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 March 31, 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 March 31, 1995, 3,678,674 shares of $.01 par value common stock
of the Registrant were outstanding.
Page 1 of 15 pages.
Exhibit Index appears
at Page 14.
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CARVER CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<CAPTION>
March 31, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 62,000 $ 249,000
Marketable securities 5,000 5,000
Accounts receivable 3,322,000 3,830,000
Inventories 7,850,000 8,050,000
Current portion of note receivable 13,000 13,000
Prepaid assets 594,000 634,000
Total current assets 11,846,000 12,781,000
Property and equipment,
less accumulated depreciation 2,473,000 2,528,000
Other assets and deferred charges
Note receivable, net of
current portion 987,000 989,000
Other 361,000 330,000
Total assets $ 15,667,000 $ 16,628,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 2,707,000 $ 3,067,000
Note payable 1,562,000 1,383,000
Accounts payable
Accrued liabilities
Commissions and advertising 154,000 221,000
Payroll and related taxes 201,000 243,000
Warranty 103,000 103,000
Other 138,000 155,000
Current maturities of
long-term debt 20,000 20,000
Total current liabilities 4,885,000 5,192,000
Long-term settlement payable,
net of current portion 186,000 203,000
Long-term debt, net of
current portion 691,000 696,000
Total long-term liabilities 877,000 899,000
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, 3,678,674 shares
issued and outstanding 37,000 37,000
Additional paid-in capital 15,931,000 15,931,000
Accumulated deficit (6,063,000) (5,431,000)
Total shareholders' equity 9,905,000 10,537,000
Total liabilities and
shareholders' equity $ 15,667,000 $ 16,628,000
(See Notes to Consolidated Financial Statements)
</TABLE>
<TABLE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
Net sales $ 5,230,000 $ 5,516,000
Cost of sales 4,047,000 4,360,000
Gross Profit 1,183,000 1,156,000
Operating expense
Selling 990,000 962,000
General & Administrative 482,000 394,000
Engineering, research & development 253,000 262,000
1,725,000 1,618,000
Loss from operations (542,000) (462,000)
Other income (expense)
Interest expense (96,000) (87,000)
Interest income 21,000 22,000
Other (15,000) (17,000)
Net loss $ (632,000) $ (544,000)
Loss per share $ (0.17) $ (0.15)
</TABLE>
<TABLE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (632,000) $ (544,000)
Adjustments to reconcile net loss
to cash flows from operating activities:
Depreciation and amortization 86,000 76,000
Changes in:
Accounts receivable 508,000 212,000
Inventories 200,000 883,000
Prepaid expenses 40,000 (165,000)
Accounts payable and
accrued liabilities 36,000 161,000
Other assets and deferred charges (39,000) (79,000)
Net cash provided by operating
activities 199,000 544,000
INVESTING ACTIVITIES:
Proceeds from repayment of note
receivable 2,000 -
Acquisition of property, plant and
equipment, net (23,000) (26,000)
Net cash used by investing activities (21,000) (26,000)
FINANCING ACTIVITIES:
Decrease of notes payable (360,000) (543,000)
Repayment of long-term debt (5,000) (4,000)
Net cash used by financing activities (365,000) (547,000
Decrease of cash and cash equivalents (187,000) (29,000)
Cash and cash equivalents:
Beginning of period 249,000 171,000
End of period $ 62,000 $ 142,000
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 96,000 $ 87,000
</TABLE>
CARVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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
"Management'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:
March 31, December 31,
1995 1994
Raw materials $1,526,000 $1,444,000
Work-in-progress 1,732,000 1,712,000
Finished goods 4,592,000 4,894,000
$7,850,000 $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
March 31, December 31,
1995 1994
Land $ 440,000 $ 440,000
Building & improvements 2,452,000 2,444,000
Equipment 2,037,000 2,026,000
4,929,000 4,910,000
Less accumulated
depreciation (2,456,000) (2,382,000)
$2,473,000 $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 $11,200,000
at this time. As future operating results improve, management will
re-assess its position in this matter.
NOTE 6 - COMMITMENTS - As of April 30, 1994, the Company has
committed to purchase approximately $1,500,000 of inventory
expected to be received in 1995 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 March 31, 1995 and 1994.
Percentage of Net Sales
Three Months Ended
March 31,
1995 1994
Net sales 100.0% 100.0%
Cost of sales 77.4 79.0
Gross profit 22.6 21.0
Operating expenses
Selling 18.9 17.5
General and administrative 9.2 7.1
Engineering, research and
development 4.9 4.8
Loss from operations (10.4) (8.4)
Interest expense (1.8) (1.6)
Interest income 0.4 0.4
Other expense (0.3) (0.3)
Net loss (12.1)% ( 9.9)%
RECENT DEVELOPMENTS -
New Products. The Company's new Lightstar Reference amplifier has
recently received favorable reviews in the November, 1994 issue of
Stereo Review and the May, 1995 issue of Stereophile magazines.
The Company believes that its Lightstar amplifier technology is the
most advanced power amplifier technology on the market in terms of
current capability, the capability to easily drive any loudspeaker
load, independence from voltage fluctuations from the AC power
line, and effortless sound quality. The Company expects to ship
the Lightstar Direct, a remote controlled preamplifier in the
second quarter of 1995, and to introduce its second Lightstar
amplifier in the third quarter.
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 intends to provide
documentation to the Customs Service which the Company believes
will result in a significant mitigation of this penalty. The
Company expects a mitigated penalty of approximately $50,000. The
Company's current cash flow position would not allow it to pay a
$400,000 penalty.
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. 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.")
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 for the quarter ended March 31, 1995 were $5,230,000, a
decrease of 5.2% from net sales of $5,516,000 for the same period
of 1994. Sales of consumer and professional amplifiers increased
over $1,000,000 or 38% from the same period last year. The
introduction of the Lightstar amplifier and sales to OEM customers
contributed 7% of the Company's net sales. These increases were
more than offset by a decrease in sales of receivers, CD players,
mobile product and other signal processors. U.S. domestic sales
decreased approximately 13% while sales outside of the United
States increased approximately 14%. The Company attributes its
increase in international sales to a broadening of its
international distribution. The decrease in domestic sales was
primarily due to the streamlining of the product offerings, a trend
which is likely to continue as the Company intends to focus its
resources on its amplifier business and eliminate other products
and product lines where it has been unsuccessful in achieving
acceptable gross margin.
Net losses for the quarter ended March 31, 1995 were $632,000
(12.1% of net sales) or $0.17 per share compared to a loss of
$544,000 (9.9% of net sales) or $0.15 per share in the first
quarter of 1994.
GROSS PROFIT -
Gross profit improved as a percent of net sales to 22.6% in the
first quarter of 1995 from 21% in the first quarter of 1994. The
adverse impact of the weakening of the U.S. dollar against the
Japanese yen (the currency in which the Company has contracted to
pay for a majority of its sourced product) (See "Effects of
Inflation and Changes in Foreign Currency Exchange Rates") was more
than offset by the favorable change in the product mix. First
quarter sales included a higher percentage of amplifiers which were
built in the Company's Lynnwood factory. While the Company
believes that it may experience further improvements in gross
profit as it increases its domestic production, it will experience
even further deterioration of margin on its Japanese sourced
product as it is forced to pay more to replenish its inventory.
The Company has accelerated its plan to reduce its reliance on
foreign suppliers. (See "Liquidity of Capital Resources".)
OPERATING EXPENSE -
Selling expense increased slightly in actual dollars and as a
percentage of sales when comparing the first quarter of 1995 to the
first quarter of 1994. In order to expand product distribution and
better serve its customers, during the first quarter of 1995 the
sales department added personnel and increased its expenditures for
commission and media advertising.
General and administrative expense increased by nearly $100,000 in
quarter to quarter comparisons as a result of higher medical
premiums, increased reserve for bad debt, investment banking fees
and expenses associated with corporate relations.
Research and development expense decreased slightly in the first
quarter of 1995 compared to the first quarter of 1994, primarily
due to lower personnel expense. The expenses associated with the
introduction of the new professional line resulted in higher
expenses in 1994.
OPERATING LOSS -
The Company reported operating losses of $542,000 for the first
quarter of 1995 compared with operating losses of $462,000 for the
first quarter of 1994. While the plan to increase amplifier sales,
primarily those built in its Lynnwood factory, was somewhat
successful and resulted in improved margins, the adverse impact of
the weakened U.S. dollar, the decline in sales and certain
increases in fixed expenses prevented the Company from improving
its overall operating results.
OTHER INCOME AND EXPENSE -
Although average borrowings were down about 7% in the first quarter
of 1995 from the first quarter of 1994, interest expense increased
slightly due to the increase in the interest rate the Company pays.
LIQUIDITY AND CAPITAL RESOURCES -
The Company's working capital on March 31, 1995 was $6,961,000
which included cash and short term investments aggregating
approximately $67,000. This compares with working capital of
$7,589,000 and cash and short-term investments of $251,000 at
December 31, 1994. At May 5, 1995, the Company's immediate capital
resources consisted of approximately $75,000 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 May 5,
1995 produced a borrowing base of $2,900,000. 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 May 5, 1995, borrowings of $2,600,000 were
outstanding under this line.
The Company's inventory has decreased $200,000 from December 31,
1994 primarily in sourced finished goods. Raw materials and work
in process have increased as the Company is now building a greater
percentage of its sales in its Lynnwood, Washington factory.
Accounts receivable have decreased $508,000 from the end of 1994
due to lower than expected 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 major vendors. In response, the Company
has initiated communications with some of its foreign suppliers
seeking postponement of deliveries, reduction or cancellation of
purchase commitments or extension of payment terms for certain
products. In addition certain products will 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 are scheduled to be increased a like amount in July
1995. While some revenue fall off is anticipated due to these
price increases, 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 45%
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. The yen-to-dollar
rate deteriorated 11% in 1994 and 16% year to date in 1995 thereby
greatly inflating costs to the point many of the Japanese built
products are unprofitable. This adverse impact of the weak dollar
will be somewhat mitigated by the Company's decreased reliance on
offshore sourcing of its products. The Company's 1995 plan
presently is for only 40% of its revenues to be attributed to
products sourced offshore. It is presently the Company's intention
to discontinue certain Japanese built products by fall 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 be occasioned by 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. If the
Company does not modify its purchasing plan, each time that the
dollar purchases one less yen, there would be approximately a
$50,000 impact to the Company's margin.
PART II. OTHER INFORMATION
CARVER CORPORATION
ITEM 1.
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: May 12, 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 14
EXHIBIT 11
CARVER CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
Three Months Ended
March 31,
1995 1994
PRIMARY EARNINGS PER SHARE
NET LOSS $ (632,000) $ (544,000)
Weighted average number of
shares outstanding 3,678,674 3,677,556
Add shares issuable from the
assumed exercise of options * *
Weighted average number of shares
outstanding, as adjusted 3,678,674 3,677,556
LOSS PER SHARE $ (0.17) $ (0.15)
<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> Mar-31-1995
<CASH> 62
<SECURITIES> 5
<RECEIVABLES> 3544
<ALLOWANCES> 222
<INVENTORY> 7850
<CURRENT-ASSETS> 11846
<PP&E> 4929
<DEPRECIATION> 2456
<TOTAL-ASSETS> 15667
<CURRENT-LIABILITIES> 4885
<BONDS> 0
<COMMON> 37
0
0
<OTHER-SE> 9868
<TOTAL-LIABILITY-AND-EQUITY> 15667
<SALES> 5230
<TOTAL-REVENUES> 5230
<CGS> 4047
<TOTAL-COSTS> 5772
<OTHER-EXPENSES> 90
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> (632)
<INCOME-TAX> 0
<INCOME-CONTINUING> (632)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (632)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
