<TABLE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
----------------------------------
($ in Thousands)
<CAPTION>
April 30, October 31,
1997 1996
----------- ----------
ASSETS (Unaudited)
- -----------------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $1,146 $ 910
Trade accounts receivable, net 330 527
Inventories:
Finished products 1,233 1,390
Raw materials 292 464
Work in process 9 14
------ ------
Total inventories 1,534 1,868
Other current assets 181 193
------ ------
Total current assets 3,191 3,498
------ ------
NOTE RECEIVABLE 325 250
------ ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Machinery and equipment 323 314
Dies and molds 312 233
Furnitures, fixtures and
leasehold improvements 222 222
------ ------
857 769
Less accumulated depreciation
and amortization ( 618) ( 588)
------ ------
Net equipment and leasehold
improvements 239 181
------ ------
MARKETABLE SECURITIES 149 101
OTHER ASSETS 32 32
------ ------
TOTAL ASSETS $3,936 $4,062
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 0 $ 17
Accrued advertising 226 314
Accrued professional fees 38 66
Accrued payroll and related items 169 171
Other accrued expenses 89 139
------ ------
Total current liabilities 522 707
------ ------
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
equity securities ( 23) ( 13)
Accumulated deficit ( 1,515) ( 1,584)
------ ------
Total stockholders' equity 3,414 3,355
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,936 $4,062
====== ======
</TABLE>
See notes to consolidated financial statements
1
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
($ in Thousands)
<CAPTION>
Three Months Ended April 30, Six Months Ended April 30,
---------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $1,159 $1,686 $2,648 $2,688
------ ------ ------ ------
COST AND EXPENSES
Cost of products
sold 832 1,198 1,869 1,959
Selling, general
& administrative 334 385 730 698
Depreciation and
amortization 16 12 30 24
------ ------ ------ ------
Total costs and
expenses 1,182 1,595 2,629 2,681
------ ------ ------ ------
(Loss) income before
other income
and expenses ( 23) 91 19 7
Other income -
Interest 28 28 51 57
------ ------ ------ ------
Net income
before provision $ 5 $ 119 $ 70 $ 64
Provision for taxes - 1 1 1
------ ------ ------ ------
Net income $ 5 $ 118 $ 69 $ 63
====== ====== ====== ======
PER SHARE INFORMATION:
Net income
per share $ - $ .04 $ .02 $ .02
====== ====== ====== ======
Average number of
common shares
outstanding 3,128,000 3,128,000 3,128,000 3,128,000
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
2
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
($ in Thousands)
<CAPTION>
Six Months Ended April 30,
--------------------------
1997 1996
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 69 $ 63
------ ------
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 30 24
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 197 37
Decrease (Increase) in inventories 334 ( 515)
(Increase) Decrease in other assets ( 63) 41
Decrease in trade accounts payable ( 17) 0
Increase in accrued expenses ( 168) ( 71)
------ ------
Net cash provided by (used in) operating
activities 382 ( 421)
------ ------
CASHED FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 88) ( 38)
Proceeds from sale of marketable securities 2 82
Purchase of marketable securities ( 60) ( 16)
------ ------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ( 146) 28
------ ------
NET INCREASE (DECREASE)IN CASH AND
CASH EQUIVALENTS 236 ( 393)
------ ------
CASH AND CASH EQUIVALENTS, beginning of period 910 1,792
------ ------
CASH AND CASH EQUIVALENTS, end of period $1,146 $1,399
====== ======
</TABLE>
See notes to consolidated financial statements
3
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the Three Months Ended April 30, 1997
(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 six-month periods are not necessarily indicative of
results for a full fiscal year. For the year ended October 31, 1996, the
Company reported net sales of $5,382,000 and a net income of $28,000.
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). 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 stockholders' equity.
At April 30, 1997 the Company had no investments that qualified as trading or
held to maturity.
Marketable equity securities are valued based on quoted market prices.
The cost of securities sold is determined by the "identified cost" method.
NOTE C - NOTE 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 was originally due in November 1996 and bore interest
(payable monthly) at 14% per annum. At October 31, 1995 this note was in
default and the maker of the note filed a Chapter 11 Bankruptcy Proceeding.
Pending disposition of the Bankruptcy proceeding, maker agreed to pay
interest on the note. The cost of the collection of the note, carried as a
receivable, was $68,000 as of October 31, 1996. An additional $7,000 in
costs was spent on collection prior to effectiveness of the plan of
reorganization. In October 1996, the Bankruptcy Court entered an order
confirming the plan of reorganization which subsequently become effective.
Under the plan, the basic note of $250,000 together with the total costs of
collection, was modified so that it bears interest at the rate of 12 3/4% per
annum and is due and payable on or before August 1, 1998. For the second
quarter of 1997, the modified amount is reflected at $325,791. Management
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
6.11 to 1 at April 30, 1997.
<TABLE>
<CAPTION>
04/30/97 10/31/96
---------- ----------
<S> <C> <C>
Working capital $2,669,000 $2,791,000
Current ratio 6.11 to 1 4.95 to 1
</TABLE>
The Company's liquidity has been generated from internally generated
funds and, prior to 1995, short-term borrowing. The Company elected not to
renew its bank line of credit which expired on March 31, 1995. The Company
concluded not to incur the cost and expenses of extending and maintaining the
bank line of credit until such time as bank borrowings were required. The
Company believes that it will be able to fund its existing business out of
current cash flow without the necessity of bank borrowings. At April 30,
1997, the Company had no material commitments for capital expenditures.
The intense competition in the magnetic media field has made it
difficult for the Company to maintain prices on its magnetic media products
and has continually reduced the Company's margins on these products. As a
result, the Company has discontinued sales of certain magnetic media products
and refused to sell magnetic media products at prices not resulting in
certain minimum margin returns. The Company does not believe that price
competition in the magnetic media field will lessen in the foreseeable future
and, therefore, there may not presently be meaningful opportunities for it to
substantially increase its sales and operating profit through its traditional
outlets. The Company has been attempting to become a private label
manufacturer of magnetic media products for several large national and
international companies and has had some success in obtaining orders which
resulted in increased fiscal 1996 and first quarter fiscal 1997 sales.
Second quarter sales dropped as a result of decrease sales to private label
customers. Sales to the third and fourth quarter of fiscal 1997 are expected
to be substantially below the third and fourth quarter of fiscal 1996 due to
a decrease in orders from private label manufacturers.
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
- ---------------------
Second Quarter Fiscal 1997 compared to Second Quarter Fiscal 1996
- -----------------------------------------------------------------
During the second quarter of fiscal 1997, the Company had a net income
of $5,000, compared to net income of $118,000 in the second quarter of fiscal
1996. The decrease in the net income for the second quarter of fiscal 1997
compared to the second quarter of 1996 was primarily due to a decrease in net
sales with an attendant decrease in gross margin of $161,000 offset by
decrease of $48,000 in overhead expense and taxes.
Net sales were $1,159,000 for the second quarter of 1997 as compared to
sales of $1,686,000 in the second quarter of 1996. The decrease of $527,000
or 31.25% was primarily the result of a decrease in sales to one major
private label user of magnetic media products of $268,000, a decrease in
sales of video cassettes of $142,000 and a decrease in other magnetic media
sales of $117,000. In the fourth quarter of fiscal 1996, the Company was
informed by this major 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
which accounted for approximately $164,000 and $474,000 of the Company's net
sales for the second quarter and six months ended April 30, 1997,
respectively. In the second quarter of fiscal 1997, the customer advised the
Company that it would resume purchasing those private
label audio products, at a reduced level, for the balance of the calendar
year 1997 with sales beginning in September 1997. In addition, this customer
has continued to purchase other private label audio products from the
Company. Also in the fourth quarter of 1996, another private label customer
which accounted for approximately $208,450 of the Company's net sales during
fiscal 1996 projected increased purchases beginning December 1996. Although
net sales to this customer during the second quarter and six months ended
April 30, 1997 were approximately $56,000 and $228,893, respectively, these
projections have not been met and the Company anticipates that sales to this
customer for the third quarter of fiscal 1997 may not be greater than during
the second quarter and that the Company's sales will decline in the third
quarter of fiscal 1997. Whether the Company's fiscal 1997 magnetic media
sales will be materially reduced when compared to fiscal 1996 magnetic media
sales will be dependent upon whether purchases by this customer will increase
a sufficient amount during fiscal 1997, so as to offset the reduced purchases
(estimated at $556,300 for fiscal 1997 when compared to fiscal 1996) from the
other private label customer.
Gross margins decreased by $161,000 for the quarter ended April 30,
1997, from $488,000 in the second quarter of fiscal 1996 to $327,000 in the
second quarter of fiscal 1997. The primary reason for the decrease is due to
decreased magnetic media sales.
Due to the decrease in net sales, selling, general and administrative
expenses decreased by $51,000 during the second quarter of fiscal 1997 from
$385,000 in the second quarter of fiscal 1996 compared to $334,000 in the
second quarter of fiscal 1997.
The Company has not recorded a provision for federal income tax for
first quarter of 1997 due to utilization of net operating loss carry forward
to offset taxable income. The $1,000 represents the minimum state tax.
The Company 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 affected by the
operating results of the issuer, as well as general economic, political and
market conditions. As of April 30, 1997, the Company held common stocks
which had a cost of approximately $172,000 and market value of approximately
$149,000.
6
In accordance with Generally Accepted Accounting Principles, the Company
has recorded the value of its investments in marketable securities on its
Balance Sheet at market value and this decrease of approximately $23,000 is
reflected in stockholders' equity as an unrealized holding loss. If the
Company sells these securities, the Company will recognize a loss in its
statement of operations equal to the amount of the decrease. 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 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.
Six Months Fiscal 1997 compared to Six Months Fiscal 1996
- ---------------------------------------------------------
For the first six months of fiscal 1997, the Company had a net income of
$69,000, compared to a net income of $63,000 for the first six months of
fiscal 1996.
Net sales were $2,648,000 for the first six months of 1997 as compared
to sales of $2,688,000 for the first six months of 1996. The decrease of
$40,000 or 1.5% was primarily the result of a decrease in sales of magnetic
media products in the second quarter of fiscal 1997. In the fourth quarter
of fiscal 1996, the Company was informed by a major private label customer
of magnetic media products 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 which accounted for
approximately $474,000 of the Company's net sales for the six month ended
April 30, 1997. In the second quarter of fiscal 1997, the customer advised
the Company that it would resume purchasing those private label audio
products, at a reduced level, for the balance of the calendar year 1997 with
sales beginning in September 1997. In addition, this customer has continued
to purchase other private label audio products from the Company. Also in the
fourth quarter of 1996, another private label customer which accounted for
approximately $208,450 of the Company's net sales during fiscal 1996
projected increased purchases beginning December 1996. Although net sales to
this customer during the first six months of fiscal 1997 were approximately
$228,893, these projections have not been met and the Company anticipates
that sales to this customer for the third quarter of fiscal 1997 may not be
greater than the $56,000 of net sales to this customer during the second
quarter and that the Company's sales will decline in the third quarter of
fiscal 1997. Whether the Company's fiscal 1997 magnetic media sales will be
materially reduced when compared to fiscal 1996 magnetic media sales will be
dependent upon whether purchases by this customer will increase a sufficient
amount during fiscal 1997, so as to offset the reduced purchases (estimated
at $556,300 for fiscal 1997 when compared to fiscal 1996) from the other
private label customer.
Gross margins increased by $50,000 for the first six months of fiscal
1997, from $729,000 for the first six months of fiscal 1996 to $779,000 for
the first six months of fiscal 1997. The primary reason for the increase is
due to sales of magnetic media with a certain marginal profit return.
Selling, general and administrative expenses increased by $32,000 during
the first six months of fiscal 1997 from $698,000 for the first six months of
fiscal 1996 compared to $730,000 for the first six months of fiscal 1997, due
to the increase in personnel expense of $50,000, supplies of $37,000 offset
by decrease in advertising expense of $30,000 and other miscellaneous expense
of $25,000.
The Company has not recorded a provision for federal income tax for
first quarter of 1997 due to utilization of net operating loss carry forward
to offset taxable income. The $1,000 represents the minimum state tax.
7
The Company 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 affected by the
operating results of the issuer, as well as general economic, political and
market conditions. As of April 30, 1997, the Company held common stocks
which had a cost of approximately $172,000 and market value of approximately
$149,000.
In accordance with Generally Accepted Accounting Principles, the Company
has recorded the value of its investments in marketable securities on its
Balance Sheet at market value and this decrease of approximately $23,000 is
reflected in stockholders' equity as an unrealized holding loss. If the
Company sells these securities, the Company will recognize a loss in its
statement of operations equal to the amount of the decrease. 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 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 herein which are not historical facts,
including statements as to the Company's sales of magnetic media products for
the third quarter of the 1997 fiscal year and the effect on the Company's
magnetic media segment and sales on account of the expected reduction in
fiscal 1997 sales of certain private label audio products which contributed
$474,000 to sales for the first six months of fiscal 1997, 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 obtaining of increased orders from
the private label customer which had forecasted increased purchases beginning
in December 1996, whether and in what volumes the private label customer
resumes purchasing private label audio products begining in September 1997,
the Company's ability to obtain additional customers and business, pricing
factors and competition.
Recently Issued Accounting Pronouncement
- ----------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share," which is
effective for financial statements issued for periods ending after December
31, 1997. SFAS No. 128 requires public companies to present basic earnings
per share and, if applicable, diluted earnings per share, instead of primary
and fully diluted earnings per share. The Company has not yet determined the
effect of adopting SFAS No. 128.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
8
PART II. OTHER INFORMATION.
------------------
Item 4. Submission of Matters to a Vote of Security Holders.
-------
(a) On March 25, 1997, the Registrant held its Annual Meeting of
Shareholders.
(b) Proxies for the meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees as listed in the Proxy Statement and all
of such nominees were elected.
(c) At the meeting, the following persons were elected by the vote
indicated as directors to serve until the next Annual Meeting of Shareholders
and their successors are duly elected and qualified:
<TABLE>
<CAPTION>
Broker
Name Vote For Withheld non-votes
---- --------- -------- ---------
<C> <S> <C> <C> <C>
Marshall I. Kass 2,677,974 7,325 101,370
Jonathan F. Kass 2,677,974 7,325 101,370
Michael S. Kass 2,677,974 7,325 101,370
Susan E. Kass 2,677,974 7,325 101,370
Herbert Bronsten 2,676,188 9,111 101,370
Rogelio Buenrostro 2,679,674 5,625 101,370
Jesse A. Lopez 2,679,674 5,625 101,370
</TABLE>
Item 6. Exhibit and Reports on Form 8-K
-------
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended April 30, 1997, no reports on Form
8-K were filed.
9
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
-----------------------------
Jesse A. Lopez
Controller
(Principal Accounting Officer)
June 2, 1997
BY (SIGNATURE) /s/ Marshall I. Kass
-----------------------------
Marshall I. Kass
Chairman of the Board and
Chief Executive Officer
June 2, 1997
10
EXHIBIT INDEX
TO
CERTRON CORPORATION QUARTERLY REPORT ON FORM 10-Q
NO. ITEM PAGE
- --- ---- ----
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECOND
QUARTER REPORT ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 1,146
<SECURITIES> 149
<RECEIVABLES> 330
<ALLOWANCES> 40
<INVENTORY> 1,534
<CURRENT-ASSETS> 3,191
<PP&E> 857
<DEPRECIATION> 618
<TOTAL-ASSETS> 3,936
<CURRENT-LIABILITIES> 522
<BONDS> 0
0
0
<COMMON> 3,128
<OTHER-SE> 286
<TOTAL-LIABILITY-AND-EQUITY> 3,936
<SALES> 2,700
<TOTAL-REVENUES> 2,648
<CGS> 1,869
<TOTAL-COSTS> 760
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 70
<INCOME-TAX> 1
<INCOME-CONTINUING> 69
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
