No. 25, "Accounting for Stock Issued to Employees." The Company
has elected to follow the intrinsic value approach prescribed by APBO No. 25
and, accordingly, adoption of SFAS No. 123 had an immaterial effect.
3. INITIAL PUBLIC OFFERING
The Company successfully completed it 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 split of the Common Stock was
completed upon the effectiveness of the offering.
4. INCOME OR LOSS PER SHARE
For the three-month periods ended March 31, 1997 and 1996, net income per
share equals the net income, divided by the weighted average number of common
shares and common equivalent shares (dilutive stock options) outstanding, after
giving effect to the conversion of preferred and common shares referred to in
Note 3 above. For the three months ended March 31, 1997 and 1996, the inclusion
of common equivalent shares would be anti-dilutive, and accordingly, they are
excluded from the loss per share calculations.
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5. PENDING CLASS ACTION LITIGATION
Since its initial public offering in May 1996, the Company's stock price
has declined from the offering price. In addition, the Company has restated its
fiscal 1995 operating results originally disclosed in the Form S-1 filed
pursuant to the offering. On April 2 and April 14, 1997, class action lawsuits
were filed against the Company related to the above. Although there is some
exposure from the above matters, Management feels that litigation on this basis
is difficult to support, particularly in light of the nature of the applicable
disclosure, the Company's overall condition and numerous other factors.
Management has reached a tentative resolution of the lawsuits, the effectiveness
of which is subject to certain procedural and other contingencies. If the
contingencies to the effectiveness of the settlements are not satisfied,
Management will vigorously contest the plaintiffs' claims.
6. INCOME TAXES
The provision for income taxes for the three month periods reflect the
estimated effective rate for the full year. The effective rate reflects the
anticipated liability for alternative minimum tax purposes. The Company has net
operating losses available to offset the liability for regular tax purposes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 sales.
THREE MONTHS ENDED MARCH
1997 1996
----- ----
Audio Sales 99.8% 95.8%
Video Sales .2 4.2
----- -----
Total Sales 100.0 100.0
Gross Margin 16.3 14.4
Operating Expenses 23.2 16.5
Interest Expense 4.7 2.9
Income (loss) before taxes (11.6) (4.9)
Net income (loss) (9.8) (4.1)
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
The consumer electronics industry within which the Company operates is
highly seasonal. As a result, the Company's historical revenues and earnings are
typically depressed during the first and second quarters, compared to the
improved performance which typically occurs during the third and fourth quarters
of each year. On a quarterly basis, the company's best performance usually
occurs within the fourth quarter as a result of higher revenue levels and lower
operating expenses, while the Company's least effective performance occurs
within the first quarter of each year, which is characteristically evidenced by
lower revenue combined with higher than average operating expenses.
The Company's net sales decreased by approximately $731,000 during the
first quarter of fiscal year 1997, compared to the same quarter of the previous
fiscal year. Much of the decrease in net sales is due to slower than anticipated
domestic sales in the following product categories: Mobile Audio, especially
in-dash mounted cassette players; CD changers; and Audio, specifically Home
Stereo Systems. Lower video sales were a result of the Company's previously
announced plans to exit the video product category and represented approximately
0.2% of net sales for the current period, compared to roughly 4.7% during the
same period in the previous fiscal year. Lower than anticipated international
sales accounted for a substantially smaller portion of the decline in net sales.
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Improved gross margins, both in terms of actual dollars and percentages,
were achieved during the quarter ended March 31, 1997 compared to the same
period of the previous fiscal year. During the quarter ended March 31, 1997,
gross margins were approximately $2,069,000 or 16.3% of net sales, compared to
$1,931,000 and 14.4% during the first quarter of 1996, producing a net increase
of $138,000 or 7.1% over the previous period. Credits from suppliers equal to
approximately $1,128,000 were realized during the quarter ended March 31, 1997,
in keeping with the Company's change in its method of accounting to record these
amounts as they are realized on a cash basis rather than on an accrual basis, as
the Company had accounted for such credits prior to the company's fiscal year
ended December 31, 1996.
Total operating expenses were approximately $734,000 higher during the
quarter ended March 31, 1997 than the same period in the previous fiscal year.
As a percentage of net sales, operating expenses incurred during the first
quarter increased by 6.7%, from 16.5% of net sales at March 31, 1996 to 23.2% at
March 31, 1997. Approximately $96,000 in net increased operating expenses
incurred during the quarter ended March 31, 1997 were not included during the
quarter ended March 31, 1996. The Company experienced increased consumer rebate
expenses of approximately $298,000, compensation expense related to Phantom
Stock Plan notes of $52,000, and marketing salaries and departmental expenses of
approximately $64,000. This approximately $414,000 increase was partially offset
when Mr. Richard Berger, the Company's President and Chief Executive Officer,
voluntarily paid back his previously earned bonus of $318,000 to the Company
after a restatement of fiscal year 1995 earnings resulted in lower income for
the Company. Other expenses which were higher on a relative basis for the
quarter ended March 31, 1997 compared to the same three-month period ended March
31, 1996 include the following:
+ Administrative expenses increased by approximately $100,000 as a result of
increased legal and professional fees, data processing fees, and temporary
staffing expenses.
+ Selling and marketing expenses increased by approximately $700,000, in part
from increased variable selling expenses in the form of advertising support
provided to major retail customers in order to help promote the sale of the
Company's products through its retail distribution channels. Higher
expenses for co-op advertising are likely to continue throughout the
remainder of fiscal year 1997. Approximately $51,000 in increased selling
and marketing expenses is attributable to greater industry advertising and
trade show expenses. As discussed above, consumer rebate expenses amounted
to approximately $298,000 for the quarter ended March 31, 1997 compared to
$0 for the corresponding period of 1996.
+ Higher expenses in Hong Kong were incurred due to added salary and
consulting expenses resulting from the addition of a general manager and
three employees involved in the design and sourcing of product. These staff
increases will likely remain in place during the remainder of the Company's
current fiscal year, but there are no plans for further increases to staff
during the same period. The remainder of the increase in Hong Kong-related
expenses consist of general administrative expenses.
+ Expenses related to the Company's joint venture ("JV") activity were
approximately $302,000 higher during the first quarter of 1997 compared to
the same period in 1996. Major activity did not occur at the JV until March
1997 due to the start-up logistical requirements to move merchandise
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intra-country from the old JV in Shenzen, People's Republic of China
("PRC") to the new JV location in Zhuhai, PRC. Expenses are expected to
level as a result of efficiency gains which are likely to occur late in the
second quarter of 1997 or early in the third quarter of 1997 as production
volumes increase.
The combined effect of these increased expenses reduced operating income by
approximately $596,000 to ($873,000) for the quarter ended March 31, 1997
compared to operating income of ($277,000) for the quarter ended March 31, 1996.
Interest expense was $211,000 higher during the first quarter of 1997 than
the first quarter of 1996. More than half of this increase resulted from greater
amortization of commitment fees due to the change in maturity on the Company's
senior secured revolving line of credit. The net increase in commitment fee
amortization amounted to $37,000 per month, or $111,000 per quarter, which began
after the Company's fiscal year ended December 31, 1996. Additional use of the
line of credit increased interest expense by approximately $70,000 during the
quarter ended March 31, 1997 when compared to the quarter ended March 31, 1996.
Due to the combination of lower net sales and higher total operating
expenses in the first quarter of 1997 compared to the first quarter of 1996, net
losses increased from approximately $548,000 for the first quarter of 1996 to
nearly $1,245,000 for the quarter ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the quarter ended March 31,
1997 was approximately $2,783,000 compared to approximately $4,253,000 for the
quarter ended March 31, 1996. This 35% reduction in net cash provided by
operating activities resulted from a higher operating loss during the first
quarter of 1997 relative to the same period of 1996, coupled with other events
described below. Despite the fact that losses were incurred in both periods, net
cash from operations was positive as a result of three trends which typically
occur during the first quarter of each fiscal year:
+ Accounts receivable levels fall as cash is collected from the majority of
sales occurring in the immediately preceding quarter. For example, accounts
receivable levels declined by approximately $6,423,000 during the quarter
ended March 31, 1997 and by approximately $1,892,000 during the quarter
ended March 31, 1996.
+ Inventory levels decline from peak levels occurring during the fourth
quarter which are necessary to support seasonal revenue trends. During the
first quarter of 1997, inventory levels declined by approximately $914,000,
and during the first quarter of 1996, inventory levels were reduced by
approximately $2,700,000.
+ Since annual peak borrowing usually occurs during the fourth quarter, net
repayments to the Company's line of credit generally occur during the first
quarter as a result of cash collections, which reduce the Company's
accounts receivable levels, and, simultaneously, amounts owing under the
Company's senior secured line of credit. During the quarter ended March 31,
1997, the Company reduced its amount owing under its revolving bank line of
credit by approximately ($3,292,000) and by approximately ($4,194,000)
during the quarter ended March 31, 1996.
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The Company's accounts payable balances fell by approximately ($2,585,000)
during the first quarter of 1997.
In the quarter ended March 31, 1997, the Company purchased approximately
$29,000 of property and equipment, primarily computer equipment and machinery
and equipment necessary to establish the Company's new JV operation in the PRC.
The Company has made no material additions to its existing plans for capital
expenditures for the remainder of fiscal year 1997, which currently include
purchasing or leasing telecommunications equipment, upgrading its accounting
software, and obtaining normal upgrades to its data processing equipment from
time to time.
Increased prepaid expenses of approximately ($428,000) resulted from
approximately $337,000 in expenses related to the Company's current and next
year trade show activities and a $90,000 investment in the Company's new JV
operation in Zhuhai, PRC.
Notes payable to a related party represented a short-term loan to the
Company made by Mr. Richard A. Miller, a member of the Company's Board of
Directors, for $566,000. Terms of the note include interest payable at 8%, with
principal payable upon demand.
The Company's senior secured revolving line of credit is collateralized by
its accounts receivable and inventory, excluding inventory which has been
transferred to the Company's new JV operation for refurbishment, and other items
which have been excluded pursuant to an Amended Loan Agreement between the
Company and its senior secured lender, Bankers Trust Commercial Corporation (the
"BTCC Loan Agreement"). Inventory which has been refurbished and shipped from
the Company's new JV to its headquarters in the U.S. is eligible for inclusion
as soon as the product is shipped and in transit. The Company's borrowing
availability under its line of credit at March 31, 1997 was approximately
$464,000 and cash generated from operations, trade credit lines, and other
financing sources were sufficient to meet the capital requirements of the
company for the quarter.
The Company complied with all of the negative financial covenants contained
in the BTCC Loan Agreement for the quarter ended March 31, 1997. In order to
obtain the necessary financial waivers required on its financial covenants at
the Company's fiscal year ended December 31, 1996, the Company agreed to a
moratorium on the payment of interest amounting to approximately $149,000 which
was due to be paid on May 1, 1997 under both subordinated debt and promissory
notes (which arose from the Company's now terminated Phantom Stock Plan). Under
the 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 the BTCC Loan Agreement. The Company
consented to this moratorium in order to insure that the Company would be able
to function with adequate resources throughout the second quarter of 1997.
The Company will not likely be capable of financing its ongoing working
capital needs if the BTCC Loan Agreement is not extended beyond August 5, 1997
or if suitable inventory and receivable financing is not negotiated prior to
that time. The Company is currently in the process of reviewing proposals from
various financial institutions which have expressed strong interest in providing
the Company with a multi-year asset based financing arrangement to replace the
Company's current line of credit, which expires on August 5, 1997. Based upon
discussions with
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potential lenders thus far, the Company believes that it will be successful in
obtaining replacement financing which is adequate to meet its capital
requirements for the foreseeable future. In addition, Management may pursue
certain sources of equity funding or unsecured debt to facilitate the Company's
capital needs. No assurance can be given, however, that such replacement
financing or provision on equity will be made available prior to August 5, 1997.
ACCOUNTING AND FINANCE CONTROLS
The Company has filled the available positions in its accounting and
finance areas in order to improve the Company's internal financial and
accounting controls. An individual has been promoted from within the Company
from her former position of Financial Analyst to the position of Accounting
Manager and the Company is currently in the final stage of hiring a new
Corporate Controller in order to add strength to the Company's accounting
function. The Company plans to add one additional support staff member to its
existing accounting and finance department team to ensure that all areas are
adequately supported throughout the fiscal year.
The Company has also taken action to improve its banking services by
incorporating state-of-the-art cash management services from its existing bank,
one of California's largest financial institutions. Management expects that
improved automation will enhance productivity within the accounting and finance
areas and will improve the amount of control over the Company's cash.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has been named as a defendant in two lawsuits filed in the
United States District Court for the Central District of California: Robert
Jacobs, individually and on behalf of all others similarly situated v. Craig
Consumer Electronics, Inc., Richard I. Berger, Donna Richardson, Peter Behrendt,
Richard Miller, Bernard Taran and James Koblensky (the "Jacobs Litigation") and
Tiffany Lewin, on Behalf of Herself and All Others Similarly Situated v. Craig
Consumer Electronics, Inc. Richard I. Berger, Donna Richardson, Richard A.
Miller, Peter M. Behrendt, Bernard Taran and James Koblensky (the "Lewin
Litigation"). Each of the Jacobs Litigation and the Lewin Litigation is a
purported class action on behalf of all persons who purchased the Company's
common stock in its initial public offering and who purchased in the marketplace
thereafter and prior to March 10, 1997.
The allegations in the Jacobs Litigation involve violations of Sections
10(b) and 20 of the Securities Exchange Act of 1934 (the "Exchange Act") and
Rule 10b-5 thereunder, Sections 11, 12 and 15 of the Securities Act of 1933 (the
"1933 Act") and violations of Sections 25400 and 25500 of the California
Corporations Code. Likewise, the allegations in the Lewin Litigation involve
violations of Sections 10(b) and 20 of the Exchange Act and Rule 10b-5
thereunder and Sections 11 and 15 of the 1933 Act. In each lawsuit, the
plaintiffs' claims are based almost entirely on the restatement of the Company's
1995 financial statements and allegations that a misleading financial statement
was intentionally allowed to remain in the marketplace from and after the date
of the initial public offering. Management believes that the adjustments giving
rise to the restatement to the 1995 financial statements are immaterial from an
investment point of view, and are particularly immaterial after giving effect to
the reversal of certain items in 1996 and 1997 that relate to 1995.
Particularly, Richard Berger's agreement to repay his 1995 bonus (approximately
$318,000), which was computed based on the financial statements prior to the
restatement, and (ii) the booking during 1996 of approximately $100,000 of
interest income related to anti-dumping duty refunds due the Company that had
not been accrued as of December 31, 1995, render the restatement immaterial from
an investment perspective. All the allegations and causes of action based on
intentional misconduct are in Management's view, based on Management's
investigation, completely unfounded.
While Management believes that the claims in the Jacobs Litigation and the
Lewin Litigation are without merit, Management has made an informed business
decision to attempt to quickly and amicably resolve the lawsuits in order to
improve its ability to obtain new inventory and receivable financing and to more
productively apply its resources. To that end, the Company has reached a
tentative resolution of the claims. There are, however, a number of significant
procedural and other contingencies to the effectiveness of the tentative
settlement. If the contingencies to the settlement are not satisfied, Management
has instructed counsel to vigorously defend the lawsuits. If the Jacobs
Litigation and the Lewin Litigation are not amicably settled in the immediately
foreseeable future, dedication of the Company's resources to defending the
litigation will be required and no assurance can be given that the outcome of
the litigation will not have a material adverse impact upon the Company.
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Other than the Jacobs Litigation and the Lewin Litigation, 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.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
In May 1996, the Company converted the 250,000 outstanding shares of Series
A Preferred Stock into shares of common stock and delivered separate
subordinated notes for a total of $780,798, representing accumulated unpaid
dividends, to the four holders of the Series A Preferred Stock (the
"Subordinated Dividend Notes"). Each Subordinated Dividend Note is a general
unsecured obligation maturing in four years. These Subordinated Dividend Notes
bear interest at the rate of 10% per annum. The Company also delivered four
subordinated notes in the aggregate original principal amount of $206,800 in
connection with the termination of the Company's phantom stock option plan (the
"Subordinated PSP Notes"). Each Subordinated PSP Note is a general unsecured
obligation maturing in five years. These Subordinated PSP Notes bear interest at
the rate of 8% per annum. Semi-annual interest payments on the Subordinated
Dividend Notes and the Subordinated PSP Notes commenced on November 1, 1996 and
semi-annual, fully amortized principal repayments were due to commence on May 1,
1997. As a condition to waivers of the Company's defaults under its existing
loan agreement with Bankers Trust Commercial Corporation, the payments due on
May 1, 1997 were not made. However, additional notes of like kind may be
delivered to satisfy the Company's obligations under these notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
No. 27 - Financial Data Schedule for Form 10-Q dated March 31, 1997.
15
<PAGE>
All other exhibits required by Item 601 of Regulation S-K are hereby
incorporated by reference to the Company's Report on Form 10-K dated April 14,
1997.
(b) REPORTS ON FORM 8-K.
During its recent 1996 independent audit, certain bookkeeping errors and
irregularities for 1995 were discovered which the Company determined to reflect
through a restatement of its 1995 financial statements. On March 14, 1997, the
Company filed a report on Form 8-K to announce this restatement.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CRAIG CONSUMER ELECTRONICS, INC.
By: /s/ Richard I. Berger
--------------------------------------
Richard I. Berger
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
By: /s/ Donna Richardson
--------------------------------------
Donna Richardson
Treasurer, Secretary and Chief
Financial Officer
(Principal Accounting Officer)
Date: May 15, 1997
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AS OF MARCH 31, 1997 AND THE STATEMENTS OF OPERATIONS AND THE STATEMENTS
OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 22,288
<SECURITIES> 0
<RECEIVABLES> 13,558,534
<ALLOWANCES> (884,546)
<INVENTORY> 16,829,369
<CURRENT-ASSETS> 30,824,882
<PP&E> 1,442,734
<DEPRECIATION> (935,325)
<TOTAL-ASSETS> 32,023,465
<CURRENT-LIABILITIES> 28,473,927
<BONDS> 0
0
0
<COMMON> 34,344
<OTHER-SE> 9,070,360
<TOTAL-LIABILITY-AND-EQUITY> 32,023,465
<SALES> 12,658,877
<TOTAL-REVENUES> 12,658,877
<CGS> 10,589,863
<TOTAL-COSTS> 2,941,845
<OTHER-EXPENSES> 152,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 440,958
<INCOME-PRETAX> (1,466,647)
<INCOME-TAX> (222,052)
<INCOME-CONTINUING> (1,244,595)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,244,595)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
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