<TABLE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
($ in Thousands)
April 30, October 31,
1999 1998
----------- -----------
ASSETS (Unaudited)
- ------------------------------------------
<CAPTION>
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $1,896 $2,237
Trade accounts receivable, net 329 323
Inventories
Finished products 809 666
Raw materials 133 183
Work in process 46 29
------ ------
Total inventories 988 878
Other current assets 86 122
------ ------
Total current assets 3,299 3,560
------ ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Machinery and equipment 327 327
Dies and molds 317 317
Furnitures, fixtures and
leasehold improvements 306 296
------ ------
950 940
Less accumulated depreciation
and amortization ( 760) ( 721)
------ ------
Net equipment and leasehold
improvements 190 219
------ ------
MARKETABLE SECURITIES 102 139
OTHER ASSETS 32 32
------ ------
TOTAL ASSETS $3,623 $3,950
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------
CURRENT LIABILITIES:
Accrued advertising $ 86 $ 160
Accrued professional fees 18 51
Accrued payroll and related items 161 164
Other accrued expenses 121 130
------ ------
Total current liabilities 386 505
------ ------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value, authorized
500,000 shares, no shares issued and outstanding
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 on marketable equity securities( 43) ( 38)
Accumulated deficit ( 1,672) ( 1,469)
------ ------
Total stockholders' equity 3,237 3,445
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,623 $3,950
====== ======
See notes to consolidated financial statements
</TABLE>
1
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in Thousands except Per Share Information)
(Unaudited)
Three Months ended April 30, Six Months ended April 30,
---------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<CAPTION>
<S> <C> <C> <C> <C>
NET SALES $ 775 $ 953 $1,470 $1,888
----- ----- ------ ------
COST AND EXPENSES
Cost of products sold 603 654 1,112 1,323
Selling, general
& administrative 282 302 560 613
Depreciation and
amortization 19 17 39 33
----- ----- ------ ------
Total costs and expenses 904 973 1,711 1,969
----- ----- ------ ------
Loss before other income
and expenses ( 129) ( 20) ( 241) ( 81)
Other income -
Interest (net) 18 28 39 57
(Loss) gain on sales
of stock ( 1) 34 - 34
----- ----- ------ ------
Net (loss) income
before provision ($ 112) $ 42 ($ 202) $ 10
Provision for taxes - - 1 1
----- ------ ------ ------
Net (loss) income ($ 112) $ 42 ($ 203) $ 9
===== ====== ====== ======
PER SHARE INFORMATION:
Basic (loss) earnings
per share ($ .04) $ .01 ($ .07) $ -
===== ====== ====== ======
Diluted (loss) earnings ($ .04) $ .01 ($ .07) $ -
per share ===== ====== ====== ======
Average number of
common shares
outstanding 3,128,000 3,128,000 3,128,000 3,128,000
========= ========= ========= =========
See notes to consolidated financial statements
</TABLE>
2
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
($ in Thousands)
(Unaudited)
Six Months Ended April 30,
--------------------------
1999 1998
-------- --------
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <S> <C> <C> <C>
Net (loss) income ($ 203) $ 9
Adjustment to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization 39 33
Changes in operating assets and liabilities:
(Increase) decrease in trade
accounts receivable ( 6) 278
(Increase)decrease in inventories ( 110) 15
Decrease (increase) in other assets 36 ( 53)
Decrease in accrued expenses ( 119) ( 96)
------ ------
Net cash (used in) provided by operating
activities ( 363) 186
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 10) ( 5)
Proceeds from sale of marketable securities 216 206
Purchase of marketable securities ( 184) ( 283)
------ ------
Net cash provided by (used in)
investing activities 22 ( 82)
------ ------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ( 341) ( 104)
CASH AND CASH EQUIVALENTS, beginning of period 2,237 1,786
------ ------
CASH AND CASH EQUIVALENTS, end of period $1,896 $1,890
====== ======
</TABLE>
See notes to consolidated financial statements
3
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the Three Months Ended April 30, 1999
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying financial statements and footnotes have been condensed and
therefore do not contain all disclosures required by generally accepted
accounting principles. The interim financial statements are unaudited;
however, in the opinion of Certron Corporation (the "Company"), the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. Results for interim periods are not necessarily indicative
of those to be expected for the full year. For the year ended October 31,
1998, the Company reported net sales of $3,931,000 and a net income of
$38,000.
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 April 30, 1999
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 specific identification of cost
method.
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 8.5
to 1 at April 30, 1999.
<TABLE>
04/30/99 10/31/98
---------- ----------
<CAPTION>
<S> <C> <C>
Working capital $2,913,000 $3,055,000
Current ratio 8.5 to 1 7.05 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 borrowing.
At April 30, 1999, the Company had no material commitments for capital
expenditures.
The Company has completed a comprehensive review of its computer systems
to identify all software applications that could be affected by the inability
of many existing computer systems to process time-sensitive data accurately
beyond the year 1999 (referred to as the "Year 2000" issue). The Company is
also continuing to monitor its computer system and the adequacy of the
processes and progress of third-party vendors of systems that may be affected
by the Year 2000 issue. The Company is dependent on third-party computer
systems and applications, particularly with respect to such critical tasks as
accounting, billing and buying, and it also relies on its own computer
systems. The Company expects to complete its Year 2000 compliance program by
mid-1999 and anticipates that its total additional expenditures on such
program will not exceed $100,000. The foregoing statement is a forward
looking statement and actual results could differ materially from this
statement. Factors which could cause actual results to differ materially
include the risk that the Company may experience cost overruns in the future,
which could have a material adverse effect on its business, results of
operations and financial condition. In addition, while management believes
the Company's procedures are designed to be successful, because of the
complexity of the Year 2000 issue and the interdependence of organizations
using computer systems, the Company's efforts, or those of third parties with
whom it interacts, may not be satisfactorily completed in a timely fashion.
If the Company fails to adequately address the Year 2000 issue, then
its business, results of operations and financial condition could be
materially adversely affected.
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.
5
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 borrowing. There can be no assurance, however, that
the Company can find such an acquisition.
RESULTS OF OPERATIONS
- ---------------------
Second Quarter Fiscal 1999 compared to Second Quarter Fiscal 1998
- -----------------------------------------------------------------
During the second quarter of fiscal 1999, the Company had a loss from
operations of $129,000, and net loss of $112,000 on sales of $775,000 as
compared to a loss from operations of $20,000 and net income of $42,000 on
sales of $953,000 during the second quarter of fiscal 1998. The net loss of
$112,000 in the second quarter of fiscal 1999 as compared to the net income
of $42,000 in the second quarter of fiscal 1998 is due primarily to a
decrease of $35,000 on sales of investment securities and a decrease in
interest income of $10,000 and an increase in loss from operations of
$109,000 over the second quarter of fiscal 1998.
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. In May 1999, the
agreement to oversee the Mexicali operations of a United States Company was
extended for two years. 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 $775,000 for the second quarter of 1999 as compared to
net sales of $953,000 in the second quarter of 1998. The decrease of
$178,000 or 18.7% was the result of a decrease in sales of mini and micro
cassettes of $260,000 primarily to private label customers which was offset
by an increase in other magnetic media products of $82,000. The Company
expects the sales in the third quarter of fiscal 1999 to be less than the
$775,000 sales of the second quarter of fiscal 1999.
Gross margins decreased by $127,000 for the quarter ended April 30,
1998, from $299,000 in the second quarter of fiscal 1998 to $172,000 in the
second quarter of fiscal 1999. The primary reason for the decrease is due to
decreased magnetic media sales and a sale made to a Canadian company, which
the Canadian company felt the price quoted was in Canadian dollars rather
than U.S. dollars. In order to avoid costly litigation, a compromise was
reached for a reduced sales price which caused a decrease in the gross
margins.
6
Due to the decrease in net sales, selling, general and administrative
expenses decreased by $20,000 during the second quarter of fiscal 1999 from
$302,000 in the second quarter of fiscal 1998 to $282,000 in the second
quarter of fiscal 1999.
The Company has not recorded a provision for federal income tax for the
second quarter of 1998 and 1999 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, 1999, the Company
held common stocks which had a cost of approximately $145,000 and market
value of approximately $102,000.
The Company has recorded the value of its investments in marketable
securities on its Balance Sheet at market value and the decrease of
approximately $43,000 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 1999 compared to Six Months Fiscal 1998
- ---------------------------------------------------------
For the first six months of fiscal 1999, the Company had a loss from
operations of $241,000 and net loss of $203,000 on sales of $1,470,000 as
compared to a loss from operations of $81,000 and a net income of $9,000 on
sales of $1,888,000 during the first six months of fiscal 1998. The decrease
in net income for the first six months of fiscal 1999 as compared to the
first six months of fiscal 1998 of $212,000 is due primarily to the decrease
in gross profit of $207,000, decrease in gain on sales of stock investment of
$34,000, and a decrease in interest income of $18,000 over the first six
months of fiscal 1998 offset by the decrease of $47,000 in selling and
general expenses.
Net sales were $1,470,000 for the first six months of 1999 as compared
to net sales of $1,888,000 for the first six months of 1998. The decrease of
$418,000 or 22.1% was primarily the result of a decrease in sales of audio
cassettes of $45,000, mini and micro cassettes of $387,000 primarily to
private label customers and other magnetic media products of $44,000 which
was offset by an increase in sales of video cassettes of $58,000.
Gross margins decreased by $207,000 for the first six months of fiscal
1999, from $565,000 for the first six months of fiscal 1998 to $358,000 for
the first six months of fiscal 1999. The primary reason for the decrease is
due to decreased sales of magnetic media products and a sale made to a
Canadian company, which the Canadian company felt the price quoted was in
Canadian dollars rather than U.S. dollars. In order to avoid costly
litigation, a compromise was reached for a reduced sales price which caused a
decrease in the gross margins. As described above under the discussion of
7
the second quarter of fiscal 1999 as compared to second quarter of fiscal
1998, the Company has 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. In May 1999, the agreement with a United States
Company to oversee its Mexicali operation was extended for two years.
Selling, general and administrative expenses decreased by $53,000 during
the first six months of fiscal 1998 from $613,000 for the first six months of
fiscal 1998 compared to $560,000 for the first six months of fiscal 1999, due
to recovery of bad debts of $26,000, decrease in personnel expense of
$25,000, and other miscellaneous expenses of $2,000.
The Company has not recorded a provision for federal income tax for the
first six months of 1999 and 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 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, 1999, the Company
held common stocks which had a cost of approximately $145,000 and market
value of approximately $102,000.
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 $43,000 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.
Forward-Looking Statements
- --------------------------
The Company's statements herein which are not historical facts,
including statements as to the Company's sales in the third quarter of the
1999 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 the private label customer, the Company's ability to obtain
additional customers and business, pricing factors and competition.
8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II. OTHER INFORMATION.
------------------
Item 4. Submission of Matters to a Vote of Security Holders.
-------
(a) On March 23, 1999, 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:
Broker
Name Vote For Withheld non votes
---------------- --------- -------- ---------
Marshall I. Kass 1,915,686 2,781 16,720
Jonathan F. Kass 1,915,686 2,781 16,720
Michael S. Kass 1,915,686 2,781 16,720
Susan E. Kass 1,915,686 2,781 16,720
Rogelio Buenrostro 1,915,486 2,981 16,720
Jesse A. Lopez 1,915,486 2,981 16,720
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, 1999, 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 9, 1999
BY: (SIGNATURE) /s/ Marshall I. Kass
--------------------
Marshall I. Kass
Chairman of the Board and
Chief Executive Officer
June 9, 1999
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, 1999 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-31-1999
<PERIOD-END> APR-30-1999
<CASH> 1,896
<SECURITIES> 102
<RECEIVABLES> 375
<ALLOWANCES> 46
<INVENTORY> 988
<CURRENT-ASSETS> 86
<PP&E> 950
<DEPRECIATION> 760
<TOTAL-ASSETS> 3,623
<CURRENT-LIABILITIES> 386
<BONDS> 0
0
0
<COMMON> 3,128
<OTHER-SE> 109
<TOTAL-LIABILITY-AND-EQUITY> 3,237
<SALES> 1,498
<TOTAL-REVENUES> 1,470
<CGS> 1,112
<TOTAL-COSTS> 1,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> ( 202)
<INCOME-TAX> ( 1)
<INCOME-CONTINUING> ( 203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ( 203)
<EPS-BASIC> ( 203)
<EPS-DILUTED> 0
</TABLE>
