FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
Commission file number 0-0000
CARVER CORPORATION
(Exact Name of Registrant as specified in its charter)
WASHINGTON 91-1043157
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
20121 - 48th Avenue West, Lynnwood, WA 98036
(Address of principal executive offices) (Zip Code)
(206) 775-1202
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At September 30, 1995, 3,679,538 shares of $.01 par value common
stock of the Registrant were outstanding.
Page 1 of 15 pages.
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CARVER CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<CAPTION>
September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 47,000 $ 249,000
Marketable securities 5,000 5,000
Accounts receivable 2,713,000 3,830,000
Inventories 6,121,000 8,050,000
Current portion of note receivable 13,000 13,000
Prepaid assets 430,000 634,000
Total current assets 9,329,000 12,781,000
Property and equipment,
less accumulated depreciation 2,354,000 2,528,000
Other assets and deferred charges
Note receivable, net of
current portion 982,000 989,000
Other 279,000 330,000
Total assets $12,944,000 $16,628,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable $ 1,884,000 $ 3,067,000
Accounts payable 1,218,000 1,383,000
Accrued liabilities
Commissions and advertising 134,000 221,000
Payroll and related taxes 212,000 243,000
Warranty 103,000 103,000
Other 87,000 155,000
Current maturities of
long-term debt 20,000 20,000
Total current liabilities 3,658,000 5,192,000
Long-term settlement payable,
net of current portion 152,000 203,000
Long-term debt, net of
current portion 681,000 696,000
Total long-term liabilities 833,000 899,000
Shareholders' equity
Preferred stock, par value $.01
per share, 2,000,000 shares
authorized, no shares issued
Common stock, par value $.01 per
share, 20000,000 shares
authorized, 3,679,538 shares
issued and outstanding 37,000 37,000
Additional paid-in capital 15,933,000 15,931,000
Accumulated deficit (7,517,000) (5,431,000)
Total shareholders' equity 8,453,000 10,537,000
Total liabilities and
shareholders' equity $12,944,000 $16,628,000
(See Notes to Consolidated Financial Statements)
</TABLE>
<TABLE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $4,494,000 $5,675,000 $14,655,000 $ 5,991,000
Cost of sales 3,416,000 4,441,000 11,689,000 12,656,000
Gross Profit 1,078,000 1,234,000 2,966,000 3,335,000
Operating expense
Selling 702,000 939,000 2,750,000 793,000
General & admin 340,000 393,000 1,294,000 1,381,000
Engineering, R&D 117,000 281,000 685,000 868,000
1,159,000 1,613,000 4,729,000 5,042,000
Loss from operations (81,000) (379,000) (1,763,000)(1,707,000)
Other income (expense)
Interest expense (82,000) (90,000) (274,000) (258,000)
Interest income 22,000 22,000 65,000 65,000
Other (10,000) (440,000) (114,000) (479,000)
Loss before income
tax (151,000) (887,000) (2,086,000)(2,379,000)
Income tax benefit 0 0 0 0
Net loss $ (151,000) $(887,000)$(2,086,000)$(2,379,000)
Loss per share $ ( 0.04) $( 0.24)$( 0.57)$( 0.65)
(See Notes to Consolidated Financial Statements)
</TABLE>
<TABLE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,086,000) $(2,379,000)
Adjustments to reconcile net loss
to cash flows from operating activities:
Depreciation and amortization 311,000 253,000
Changes in:
Accounts receivable 1,117,000 1,230,000
Inventories 1,929,000 1,053,000
Prepaid expenses 204,000 (101,000)
Accounts payable and
accrued liabilities (401,000) 190,000
Other assets and deferred charges (45,000) (47,000)
Net cash provided by operating
activities 1,029,000 199,000
INVESTING ACTIVITIES:
Proceeds from repayment of note
receivable 7,000 8,000
Acquisition of property, plant and
equipment, net (42,000) (100,000)
Net cash used by investing activities (35,000) (92,000)
FINANCING ACTIVITIES:
Repayment of notes payable (1,183,000) (67,000)
Repayment of long-term debt (15,000) (13,000)
Issuance of Common Stock 2,000 1,000
Net cash used by financing activities (1,196,000) (79,000)
Increase (decrease) of cash and
cash equivalents (202,000) 28,000
Cash and cash equivalents:
Beginning of period 249,000 171,000
End of period $ 47,000 $ 199,000
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 274,000 $ 258,000
</TABLE>
CARVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
In the opinion of management, the consolidated financial statements
include all adjustments (which include only normal recurring
adjustments) necessary to present fairly the changes in financial
position and results of operations for the interim periods
reported. The results of operations for any interim period are not
necessarily indicative of the results for the entire year.
The financial statements should be read with reference to
"0Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained herein and the "Notes to
Consolidated Financial Statements" set forth in the Company's 10-K
filing for the year ended December 31, 1994.
NOTE 2 - INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1995 1994
Raw materials $1,422,000 $1,444,000
Work-in-progress 1,694,000 1,712,000
Finished goods 3,005,000 4,894,000
$6,121,000 $8,050,000
NOTE 3 - EARNINGS PER SHARE
The earnings per share computations are based upon the weighted
average number of shares outstanding for the interim periods
presented as set forth in Exhibit 11, "Computation of Earnings per
Share." The earnings per share calculation for periods in which a
loss is recorded excludes common share equivalents because the
effect would be antidilutive.
NOTE 4 - PROPERTY AND EQUIPMENT
September 30, December 31,
1995 1994
Land $ 440,000 $ 440,000
Building & improvements 2,452,000 2,444,000
Equipment 2,041,000 2,026,000
4,933,000 4,910,000
Less accumulated
depreciation (2,579,000) (2,382,000)
$2,354,000 $2,528,000
NOTE 5 - INCOME TAXES - Effective January 1, 1993, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes", under which income tax expense is
determined using an asset and liability approach. There was no
effect on the Company's financial position or results of operations
as a result of implementing this accounting standard. Management
is of the opinion that it is not appropriate to record a benefit
for net operating loss carryforwards of approximately $12,700,000
at this time. As future operating results improve, management will
re-assess its position in this matter.
NOTE 6 - COMMITMENTS - As of September 30, 1995, the Company has
committed to purchase approximately $2,000,000 of inventory
expected to be received in 1995 and 1996 from various offshore
vendors.
NOTE 7 - CONTINGENCIES - See Customs Audit, Part 1, Item 2
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
PART 1. FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS -
The following tables set forth items in the consolidated statement
of income as a percentage of net sales for the three-month periods
ended September 30, 1995 and 1994.
Percentage of Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.0 78.3 79.7 79.1
Gross profit 24.0 21.7 20.2 20.9
Operating expenses
Selling 15.6 16.5 18.7 17.5
General and admin 7.6 6.9 8.8 8.7
Engineering, R & D 2.6 5.0 4.7 5.4
Loss from operations (1.8) (6.7) (12.0) (10.7)
Interest expense (1.9) ( 1.6) ( 1.9) ( 1.6)
Interest income 0.5 0.4 0.5 0.4
Other expense (0.2) ( 7.7) ( 0.8) (3.0)
Loss before tax (3.4) (15.6) (14.2) (14.9)
Income tax benefit - - - -
Net loss (3.4%) (15.6%) (14.2%) (14.9%)
RECENT DEVELOPMENTS -
Strategic Alternatives. The Company has retained the services of
the investment banking firm of Cruttenden Roth with the intention
of seeking a strategic partner, capital infusion or buyer for part
or all of the Company. Management has reached the conclusion that
outside investment of capital is necessary to fund the Company's
current operating and future growth plans. While the Company is
currently conducting discussions with various interested parties,
there can be no assurances any outside investment can be obtained
on terms favorable for the Company and its shareholders. If the
Company is unable to obtain additional financing, it will be
necessary to further streamline the Company's operations. (See
"Liquidity and Capital Resources.")
Customs Audit. Between 60% to 65% of the Company's revenues in
recent years are of products which are sourced from offshore
suppliers primarily from the Far East. Late in 1994 the United
States Customs Service conducted an audit of the Company's import
operations. The Customs Service found that the Company had made
late duty payments totaling $99,000 on tooling between 1989 to
1993. On March 9, 1995, the Customs Service issued to the Company
a prepenalty notice indicating that it will assess a penalty up to
approximately $400,000. The Company provided documentation to the
Customs Service which the Company believes will result in a
significant mitigation of this penalty. In July, 1995 the Company
paid United States Customs $50,000 as an offer in compromise to the
penalties. While the Company believes its offer will be accepted,
there can be no assurances. The Company's current cash flow
position would not allow it to pay a $400,000 penalty.
Seasonality. The markets for consumer audio equipment are
moderately seasonal, with somewhat higher sales expected to occur
in the last six months of the year. The introduction of new
products may affect this seasonality and quarter-to-quarter
comparisons. Demand for audio products also exhibits some
cyclicality, reflecting the general state of the economy and
consumer expectations.
NET SALES AND NET LOSSES -
Net sales of the quarter ended September 30, 1995 were $4,494,000
down 20.8% from sales of $5,675,000 for the same period in 1994.
The largest factor in the decline of sales was unavailability of
offshore sourced product that the Company sells to its consumer
customers. Due to its cash constraints the Company was unable to
purchase enough of these products to fill its orders. The Company
has also streamlined its product offerings from a year ago and
therefore had planned for a decline in net sales. There was also a
significant decline of sales of professional amplifiers.
Management attributes this decline to increased price competition
by its competitors and market uncertainty about Carver's future.
Sales of product that the Company builds in its Lynnwood factory
and sales to international and OEM customers increased in quarter
to quarter comparison. Sales of product built in the Company's
manufacturing facility comprised 55% of total revenues from
approximately 38% for the same period in 1994.
Net sales for the nine months ended September 30, 1995 were
$14,655,000 down 8.4% from sales of $15,991,000 for the first nine
months of 1994. The Company is planning to broaden its consumer
distribution which is likely to increase net revenues in 1996 and
beyond.
The Company reported net losses of $151,000 (3.4% of sales) or
$0.04 per share and $2,086,000 (14.2% of sales) or $0.57 per share
for the three and nine month periods respectively ended September
30, 1995. This compares to net losses of $887,000 (15.6% of sales)
or $0.24 per share for the three month period and $2,379,000 (14.9%
of sales) or $0.65 per share. The Company's operating performance
improved due to improved margins and aggressive cost cutting. 1994
net losses include a $430,000 provision due to a legal settlement.
GROSS PROFIT -
Gross profit increased as a percent of net sales to 24% in the
third quarter of 1995 from 21.7% in the third quarter of 1994. The
third quarter benefited from improvements in the Company's
manufacturing productivity and from a product mix that was
predominantly amplifiers that the Company produces in its Lynnwood
factory. While the strength of the U.S. Dollar against the Japanese Yen
improved during this period, the Company purchased less sourced
products than it has historically and currency fluctuations did not
significantly impact the quarter's improvement. For the first nine months
of 1995 the Company's gross profit improved only slightly when compared to
the first nine months of 1994. Improvements in the Company's
manufacturing process were largely offset by the weakness of the
U.S. dollar that occurred in the first part of 1995.
OPERATING EXPENSE -
Selling expense decreased both in actual dollars ($237,000) and as
a percentage of sales in quarter to quarter comparisons due to
elimination of certain personnel and all discretionary spending
including media advertising. When the Company's cash position
improves, it is likely to invest more in sales and marketing expense, as it
believes its current reduced level of expenditures on advertising and
other promotional activities is having an adverse impact on the
Company's revenues.
General and administrative expense have decreased in quarter to
quarter and year to year comparisons primarily due to decreased
salary expenditure, cost cutting measures and a reduction in legal
fees.
Research and development expense has decreased substantially in the
third quarter and for the nine month period ended September 30,
1995 primarily due to head count reductions and the limiting of new
development projects started.
OTHER INCOME AND EXPENSE -
Other expense has decreased $438,000 in quarter to quarter comparisons.
This reflects a $430,000 legal settlement that was recorded in 1994.
Year to date interest expense has increased by $16,000 even though
the Company has decreased its borrowings largely due to an increase
in interest rates.
LIQUIDITY AND CAPITAL RESOURCES -
The Company's working capital on September 30, 1995 was $5,671,000
which included cash and short term investments aggregating
approximately $52,000. This compares with working capital of
$7,589,000 and cash and short-term investments of $251,000 at
December 31, 1994. At November 6, 1995, the Company's immediate
capital resources consisted of approximately $95,000 in cash (and
cash equivalents) and the credit facility described below.
The Company has a $6,000,000 revolving line of credit, $1,000,000
of which can be used to open commercial letters of credit.
Borrowings under this agreement are restricted to 70% of eligible
accounts receivable and 50% of eligible inventory which at
November 6, 1995 produced a borrowing base of $1,800,000. The line
is collateralized by substantially all assets of the Company and
bears interest at the prime lending rate plus 2%. This line
expires April 30, 1996. At November 6, 1995, borrowings of
$1,500,000 were outstanding under this line.
The Company's inventory has decreased $1,929,000 from December 31,
1994 primarily in sourced finished goods. Accounts receivable have
decreased $1,117,000 from the end of 1994 due to the decline in
sales.
As the Company's borrowing base is dependent on its inventory and
receivables and as the Company has continued to experience a
decline in sales accompanied by higher than expected losses, the
Company's borrowing availability has contracted to a level at which
current cash requirements exceed its ability to borrow. Therefore,
the Company has been and will continue to be forced to delay prompt
payment of certain of its vendors. In response, the Company has
negotiated payment and delivery schedules with some of its foreign
suppliers and has canceled purchase orders for certain products.
In addition certain products have been and will continue to be
discounted and sold to generate cash which will impair margins. An
aggressive cost cutting program has also been implemented to
preserve cash and allow the Company to operate within its cash
availability. It is the intention of management to not jeopardize
its Lynnwood production and to maintain a reliable supply of
domestic built product.
The Company has announced that it has retained the services of an
investment banker to seek alternative or additional sources of
working capital or a buyer for all or part of the Company. There
can be no assurance that the Company will be able to obtain
additional financing or other sources of working capital, or if it
is able, that the terms will be favorable to the Company. Nor can
there be any assurance that the Company will be able to obtain
concessions from its suppliers or reduce its expenses sufficient to
achieve positive cash flow.
If the Company does not attract additional financing and if it
continues to record losses, the Company likely would have to delay
payment of suppliers and be forced to seek other relief from its
creditors.
EFFECTS OF INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
Due to the competitive conditions in the market for consumer
electronics, historically the Company has been limited in its
ability to increase prices for its products in amounts sufficient
to offset increased production and operating costs. The Company
increased its domestic consumer and worldwide professional prices
on average of 5% on January 15, 1995 due to the increase in
material and labor costs it has been experiencing as well as the
continued erosion in the strength of the U.S. dollar. Consumer
export prices were also increased in July 1995. The Company
believes that it is appropriate to trade some decline in sales for
an improvement in margins. The Company intends to continue to
monitor costs and its market and adjust prices taking into
consideration the Company's costs and competitive conditions.
Approximately 60% of the Company's net sales in 1994 and 43% year
to date in 1995 were of products designed by and/or manufactured to
the Company's specifications by overseas suppliers. The Company
purchased a substantial portion of these products at an agreed per
unit price payable in Japanese yen. Accordingly, the weakening in
the value of the dollar versus the yen has had an adverse effect on
the Company's gross margin. This adverse impact of the weak dollar
has been somewhat mitigated by a mild recovery in the third quarter
and the Company's decreased reliance on offshore sourcing of its
products. It is presently the Company's intention to discontinue
certain Japanese built products by the end of 1995 which is likely
to result in write offs of prepaid tooling. The Company is
currently evaluating a strategy which involves sourcing from
countries that do not require payment in yen and evaluating the
impact of this change. However, the transition to alternate
suppliers will take several months and may occasion an initial
increase in quality control issues, delays in delivery of product
and other transitional problems.
Due to credit restrictions experienced by the Company it has not
been able to hedge against foreign currency exposure. Accordingly,
the Company has considerable exposure to currency fluctuations
which will adversely affect its gross profit in 1995 unless the
U.S. dollar strengthens considerably against the yen.
PART II. OTHER INFORMATION
CARVER CORPORATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11
Computation of Earnings per Share
(b) Reports on Form 8-K
None.
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.
CARVER CORPORATION
Dated: November 14, 1995 /s/ Sandra L. Jenkins
Sandra L. Jenkins
Vice President - Finance
(Principal Financial and
Accounting Officer)
CARVER CORPORATION
EXHIBIT INDEX
Exhibit Title Page
11 Computation of Earnings Per Share 15
EXHIBIT 11
CARVER CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
PRIMARY EARNINGS PER
SHARE NET LOSS $(151,000) $(887,000) $(2,086,000) $(2,379,000)
Weighted average number
of shares
outstanding 3,679,538 3,678,202 3,679,106 3,677,843
Add shares issuable from
the assumed exercise
of options * * * *
Weighted average number
of shares outstanding,
as adjusted 3,679,538 3,678,202 3,679,10 3,677,843
LOSS PER SHARE $ (0.04) $ (0.24) $ (0.57) $ (0.65)
*Effect on loss per share is antidilutive
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-01-1995
<PERIOD-END> Sep-30-1995
<CASH> 47
<SECURITIES> 5
<RECEIVABLES> 3026
<ALLOWANCES> 313
<INVENTORY> 6121
<CURRENT-ASSETS> 9329
<PP&E> 4933
<DEPRECIATION> 2579
<TOTAL-ASSETS> 12944
<CURRENT-LIABILITIES> 3658
<BONDS> 0
<COMMON> 37
0
0
<OTHER-SE> 8416
<TOTAL-LIABILITY-AND-EQUITY> 12944
<SALES> 4494
<TOTAL-REVENUES> 4494
<CGS> 3416
<TOTAL-COSTS> 4575
<OTHER-EXPENSES> 70
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> (151)
<INCOME-TAX> 0
<INCOME-CONTINUING> (151)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (151)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
