<TABLE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
----------------------------------
($ in Thousands)
July 31, October 31,
1999 1998
----------- -----------
ASSETS (Unaudited)
- ----------------------------------------
<CAPTION>
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $1,996 $2,237
Trade accounts receivable, net 241 323
Inventories
Finished products 677 666
Raw materials 165 183
Work in process 68 29
------ ------
Total inventories 910 878
Other current assets 85 122
------ ------
Total current assets 3,232 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 ( 776) ( 721)
------ ------
Net equipment and leasehold
improvements 174 219
------ ------
MARKETABLE SECURITIES 104 139
OTHER ASSETS 32 32
------ ------
TOTAL ASSETS $3,542 $3,950
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------
CURRENT LIABILITIES:
Accrued advertising $ 120 $ 160
Accrued professional fees 29 51
Accrued payroll and related items 162 164
Other accrued expenses 112 130
------ ------
Total current liabilities 423 505
------ ------
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 ( 40) ( 38)
Accumulated deficit ( 1,793) ( 1,469)
------ ------
Total stockholders' equity 3,119 3,445
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,542 $3,950
====== ======
See notes to consolidated financial statements
</TABLE>
1
<TABLE>
CERTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
($ in Thousands except Per Share Information)
(Unaudited)
Three Months ended July 31, Nine Months ended July 31,
--------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<CAPTION>
<S> <C> <C> <C> <C>
NET SALES $669 $1,216 $2,139 $3,104
---- ------ ------ ------
COST AND EXPENSES
Cost of products sold 506 855 1,618 2,178
Selling, general
& administrative 291 310 851 923
Depreciation and
amortization 17 16 56 49
---- ------ ------ ------
Total costs and
expenses 814 1,181 2,525 3,150
---- ------ ------ ------
(Loss) income before
other income
and expenses ( 145) 35 ( 386) ( 46)
Other income -
Interest (net) 15 30 54 87
Gain on sales
of stock 9 2 9 36
---- ------ ------ ------
Net (loss) income
before provision ($121) $ 67 ($ 323) $ 77
Provision for taxes - - 1 1
---- ------ ------ ------
Net (loss) income ($121) $ 67 ($ 324) $ 76
==== ====== ====== ======
PER SHARE INFORMATION:
Basic (loss) earnings
per share ($.04) $ .02 ($ .10) $ .02
==== ====== ====== ======
Diluted (loss) earnings ($.04) $ .02 ($ .10) $ .02
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)
Nine Months Ended July 31,
---------------------------
1999 1998
<CAPTION>
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <S> <C> <C> <C> <C>
Net (loss) income ($ 324) $ 76
------ ------
Adjustment to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization 55 49
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 82 228
(Increase)decrease in inventories ( 32) 203
Decrease (increase) in other assets 37 ( 94)
Decrease in accrued expenses ( 82) ( 93)
------ ------
Net cash (used in) provided by operating
activities ( 264) 369
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 10) ( 8)
Proceeds from sale of marketable securities 345 259
Purchase of marketable securities ( 312) ( 593)
------ ------
Net cash provided by (used in)
investing activities 23 ( 342)
------ ------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ( 241) 27
CASH AND CASH EQUIVALENTS, beginning of period 2,237 1,786
------ ------
CASH AND CASH EQUIVALENTS, end of period $1,996 $1,813
====== ======
</TABLE>
See notes to consolidated financial statements
3
CERTRON CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the Nine Months Ended July 31, 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 July 31, 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
to 7.64 at July 31, 1999.
<TABLE>
07/31/99 10/31/98
---------- ----------
<CAPTION>
<S> <C> <C>
Working capital $2,809,000 $3,055,000
Current ratio 7.64 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
July 31, 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
last quarter of 1999 and anticipates that its total expenditures on such
program will not exceed $100,000 of which $83,000 to date has been expended.
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.
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
5
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
- ---------------------
Third Quarter Fiscal 1999 compared to Third Quarter Fiscal 1998
- ---------------------------------------------------------------
During the third quarter of fiscal 1999, the Company had a loss from
operations of $145,000, and net loss of $121,000 on sales of $669,000 as
compared to an income from operations of $35,000 and net income of $67,000 on
sales of $1,216,000 during the third quarter of fiscal 1998. The net loss of
$121,000 in the third quarter of fiscal 1999 as compared to the net income of
$67,000 in the third quarter of fiscal 1998 is due primarily to a decrease in
interest income of $15,000 and an increase in loss from operations of $180,000
over the third quarter of fiscal 1998 and offset by an increase of $7,000 on
sales of investment securities.
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, signed a second contract as of May 1, 1999 for a period of
two years to package and assemble products at Certron's Mexicali, Mexico
facility. In May 1999, the agreement to oversee the Mexicali operations of a
United States Company was extended for two years with a sixty day cancellation
clause. Due to a change in emphasis on product development by the customer,
the customer exercised its option to terminate the contract. The termination
was completed on August 1, 1999. The Company began assembly work for a third
customer on June 1, 1999. The Company is actively seeking other
assemblies/manufacturing business to oversee. Although neither or both of
these existing 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 the customers, and general economic conditions.
Net sales were $669,000 for the third quarter of 1999 as compared to net
sales of $1,216,000 in the third quarter of 1998. The decrease of $547,000 or
44.98% was the result of a decrease in sales of mini and micro cassettes of
$534,000 primarily to private label customers and a decrease in sales of other
magnetic media products of $13,000.
Due to the downturn in sales, in June 1999 the Company began overhauling
its sales department and is looking forward to an increase in sales under a
new sales manager. The Company expects net sales in the fourth quarter of
fiscal 1999 to exceed the $669,000 net sales of the third quarter of fiscal
1999 by 10% or more. Sales in August 1999 were 17.6% above July 1999 sales.
6
Gross margins decreased by $198,000 for the quarter ended July 31, 1999,
from $361,000 in the third quarter of fiscal 1998 to $163,000 in the third
quarter of fiscal 1999. The primary reason for the decrease is due to
decreased magnetic media sales.
Due to the decrease in net sales, selling, general and administrative and
depreciation expenses decreased by $18,000 during the third quarter of fiscal
1999 from $326,000 in the third quarter of fiscal 1998 to $308,000 in the
third quarter of fiscal 1999.
The Company has not recorded a provision for federal income tax for the
third 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 has 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 July 31, 1999, the Company
held common stocks which had a cost of approximately $144,000 and market value
of approximately $104,000.
The Company has recorded the value of its investments in marketable
securities on its Balance Sheet at market value and the decrease of
approximately $40,000 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.
Nine Months Fiscal 1999 compared to Nine Months Fiscal 1998
- -----------------------------------------------------------
For the first nine months of fiscal 1999, the Company had a loss from
operations of $386,000 and net loss of $324,000 on sales of $2,139,000 as
compared to a loss from operations of $46,000 and a net income of $76,000 on
sales of $3,104,000 during the first nine months of fiscal 1998. The decrease
in net income for the first nine months of fiscal 1999 as compared to the
first nine months of fiscal 1998 of $400,000 is due primarily to the decrease
in gross profit of $405,000, decrease in gain on sales of stock investment of
$27,000, and a decrease in interest income of $33,000 over the first nine
months of fiscal 1999 offset by the decrease of $65,000 in selling and general
expenses.
Net sales were $2,139,000 for the first nine months of 1999 as compared
to net sales of $3,104,000 for the first nine months of 1998. The decrease of
$965,000 or 31.1% was primarily the result of a decrease in sales of mini and
micro cassettes of $923,000 primarily to private label customers and a
decrease in sales of other magnetic media products of $42,000.
Due to the downturn in sales, in June 1999 the Company began overhauling
its sales department and is looking forward to an increase in sales under a
new sales manager. The Company expects net sales in the fourth quarter of
fiscal 1999 to exceed the $669,000 net sales of the third quarter of fiscal
1999 by 10% or more. Sales in August 1999 were 17.6% above July 1999 sales.
7
Gross margins decreased by $405,000 for the first nine months of fiscal
1999, from $926,000 for the first nine months of fiscal 1998 to $521,000 for
the first nine 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 the
third quarter of fiscal 1999 as compared to third 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 to package and assemble products at the Company's Mexicali,
Mexico plant. In May 1999, the agreement with a United States Company to
oversee its Mexicali operation was extended for two years with a sixty day
cancellation clause. Due to a change in emphasis on product development by
the customer, the customer exercised its option to terminate the contract.
The termination was completed on August 1, 1999. The Company began assembly
work for a third customer on June 1, 1999. The Company is actively seeking
other assemblies/manufacturing business to oversee.
Selling, general and administrative and depreciation expenses decreased
by $65,000 during the first nine months of fiscal 1999 from $907,000 for the
first nine months of fiscal 1999 compared to $972,000 for the first nine
months of fiscal 1998.
The Company has not recorded a provision for federal income tax for the
first nine 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 has 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 July 31, 1999, the Company
held common stocks which had a cost of approximately $144,000 and market value
of approximately $104,000.
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 $40,000 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 fourth 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
8
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
existing customers, 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.
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 July 31, 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)
September 13, 1999
BY: (SIGNATURE) /s/ Marshall I. Kass
---------------------
Marshall I. Kass
Chairman of the Board and
Chief Executive Officer
September 13, 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 THIRD
QUARTER REPORT ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 1,996
<SECURITIES> 104
<RECEIVABLES> 287
<ALLOWANCES> 46
<INVENTORY> 910
<CURRENT-ASSETS> 85
<PP&E> 950
<DEPRECIATION> 776
<TOTAL-ASSETS> 3,542
<CURRENT-LIABILITIES> 423
<BONDS> 0
0
0
<COMMON> 3,128
<OTHER-SE> ( 9)
<TOTAL-LIABILITY-AND-EQUITY> 3,119
<SALES> 2,179
<TOTAL-REVENUES> 2,139
<CGS> 1,618
<TOTAL-COSTS> 2,525
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> ( 323)
<INCOME-TAX> ( 1)
<INCOME-CONTINUING> ( 324)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ( 324)
<EPS-BASIC> ( .10)
<EPS-DILUTED> ( .10)
</TABLE>
