<TABLE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
----------------------------------
($ in Thousands)
<CAPTION>
January 31, October 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
- ------------------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $1,264 $ 910
Trade accounts receivable, net 561 527
Inventories:
Finished products 1,138 1,390
Raw materials 262 464
Work in process 8 14
------ ------
Total inventories 1,408 1,868
Other current assets 141 193
------ ------
Total current assets 3,374 3,498
------ ------
NOTE RECEIVABLE 326 250
------ ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Machinery and equipment 317 314
Dies and molds 312 233
Furnitures, fixtures and
leasehold improvements 222 222
------ ------
851 769
Less accumulated depreciation
and amortization ( 603) ( 588)
------ ------
Net equipment and leasehold
improvements 248 181
------ ------
MARKETABLE SECURITIES 141 101
OTHER ASSETS 32 32
------ ------
TOTAL ASSETS $4,121 $4,062
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------
CURRENT LIABILITIES:
Accounts payable $ - $ 17
Accrued advertising 340 314
Accrued professional fees 54 66
Accrued payroll and related items 162 171
Other accrued expenses 137 139
------ ------
Total current liabilities 693 707
------ ------
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 ( 4) ( 13)
Accumulated deficit ( 1,520) ( 1,584)
------ ------
Total stockholders' equity 3,428 3,355
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,121 $4,062
====== ======
</TABLE>
See notes to consolidated financial statements
1
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
($ in Thousands)
<CAPTION>
For the Three Months Ended
--------------------------
01-31-97 01-31-96
------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $1,489 $1,002
------ ------
COST AND EXPENSES
Cost of products sold 1,037 761
Selling, general & administrative 396 313
Depreciation and amortization 15 12
------ ------
Total costs and expenses 1,448 1,086
------ ------
Income (loss) before other income and expenses 41 ( 84)
Other income - Interest 24 29
------ ------
Net income (loss) before provision $ 65 ($ 55)
Provision for taxes 1 0
------ ------
Net income (loss) $ 64 ($ 55)
====== ======
PER SHARE INFORMATION:
Net income (loss) per share $ .02 ($ .02)
====== ======
Average number of common shares
outstanding 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>
For the Three Months Ended
--------------------------
01-31-97 01-31-96
------------ -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 64 ($ 55)
------ ------
Adjustment to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 15 12
Changes in operating assets and liabilities:
Increase in trade accounts receivable ( 34) ( 65)
Decrease (Increase) in inventories 460 ( 553)
(Increase) Decrease in other assets ( 24) 50
Decrease in trade accounts payable ( 17) 0
Increase in accrued expenses 3 47
------ ------
Net cash provided by (used in) operating
activities 467 ( 564)
CASHED FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 82) ( 18)
Proceeds from sale of marketable securities - 56
Purchase of marketable securities ( 31) ( 16)
------ ------
NET INCREASE (DECREASE)IN CASH AND
CASH EQUIVALENTS 354 ( 542)
CASH AND CASH EQUIVALENTS, beginning of quarter 910 1,792
------ ------
CASH AND CASH EQUIVALENTS, end of quarter $1,264 $1,250
====== ======
</TABLE>
See notes to consolidated financial statements
3
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the Three Months Ended January 31, 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 three-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). 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
stockholders' equity. At January 31, 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. It is anticipated that 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 first 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
4.87 to 1 at January 31, 1997.
<TABLE>
<CAPTION>
01/31/97 10/31/96
---------- ----------
<S> <C> <C>
Working capital $2,681,000 $2,791,000
Current ratio 4.87 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 January 31,
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.
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
First Quarter Fiscal 1997 compared to First Quarter Fiscal 1996
- ---------------------------------------------------------------
During the first quarter of fiscal 1997, the Company had a net income of
$64,000, compared to a net loss of $55,000 in the first quarter of fiscal
1996. The increase in the net income for the first quarter of fiscal 1997
compared to the first quarter of 1996 was due to increase in gross margin of
$211,000 offset by increase of $86,000 in overhead expense, increase of
$1,000 in taxes and a decrease in interest income of $5,000.
Net sales were $1,489,000 for the first quarter of 1997 as compared to
sales of $1,002,000 in the first quarter of 1996. The increase of $487,000
or 48.6% was primarily the result of sales to two major private label users
of magnetic media products. In the fourth quarter of fiscal 1996, the
Company was informed by one of those private label customers 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 $309,600 of the Company's net
sales for the first quarter ended January 31, 1997. The customer indicated,
however, that it will continue to purchase other private label audio products
from the Company. At the same time, 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 quarter of fiscal 1997 were
approximately $172,890, these projections have not been met and the Company
anticipates that sales to this customer for the second quarter of fiscal 1997
will be lower than during the first quarter and that the Company's sales will
decline in the second 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 $211,000 for the quarter ended January 31,
1997, to $452,000 in the first quarter of fiscal 1997 from $241,000 in the
first quarter of fiscal 1996. The primary reason for the increase is due to
increased magnetic media sales.
Due to the increase in net sales, selling, general and administrative
expenses increased by $83,000 during the first quarter of fiscal 1997 from
$313,000 in the first quarter of fiscal 1996 compared to $396,000 in the
first 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 January 31, 1997, the Company held common stocks
which had a cost of approximately $145,000 and market value of approximately
$141,000.
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 $4,000 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 beginning in
the second 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
$309,600 to sales in the first quarter 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 maintaing its current
customer base, the obtaining of increased orders from a private label
customer, the Company's ability to obtain additional customers and business,
pricing factors and competition.
7
PART II. OTHER INFORMATION.
------------------
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 January 31, 1997, no reports on Form
8-K were filed.
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)
BY (SIGNATURE) /s/ Marshall I. Kass
--------------------
Marshall I. Kass
Chairman of the Board and
Chief Executive Officer
8
EXHIBIT INDEX
TO
CERTRON CORPORATION QUARTERLY REPORT ON FORM 10-Q
NO. ITEM PAGE
27 Financial Data Schedule
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
QUARTER REPORT ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 1,264
<SECURITIES> 141
<RECEIVABLES> 601
<ALLOWANCES> 40
<INVENTORY> 1,408
<CURRENT-ASSETS> 141
<PP&E> 851
<DEPRECIATION> 603
<TOTAL-ASSETS> 4,121
<CURRENT-LIABILITIES> 693
<BONDS> 0
0
0
<COMMON> 3,128
<OTHER-SE> 300
<TOTAL-LIABILITY-AND-EQUITY> 4,121
<SALES> 1,510
<TOTAL-REVENUES> 1,489
<CGS> 1,037
<TOTAL-COSTS> 1,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 65
<INCOME-TAX> 1
<INCOME-CONTINUING> 64
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64
<EPS-PRIMARY> 64
<EPS-DILUTED> .02
</TABLE>
