<TABLE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
($ in Thousands)
<CAPTION>
July 31, October 31,
1996 1995
-------- -----------
ASSETS (Unaudited)
- --------------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 926 $1,792
Trade accounts receivable, net 555 381
Inventories:
Finished goods 1,261 822
Raw materials 605 299
Work in process 18 9
------ ------
Total inventories 1,884 1,130
Other current assets 186 138
------ ------
Total current assets 3,551 3,441
------ ------
NOTE RECEIVABLE 250 250
------ ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Machinery and equipment 290 243
Dies and molds 227 203
Furnitures, fixtures and
leasehold improvements 222 218
------ ------
739 664
Less accumulated depreciation
and amortization ( 573) ( 537)
------ ------
Net equipment and leasehold
improvements 166 127
------ ------
MARKETABLE SECURITIES 97 115
OTHER ASSETS 32 32
------ ------
TOTAL ASSETS $4,096 $3,965
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $ 120 $ 0
Accrued advertising 222 236
Accrued professional fees 56 66
Other accrued expenses 263 295
------ ------
Total current liabilities 661 597
------ ------
STOCKHOLDERS' EQUITY:
Common stock, no par value;
stated value $1 per share; authorized
10,000,000 shares; issued 3,128,000 3,128 3,128
Additional paid-in capital 1,824 1,824
Net unrealized (loss) gain on marketable securities ( 4) 28
Accumulated deficit ( 1,513) ( 1,612)
------ ------
Total stockholders' equity 3,435 3,368
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,096 $3,965
====== ======
See notes to consolidated financial statements
1
</TABLE>
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
($ in Thousands)
<CAPTION>
Three Months Ended July 31, Nine Months Ended July 31,
--------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $1,395 $ 832 $4,083 $2,849
------ ------ ------ ------
COST AND EXPENSES
Cost of products
sold 993 655 2,952 2,199
Selling, general
& administrative 384 341 1,083 1,119
Depreciation and
amortization 13 13 36 40
------ ------ ------ ------
Total costs and
expenses 1,390 1,009 4,071 3,358
------ ----- ------ ------
Income (loss) before
other income
and expenses 5 ( 177) 12 ( 509)
Realized loss on
marketable security ( 341) ( 341)
Other income -
Interest 31 70 88 118
------ ------ ------ ------
Net income (loss)before
provision $ 36 ($ 448) 100 ($ 732)
Provision for taxes 1 1
------ ------ ------ ------
Net income (loss) $ 35 ($ 448) $ 99 ($ 732)
====== ====== ====== ======
PER SHARE INFORMATION:
Net income
(loss) per share $ .01 ($ .14) $ .03 ($ .23)
====== ====== ====== ======
Average number
of common shares
outstanding 3,128,000 3,128,000 3,128,000 3,128,000
========= ========= ========= =========
See notes to consolidated financial statements
2
</TABLE>
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
($ in Thousands)
<CAPTION>
Nine Months Ended July 31,
--------------------------
1996 1995
---------- ----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 99 ($ 732)
Adjustment to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 36 40
Realized loss on marketable securities 341
Changes in operating assets and liabilities:
(Increase) Decrease in trade accounts
receivable ( 174) 607
(Increase) Decrease in inventories ( 754) 41
Increase in other assets ( 48) ( 52)
Increase (Decrease) in trade accounts
payable and accrued expenses 64 ( 138)
------ ------
Net cash (used in) provided by operating
activities ( 777) 107
------ ------
CASHED FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment and
leasehold improvements ( 75) ( 50)
Proceeds from sale of marketable securities 82 92
Purchase of marketable securities ( 96) ( 189)
------ ------
Net cash used in investing activities ( 89) ( 147)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit agreement - 460,000
Payments under line of credit agreement - (460,000)
------ -------
NET DECREASE IN CASH AND CASH EQUIVALENTS ( 866) ( 40)
CASH AND CASH EQUIVALENTS, beginning of period 1,792 1,860
------ -------
CASH AND CASH EQUIVALENTS, end of period $ 926 $ 1,820
====== =======
See notes to consolidated financial statements
3
</TABLE>
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the Three and Nine Months Ended July 31, 1996
(Unaudited)
NOTE A - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the financial position and
results of operation for the periods presented. The only adjustments made
were normal recurring adjustments.
The results for such three-month and nine-month periods are not necessarily
indicative of results for a full fiscal year. For the year ended October 31,
1995, the Company reported net sales of $3,900,000 and a net loss of $774,000,
$341,000 of which was due to a loss resulting from an investment in Stuarts
Department Store, a discount department store operation located in New
England. Stuart's filed for bankruptcy under the Federal Bankruptcy Code in
April of 1995.
NOTE B - MARKETABLE EQUITY SECURITIES
The Company has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (FAS 115).
In accordance with FAS 115, Management determines the appropriate
classification of its investments in debt and equity securities at the time of
purchase and reevaluates such determination at each balance sheet date.
Securities available for sale are carried at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of
shareholders' equity. At July 31, 1996, the Company had no investments that
qualified as trading or held to maturity. Marketable equity securities are
valued based on quoted market prices.
NOTE C - NOTES RECEIVABLE
The Company has a note receivable from an unrelated party which is
collateralized by a first deed of trust and assignment of rents on commercial
property. The note is due in November 1996 and bears interest (payable
monthly) at 14% per annum. At October 31, 1995 this note was in default and
the maker of the note had filed a Chapter 11 Bankruptcy Proceeding. Pending
disposition of the bankruptcy proceeding, maker has agreed to pay interest on
the note. The Company believes that the collateral is sufficient to cover all
amounts due.
4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As set forth in the following chart, the Company's current ratio was 5.37
to 1 at July 31, 1996.
<TABLE>
<CAPTION>
07/31/96 10/31/95
---------- ----------
<S> <C> <C>
Working capital $2,890,000 $2,844,000
Current ratio 5.37 to 1 5.76 to 1
</TABLE>
The Company elected not to renew its bank line of credit which expired on
March 31, 1995. The Company believes that it will be able to fund its
existing business out of current cash flow without the necessity of bank
borrowings and, therefore, concluded not to incur the cost and expenses of
extending and maintaining the bank line of credit until such time as bank
borrowings is required. At July 31, 1996, the Company had no material
commitments for capital expenditures.
The Company has made every effort to become a private label manufacturer
of magnetic media products for several large national and international
companies by emphasizing the Company's consistency in quality and
manufacturing expertise. The Company has obtained orders from several major
users of magnetic media products for certain private label audio products. As
a result of these orders there has been an increase in magnetic media sales
for the second and third quarters of 1996 and the Company expects that there
will be an increase in magnetic media sales for the balance of fiscal 1996 as
compared to fiscal 1995. The increase in inventory at July 31, 1996 reflects
the anticipated additional requirement to meet the sales forecasts from the
private label customers.
In addition, the Company is actively investigating acquiring other
product lines or businesses. If any of these investigations result in an
acquisition of assets or a business, the Company believes that, due to its
existing financial condition, it can obtain any necessary cash financing for
such acquisition from bank borrowings. There can be no assurance, however,
that the Company can find such an acquisition.
5
RESULTS OF OPERATIONS
- ---------------------
Third Quarter Fiscal 1996 compared to Third Quarter Fiscal 1995
- ---------------------------------------------------------------
During the third quarter of fiscal 1996, the Company had net income of
$35,000, compared to a net loss of $448,000 in the third quarter of fiscal
1995. The increase in net income is due to increase in gross margin of
$225,000, offset by increase of $44,000 in overhead expense and a decrease in
interest income of $39,000. The net loss in the third quarter of 1995
includes the loss of investment in common stock of Stuarts Department Stores
of $341,000.
Net sales were $1,395,000 for the third quarter of 1996 as compared to
net sales of $832,000 in the third quarter of 1995. The increase was $563,000
or 67.7%. The primary reason for the increase is due to increased private
label magnetic media sales to national and international users of magnetic
media products. As described under "Liquidity and Capital Resources," the
Company expects that these sales will result in increased magnetic media sales
for the balance of fiscal 1996 as compared to fiscal 1995. Subsequent to the
end of the third quarter, the Company was informed by a private label customer
that following delivery of products ordered for early February 1997, such
customer would no longer use Certron as a major resource for certain of its
private label audio products. Sales of the private label audio products to
the customer which it has indicated it will not purchase after February 1997
accounted for $325,400 and $815,223 of the Company's net sales for the quarter
and nine month period ended July 31, 1996, respectively. This customer
assured the Company that its decision was not due to price, quality or
delivery. In addition, the customer indicated that it will continue to
purchase other private label audio products from the Company. At the same time
another private label customer has projected increased purchases beginning
December 1996. Unless the Company is successful in obtaining additional
customers or orders for its private label audio magnetic products, it is
expected that sales of magnetic media products by the Company beginning with
the second quarter of fiscal 1997 will be adversely affected by the user's
decision to discontinue using the Company as a major resource for certain
private label audio products.
Primarily as a result of the increased sales, gross margins increased by
$225,000 (127%) for the quarter ended July 31, 1996, from $177,000 in the
third quarter of fiscal 1995 to $402,000 in the third quarter of fiscal 1996.
Due to the increase in net sales, selling, general and administrative
expenses increased by $43,000 during the third quarter of fiscal 1996 from
$341,000 in the third quarter of fiscal 1995 compared to $384,000 in the third
quarter of fiscal 1996.
The company has not recorded a provision for federal income taxes in
1996, due to the utilization of net operating loss carry forward to offset
taxable income, the one thousand dollars represents the minimum state tax.
6
The Company has invested cash not needed in operations in publicly traded
common stocks of other companies and may purchase additional common stocks in
the future. Investments in common stocks are subject to risks of the market
and market prices may fluctuate and be adversely effected on account of the
operating results of the issuer, as well as general economic, political and
market conditions. As of July 31, 1996 the Company held common stocks having
a cost of approximately $101,000 and market value of approximately $97,000.
In accordance with accounting rules, the Company has reflected all of its
investments in marketable securities on its Balance Sheet at market value and
approximately $4,000 is reflected in stockholders' equity as an unrealized
holding loss. If the Company sells securities, the carrying value of which
has been reduced, the Company will recognize a loss in its statement of
operations equal to the amount of the reduction. Although the Company
presently intends to hold these securities, if, on account of its capital
requirements or for any other reason, the Company should decide to liquidate
these or other investments at a time when their fair market value is less than
their cost, the Company would recognize a loss which could adversely affect
the results of operations for the period in which the sale occurs.
7
Nine Months Fiscal 1996 compared to Nine Months Fiscal 1995
- -----------------------------------------------------------
During the nine month period of fiscal year 1996, the Company had a net
income of $99,000, compared to a net loss of $732,000 in the nine month period
of fiscal 1995. The increase in net income is due to an increase in gross
margin of $481,000, a decrease of $39,000 in overhead expense offset by a
decrease in interest income of $30,000. The net loss in the nine period of
1995 includes the loss of investment in common stock of Stuarts Department
Stores of $341,000.
Net sales for the first nine months ended July 31, 1996 increased by
$1,234,000 (43.3%), from $2,849,000 for the first nine months period of fiscal
1995 to $4,083,000 for the first nine months period of fiscal 1996. The
primary reason for the increase is due to increased private label magnetic
media sales to national and international users of magnetic media products.
As described under "Liquidity and Capital Resources," the Company expects that
these sales will result in increased magnetic media sales for the balance of
fiscal 1996 as compared to fiscal 1995. Subsequent to the end of the third
quarter, the Company was informed by a private label customer that following
delivery of products ordered for early February 1997, such customer would no
longer use Certron as a major resource for certain of its private label audio
products. Sales of the private label audio products to the customer which it
has indicated it will not purchase after February 1997 accounted for $325,400
and $815,223 of the Company's net sales for the quarter and nine month period
ended July 31, 1996, respectively. This customer assured the Company that its
decision was not due to price, quality or delivery. In addition the customer
indicated that it will continue to purchase other private label audio products
from the Company. At the same time another private label customer has
projected increased purchases beginning December 1996. Unless the Company is
successful in obtaining additional customers or orders for its private label
audio magnetic products, it is expected that sales of magnetic media products
by the Company beginning with the second quarter of fiscal 1997 will be
adversely affected by the user's decision to discontinue using the Company as
a major resource for certain private label audio products.
Primarily as a result of the increased sales, gross margins for the first
nine months of fiscal 1996 increased by $481,000 (74%), from $650,000 in the
first nine months period of fiscal 1995 to $1,131,000 in the first nine months
of fiscal 1996.
Although net sales increased, selling, general and administrative
expenses decreased by $36,000 (3.21%) during the first nine months of fiscal
1996 from $1,119,000 in the first nine months of fiscal 1995 compared to
$1,083,000 in the first nine months of fiscal 1996. The decrease which is
due primarily to cost cutting measures is represented by decreased freight
expenses of $29,000, commission expense of $22,000 and a decrease in
miscellaneous expenses of $12,000 offset by an increase of $27,000 in
advertising expense.
The company has not recorded a provision for federal income taxes in
1996, due to the utilization of net operating loss carry forwards to offset
taxable income, the one thousand dollars represents the minimum state tax.
8
The Company has invested cash not needed in operations in publicly traded
common stocks of other companies and may purchase additional common stocks in
the future. Investments in common stocks are subject to risks of the market
and market prices may fluctuate and be adversely effected on account of the
operating results of the issuer, as well as general economic, political and
market conditions. As of July 31, 1996, the Company held common stocks having
a cost of approximately $101,000 and market value of approximately $97,000.
In accordance with accounting rules, the Company has reflected all of its
investments in marketable securities on its Balance Sheet at market value and
approximately $4,000 is reflected in stockholders' equity as an unrealized
holding loss. If the Company sells securities, the carrying value of which
has been reduced, the Company will recognize a loss in its statement of
operations equal to the amount of the reduction. Although the Company
presently intends to hold these securities, if, on account of its capital
requirements or for any other reason, the Company should decide to liquidate
these or other investments at a time when their fair market value is less than
their cost, the Company would recognize a loss which could adversely affect
the results of operations for the period in which the sale occurs.
Forward-Looking Statements
- --------------------------
The Company's statements in this item which are not historical facts,
including statements as to the Company's sales of magnetic media products for
the balance of the 1996 fiscal year and the first and second quarters of the
1997 fiscal year, are forward-looking statements. These statements involve
risks and uncertainties that could cause actual results to differ materially
from these forward-looking statements. Factors which could cause actual
results to differ materially include economic conditions, the Company's
success in maintaining its current customer base, the Company's ability to
obtain additional customers and business, pricing factors and competition.
9
PART II. OTHER INFORMATION.
------------------
Item 6. Exhibits and Reports on Form 8-K
-------
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended July 31, 1996, no reports were filed
on Form 8-K.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
(REGISTRANT) CERTRON CORPORATION
BY (SIGNATURE) /s/ Jesse A. Lopez
-------------------
Controller
(Principal Accounting Officer)
September 5, 1996
BY (SIGNATURE) /s/ Marshall I. Kass
--------------------
Chairman of the Board and
Chief Executive Officer
September 5, 1996
10
EXHIBIT INDEX
TO
CERTRON CORPORATION QUARTERLY REPORT ON FORM 10-Q
NO. ITEM PAGE
- --- ---- ----
27 Financial Data Schedule
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIRD
QUARTER REPORT ENDED JULY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 742
<SECURITIES> 97
<RECEIVABLES> 589
<ALLOWANCES> 40
<INVENTORY> 1,884
<CURRENT-ASSETS> 117
<PP&E> 739
<DEPRECIATION> 574
<TOTAL-ASSETS> 4,096
<CURRENT-LIABILITIES> 661
<BONDS> 0
0
0
<COMMON> 3,128
<OTHER-SE> 307
<TOTAL-LIABILITY-AND-EQUITY> 4,096
<SALES> 4,146
<TOTAL-REVENUES> 4,083
<CGS> 2,952
<TOTAL-COSTS> 4,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 100
<INCOME-TAX> 1
<INCOME-CONTINUING> 99
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99
<EPS-PRIMARY> 99
<EPS-DILUTED> .03
</TABLE>
