<TABLE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
($ in Thousands)
January 31, October 31,
1998 1997
----------- -----------
ASSETS (Unaudited)
- ----------------------------------------
<CAPTION>
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $1,765 $1,786
Trade accounts receivable, net 335 518
Inventories:
Finished products 862 820
Raw materials 135 178
Work in process 61 82
------ ------
Total inventories 1,058 1,080
Other current assets 112 68
------ ------
Total current assets 3,270 3,452
------ ------
NOTE RECEIVABLE 326 326
------ ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Machinery and equipment 327 327
Dies and molds 312 312
Furnitures, fixtures and
leasehold improvements 224 224
------ ------
863 863
Less accumulated depreciation
and amortization ( 671) ( 655)
------ ------
Net equipment and leasehold
improvements 192 208
------ ------
MARKETABLE SECURITIES 150 45
OTHER ASSETS 31 32
------ ------
TOTAL ASSETS $3,969 $4,063
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------
CURRENT LIABILITIES:
Accrued advertising $ 241 $ 263
Accrued professional fees 42 63
Accrued payroll and related items 172 164
Other accrued expenses 105 123
------ ------
Total current liabilities 560 613
------ ------
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 ( 3) 5
Accumulated deficit ( 1,540) ( 1,507)
------ ------
Total stockholders' equity 3,409 3,450
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,969 $4,063
====== ======
</TABLE>
See notes to consolidated financial statements
1
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
($ in Thousands except Per Share Information)
(Unaudited)
For the Three Months Ended
--------------------------
01-31-98 01-31-97
------------ -----------
<CAPTION>
<S> <C> <C>
NET SALES $ 935 $1,489
------ ------
COST AND EXPENSES
Cost of products sold 669 1,037
Selling, general & administrative 311 396
Depreciation and amortization 16 15
------ ------
Total costs and expenses 996 1,448
------ ------
(Loss) income before other income and expenses ( 61) 41
Other income - Interest (net) 29 24
------ ------
Net (loss) income before provision ($ 32) $ 65
Provision for taxes 1 1
------ ------
Net (loss) income ($ 33) $ 64
====== ======
PER SHARE INFORMATION:
Net (loss) income per share ($ .01) $ .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)
(Unaudited)
For the Three Months Ended
--------------------------
01-31-98 01-31-97
------------ -----------
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income ($ 33) $ 64
------ ------
Adjustment to reconcile net (loss) income
to net cash provided by
operating activities:
Depreciation and amortization 16 15
Changes in operating assets and liabilities:
Decrease (increase) in trade
accounts receivable 183 ( 34)
Decrease in inventories 22 460
Increase in other assets ( 43) ( 24)
Decrease in trade accounts payable - ( 17)
(Decrease) increase in accrued expenses ( 53) 3
------ ------
Net cash provided by operating
activities 92 467
CASHED FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( - ) ( 82)
Purchase of marketable securities ( 113) ( 31)
------ ------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ( 21) 354
CASH AND CASH EQUIVALENTS, beginning of quarter 1,786 910
------ ------
CASH AND CASH EQUIVALENTS, end of quarter $1,765 $1,264
====== ======
</TABLE>
See notes to consolidated financial statements
3
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the Three Months Ended January 31, 1998
(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, 1997, the
Company reported net sales of $4,988,000 and a net income of $77,000.
NOTE B - MARKETABLE EQUITY SECURITIES
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,
1998 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.
Subsequently, the note was rewritten to reflect the expense of collection and
the bankruptcy proceeding was dismissed. The note now stands at $326,000.
The interest rate was adjusted to 12 3/4%. The note is due August, 1998. On
January 20, 1998, the maker of the note again filed a bankruptcy petition.
As of January 31, 1998, the note was not in default.
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
5.84 to 1 at January 31, 1998.
<TABLE>
01/31/98 10/31/97
---------- ----------
<CAPTION>
<S> <C> <C>
Working capital $2,710,000 $2,839,000
Current ratio 5.84 to 1 5.63 to 1
</TABLE>
The Company's liquidity has been supplied 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. This was due to the
Company's decision 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, 1998, 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. As described below, the Company is attempting to become a private
label manufacturer of magnetic media products for several large national and
international companies.
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 1998 compared to First Quarter Fiscal 1997
- ---------------------------------------------------------------
During the first quarter of fiscal 1998, the Company had a net loss of
$33,000, compared to a net income of $64,000 in the first quarter of fiscal
1997. The net loss for the first quarter of fiscal 1998 compared to the net
income in the first quarter of 1997 was due to a decrease in net sales of
$554,000 (37.2%) with an attendant decrease in gross margin of $186,000
offset by decrease of $84,000 in overhead expense and an increase in interest
income of $5,000.
Net sales were $935,000 for the first quarter of 1998 as compared to
sales of $1,489,000 in the first quarter of 1997. The decrease of $554,000
or 37.2% was primarily the result of the decrease in sales to two major
private label users of $292,000, video cassettes of $74,000 and other
magnetic media products of $188,000. The Company expects the sales in second
quarter of fiscal 1998 to equal or exceed $935,000 sales of the first quarter
of fiscal 1998.
Gross margins decreased by $186,000 for the quarter ended January 31,
1998, to $266,000 in the first quarter of fiscal 1998 from $452,000 in the
first 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 $85,000 during the first quarter of fiscal 1998 from
$396,000 in the first quarter of fiscal 1997 compared to $311,000 in the
first quarter of fiscal 1998.
The Company has not recorded a provision for federal income tax for
first quarter of 1998 due to utilization of net operating loss carry forward
to offset taxable income. The $1,000 represents the minimum state tax.
The Company invested some 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, 1998, the Company held common stocks
which had a cost of approximately $153,000 and market value of approximately
$150,000.
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 $3,000 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.
6
Forward-Looking Statements
- --------------------------
The Company's statements herein which are not historical facts,
including the statement as to the Company's sales in the second quarter of
the 1998 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 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, 1998, the Company filed
a form 8-k reporting on Item 5. "Other Events" with Date of Report (Date of
earliest event reported) being January 2, 1998.
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)
March 11, 1998
BY (SIGNATURE) /s/ Marshall I. Kass
---------------------
Marshall I. Kass
Chairman of the Board and
Chief Executive Officer
March 11, 1998
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, 1998 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-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 1,765
<SECURITIES> 150
<RECEIVABLES> 335
<ALLOWANCES> 50
<INVENTORY> 1,058
<CURRENT-ASSETS> 3,270
<PP&E> 863
<DEPRECIATION> 671
<TOTAL-ASSETS> 3,969
<CURRENT-LIABILITIES> 560
<BONDS> 0
0
0
<COMMON> 3,128
<OTHER-SE> 281
<TOTAL-LIABILITY-AND-EQUITY> 3,969
<SALES> 951
<TOTAL-REVENUES> 935
<CGS> 669
<TOTAL-COSTS> 996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> ( 32)
<INCOME-TAX> 1
<INCOME-CONTINUING> ( 33)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ( 33)
<EPS-PRIMARY> ( 33)
<EPS-DILUTED> .01
</TABLE>
