<TABLE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
($ in Thousands)
April 30, October 31,
1998 1997
--------- -----------
ASSETS (Unaudited)
- --------------------------------------
<CAPTION>
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $1,890 $1,786
Trade accounts receivable, net 240 518
Inventories:
Finished products 867 820
Raw materials 147 178
Work in process 51 82
------ ------
Total inventories 1,065 1,080
Other current assets 121 68
------ ------
Total current assets 3,316 3,452
------ ------
NOTE RECEIVABLE 326 326
------ ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Machinery and equipment 327 327
Dies and molds 317 312
Furnitures, fixtures and
leasehold improvements 224 224
------ ------
868 863
Less accumulated depreciation
and amortization ( 688) ( 655)
------ ------
Net equipment and leasehold
improvements 180 208
------ ------
MARKETABLE SECURITIES 116 45
OTHER ASSETS 32 32
------ ------
TOTAL ASSETS $3,970 $4,063
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 0 $ 0
Accrued advertising 181 263
Accrued professional fees 30 63
Accrued payroll and related items 174 164
Other accrued expenses 132 123
------ ------
Total current liabilities 517 613
------ ------
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 ( 1) 5
Accumulated deficit ( 1,498) ( 1,507)
------ ------
Total stockholders' equity 3,453 3,450
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,970 $4,063
====== ======
</TABLE>
See notes to consolidated financial statements
1
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
($ in Thousands)
Three Months Ended April 30, Six Months Ended April 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<CAPTION>
<S> <C> <C> <C> <C>
NET SALES $ 953 $1,159 $1,888 $2,648
------ ------ ------ ------
COST AND EXPENSES
Cost of products sold 654 832 1,323 1,869
Selling, general
& administrative 302 335 613 728
Depreciation and
amortization 17 16 33 31
------ ------ ------ ------
Total costs and
expenses 973 1,183 1,969 2,628
------ ------ ------ ------
(Loss) income before
other income
and expenses ( 20) ( 24) ( 81) 20
Other income -
Interest (net) 28 24 57 45
Gain on sales of stock 34 5 34 5
------ ------ ------ ------
Net income
before provision $ 42 $ 5 $ 10 $ 70
Provision for taxes - - 1 1
------ ------ ------ ------
Net income $ 42 $ 5 $ 9 $ 69
====== ====== ====== ======
PER SHARE INFORMATION:
Basic earnings
per share $ .01 $ - $ - $ .02
======= ====== ====== ======
Diluted earnings $ .01 $ - $ - $ .02
per share ======= ====== ====== ======
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)
Six Months Ended April 30,
--------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<CAPTION>
<S> <C> <C>
Net income $ 9 $ 69
------ ------
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 33 30
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 278 197
Decrease in inventories 15 334
Increase in other assets ( 53) ( 63)
Decrease in trade accounts payable - ( 17)
Decrease in accrued expenses ( 96) ( 168)
------ ------
Net cash provided by operating
activities 186 382
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 5) ( 88)
Proceeds from sale of marketable securities 206 2
Purchase of marketable securities ( 283) ( 60)
------ ------
NET CASH USED IN INVESTING ACTIVITIES ( 82) ( 146)
------ ------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 104 236
------ ------
CASH AND CASH EQUIVALENTS, beginning of period 1,786 910
------ ------
CASH AND CASH EQUIVALENTS, end of period $1,890 $1,146
====== ======
</TABLE>
See notes to consolidated financial statements
3
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the Three Months Ended April 30, 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 six-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
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, 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 April 30, 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
6.41 to 1 at April 30, 1998.
<TABLE>
04/30/98 10/31/97
---------- ----------
<CAPTION>
<S> <C> <C>
Working capital $2,799,000 $2,839,000
Current ratio 6.41 to 1 5.63 to 1
</TABLE>
The Company's liquidity has been supplied from internally generated
funds. 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, 1998, the Company had no material commitments for capital
expenditures.
The Company has reviewed its computer systems (hardware and software)
for possible year 2000 problems and presently anticipates an expenditure of
approximately $65,000 to upgrade its computer system to cover the problems of
year 2000. The Company presently expects to fund this expenditure out of
existing working capital. Due to the fact that the expenditure will be
capitalized and depreciated over several years, the Company does not expect
that it will materially adversely effect its results of operations. The
foregoing statements as to the anticipated future effect to the Company of
the year 2000 issue are forward looking statements which 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 customer and suppliers effectively addressing the
year 2000 problems and further hardware or software requirements due to
changes in business.
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
- ---------------------
Second Quarter Fiscal 1998 compared to Second Quarter Fiscal 1997
- -----------------------------------------------------------------
During the second quarter of fiscal 1998, the Company had a loss from
operations of $20,000, and net income of $42,000 on sales of $953,000 as
compared to a loss from operations of $24,000 and net income of $5,000 on
sales of $1,159,000 during the second quarter of fiscal 1997. The increase
in net income of $37,000 in the second quarter of fiscal 1998 as compared to
the second quarter of fiscal 1997 is due primarily to an increase in the gain
of $29,000 on sales of investment securities and an increase in interest
income of $4,000 and a decrease in loss from operations of $4,000 over the
second quarter of fiscal 1997. The increase in gross margin is primarily due
to the assembly work the Company is overseeing for others in Mexicali.
For the past several years the Company has not been successful in
obtaining agreements to render assembly services for others at its Mexicali,
Mexico facility. During the second quarter of fiscal 1998 the Company signed
a one-year agreement with a United States company to oversee its Mexicali
operations through the rendering of administrative services by the Company
and, in addition, commenced packaging products at its Mexicali, Mexico
facility for another company on an order by order basis. Although neither or
both of these arrangements are expected to have a material effect on the
Company's sales or results of operations, they should make a minor
contribution to the Company's gross margins over the remainder of this fiscal
year. The foregoing statement is a forward looking statement which involves
risks and uncertainties that could cause actual results to differ materially
from the forward looking statement. Factors which could cause actual results
to differ materially include a reduction in the volume of business of either
of the companies, the company for whom the Company is packaging products
ceasing to do business with the Company, and general economic conditions.
Net sales were $953,000 for the second quarter of 1998 as compared to
net sales of $1,159,000 in the second quarter of 1997. The decrease of
$206,000 or 17.8% was primarily the result of a decrease in sales of audio
cassettes of $61,000, video cassettes of $36,000, mini and micro cassettes of
$80,000 and other magnetic media products of $37,000 offset by an increase in
assembly operations in Mexico in the amount of $8,000. The decrease in micro
cassettes is primarily due to a decrease in sales in private label micro
cassettes and the accumulation of product for a $322,000 order for Certron
labeled micro cassettes that were delivered to a private label customer in
May, 1998. Primarily as a result of this delivery, the Company expects its
net sales in the third quarter of fiscal 1998 to exceed its $953,000 of net
sales in the second quarter of fiscal 1998.
Gross margins decreased by $28,000 for the quarter ended April 30, 1998,
from $327,000 in the second quarter of fiscal 1997 to $299,000 in the second
quarter of fiscal 1998. The primary reason for the decrease is due to
decreased magnetic media sales offset by increased assembly operations in
Mexico in the amount of $8,000.
Due to the decrease in net sales, selling, general and administrative
expenses decreased by $33,000 during the second quarter of fiscal 1998 from
$335,000 in the second quarter of fiscal 1997 to $302,000 in the second
quarter of fiscal 1998.
The Company has not recorded a provision for federal income tax for the
second quarter of 1997 and 1998 due to utilization of net operating loss
carry forward to offset taxable income. The $1,000 represents the minimum
state tax.
6
The Company invested cash, not needed in operations, in commercial paper
and 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, 1998, the Company
held common stocks which had a cost of approximately $116,000 and market
value of approximately $115,000.
The Company has recorded the value of its investments in marketable
securities on its Balance Sheet at market value and the decrease of
approximately $1,000 is reflected in stockholders' equity as an unrealized
holding loss. If the Company sells these securities at a loss, 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 1998 compared to Six Months Fiscal 1997
- ---------------------------------------------------------
For the first six months of fiscal 1998, the Company had a loss from
operations of $81,000 and net income of $9,000 on sales of $1,888,000 as
compared to a profit from operations of $20,000 and a net income of $69,000
on sales of $2,648,000 during the first six months of fiscal 1997. The
decrease in net income for the first six months of fiscal 1998 as compared to
the first six months of fiscal 1997 of $60,000 is due primarily to the
decrease in gross profit of $101,000, offset in part by the gain from sale of
stock investments of $29,000, and an increase in interest income of $12,000
over the first six months of fiscal 1997.
Net sales were $1,888,000 for the first six months of 1998 as compared
to net sales of $2,648,000 for the first six months of 1997. The decrease of
$760,000 or 28.7% was primarily the result of a decrease in sales of audio
cassettes of $63,000, video cassettes of $110,000, mini and micro cassettes
of $520,000 and other magnetic media products of $75,000 offset by an
increase in assembly operations in Mexico in the amount of $8,000. The
primary reason for the decrease in sales of micro cassettes is the decrease
in private label micro cassettes and the accumulation of product for a
$322,000 order for Certron labeled micro cassettes delivered in May, 1998
which is described above under the discussion of the second quarter of fiscal
1998 as compared to second quarter of fiscal 1997.
Gross margins decreased by $214,000 for the first six months of fiscal
1998, from $779,000 for the first six months of fiscal 1997 to $565,000 for
the first six months of fiscal 1998. The primary reason for the decrease is
due to decreased sales of magnetic media products offset by an increase in
assembly operations in Mexico in the amount of $8,000. As described above
under the discussion of the second quarter of fiscal 1998 as compared to
second quarter of fiscal 1997, the Company has recently signed a one year
agreement with a United States company to oversee such company's Mexicali
operation and has an arrangement with another small company for the packing
of various products at the Company's Mexicali plant.
Selling, general and administrative expenses decreased by $115,000
during the first six months of fiscal 1998 from $728,000 for the first six
months of fiscal 1997 compared to $613,000 for the first six months of fiscal
7
1998, due to the decrease in advertising expense of $76,000, supplies of
$37,000 and other miscellaneous expense of $14,000 and offset in part by an
increase in personnel expense of $12,000.
The Company has not recorded a provision for federal income tax for the
first six months of 1998 and 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 commercial paper
and 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, 1998, the Company
held common stocks which had a cost of approximately $116,000 and market
value of approximately $115,000.
The Company has recorded the value of its investments in marketable
securities on its Balance Sheet at market value and the decrease of
approximately $1,000 from their original cost is reflected in stockholders'
equity as an unrealized holding loss. If the Company sells these securities
at a loss, the Company will recognize the 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 anticipated net sales in the third
quarter of the 1998 fiscal year as compared to the net sales for the second
quarter of fiscal 1998, 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, the Company's ability to
obtain additional customers and business, pricing factors and competition.
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 24, 1998, 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 (there were no broker
non-votes):
<TABLE>
Name Vote For Withheld
---- --------- --------
<CAPTION>
<C> <S> <C> <C>
Marshall I. Kass 2,795,700 84,084
Jonathan F. Kass 2,805,299 74,485
Michael S. Kass 2,805,299 74,485
Susan E. Kass 2,805,324 74,460
Herbert Bronsten 2,804,724 75,060
Rogelio Buenrostro 2,805,324 74,460
Jesse A. Lopez 2,805,124 74,660
</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, 1998, 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 8, 1998
BY (SIGNATURE) /s/ Marshall I. Kass
--------------------
Marshall I. Kass
Chairman of the Board and
Chief Executive Officer
June 8, 1998
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 SECOND
QUARTER REPORT ENDED APRIL 30, 1998 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-31-1998
<PERIOD-END> APR-30-1998
<CASH> 1,890
<SECURITIES> 116
<RECEIVABLES> 290
<ALLOWANCES> 50
<INVENTORY> 1,065
<CURRENT-ASSETS> 121
<PP&E> 868
<DEPRECIATION> 688
<TOTAL-ASSETS> 3,970
<CURRENT-LIABILITIES> 517
<BONDS> 0
0
0
<COMMON> 3,128
<OTHER-SE> 325
<TOTAL-LIABILITY-AND-EQUITY> 3,970
<SALES> 1,922
<TOTAL-REVENUES> 1,888
<CGS> 1,323
<TOTAL-COSTS> 1,969
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 10
<INCOME-TAX> 1
<INCOME-CONTINUING> 9
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9
<EPS-PRIMARY> 9
<EPS-DILUTED> 0
</TABLE>
