<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-14482
-------------------------
CARVER CORPORATION
------------------
(Exact Name of Registrant as specified in its charter)
WASHINGTON 91-1043157
---------- ----------
(State or other jurisdiction (IRS 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 June 30, 1996, 3,698,371 shares of $.01 par value common stock of
the Registrant were outstanding.
Page 1 of 23 pages.
Exhibit Index appears at Page 19.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CARVER CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 42,000 $ 261,000
Marketable securities 5,000 5,000
Accounts receivable, trade, net 1,814,000 2,304,000
Inventories 4,550,000 3,927,000
Current portion of note receivable 270,000 1,342,000
Prepaid expenses 957,000 377,000
----------- -----------
Total current assets 7,638,000 8,216,000
Property and equipment,
less accumulated depreciation 2,208,000 2,291,000
Other assets and deferred charges 187,000 167,000
----------- -----------
Total Assets $10,033,000 $10,674,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable $ 1,933,000 $ 1,216,000
Accounts payable 685,000 842,000
Accrued liabilities
Commissions and advertising 142,000 104,000
Payroll and related taxes 173,000 198,000
Warranty 73,000 73,000
Other 38,000 156,000
Current portion of long-term debt 696,000
----------- -----------
Total current liabilities 3,044,000 3,285,000
----------- -----------
Shareholders' equity
Preferred Stock, par value $.01 per
share 2,000,000 shares authorized,
470,588 shares issued 5,000
Common stock, par value $.01 per
share 20,000,000 shares authorized 37,000 37,000
Additional paid-in capital 16,891,000 15,940,000
Accumulated deficit (9,944,000) (8,588,000)
----------- -----------
Total shareholders' equity 6,989,000 7,389,000
----------- -----------
Total liabilities and shareholders'
equity $10,033,000 $10,674,000
=========== ===========
</TABLE>
(See Notes to Consolidated Financial Statements)
2
<PAGE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $3,045,000 $ 4,931,000 $ 7,393,000 $10,161,000
Cost of sales 2,547,000 4,226,000 6,055,000 8,273,000
---------- ----------- ----------- -----------
Gross profit 498,000 705,000 1,338,000 1,888,000
Operating expense
Selling 543,000 1,058,000 1,182,000 2,048,000
General & administrative 586,000 472,000 1,010,000 954,000
Engineering, research & development 178,000 315,000 331,000 568,000
---------- ----------- ----------- -----------
1,307,000 1,845,000 2,523,000 3,570,000
---------- ----------- ----------- -----------
Loss from operations (809,000) (1,140,000) (1,185,000) (1,682,000)
Other income (expense)
Interest expense (89,000) (96,000) (143,000) (192,000)
Interest income 23,000 22,000 49,000 43,000
Other (96,000) (89,000) (77,000) (104,000)
---------- ----------- ----------- -----------
Net loss $ (971,000) $(1,303,000) $(1,356,000) $(1,935,000)
---------- ----------- ----------- -----------
Loss per common share $ (0.26) $ (0.35) $ (0.37) $ (0.53)
---------- ----------- ----------- -----------
</TABLE>
3
<PAGE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
Operating Activities:
Net loss $(1,356,000) $(1,935,000)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation and amortization 120,000 237,000
Changes in:
Accounts receivable 490,000 766,000
Inventories (623,000) 1,087,000
Prepaid expenses (580,000) 91,000
Accounts payable and accrued liabilities (262,000) 16,000
Other assets & deferred charges (20,000) (31,000)
----------- ----------
Net cash (used) provided by operating activities (2,231,000) 231,000
----------- ----------
Investing Activities:
Acquisition of property, plant and
equipment, net (37,000) (37,000)
Proceeds from notes receivable 1,072,000 5,000
----------- ----------
Net cash (used) provided by investing activities 1,035,000 (32,000)
----------- ----------
Financing Activities:
Increase (decrease) in notes payable 717,000 (335,000)
Repayment of long-term debt (696,000) (10,000)
Issuance of common stock 2,000
Issuance of Preferred Stock 956,000
----------- ----------
Net cash (used) provided by financing activities 977,000 (343,000)
----------- ----------
Decrease of cash and cash equivalents (219,000) (144,000)
Cash and cash equivalents:
Beginning of period 261,000 249,000
----------- ----------
End of period $ 42,000 $ 105,000
----------- ----------
Supplemental cash flow information:
Interest paid $ 126,000 $ 192,000
</TABLE>
4
<PAGE>
CARVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(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, 1995.
The Company has adopted SFAS 123 but will continue to apply APB 25 for the
measurement of stock options granted by the Company. The exercise price of all
options for purchase of shares of the Company's Common Stock have been equal to
the fair market value of the Company's stock on the date of grant.
NOTE 2 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw materials $ 699,000 $ 893,000
Work-in-progress 1,617,000 1,284,000
Finished goods 2,234,000 1,750,000
---------- ----------
$4,550,000 $3,927,000
========== ==========
</TABLE>
NOTE 3 - EARNINGS PER COMMON 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.
5
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Land $ 440,000 $ 440,000
Building & improvements 2,452,000 2,452,000
Equipment 1,973,000 2,019,000
---------- ----------
4,865,000 4,911,000
Less accumulated
depreciation (2,657,000) (2,620,000)
---------- ----------
$2,208,000 $2,291,000
========== ==========
</TABLE>
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 $14,550,000 at this time. As future
operating results improve, management will re-assess its position in this
matter.
NOTE 6 - COMMITMENTS - As of July 31, 1996, the Company has committed to
purchase approximately $2,439,000 of inventory expected to be received in 1996
from various offshore vendors.
6
<PAGE>
PART 1. FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD - LOOKING INFORMATION -
- -----------------------------
Statements in this report concerning future performance, achievements,
developments, expectations, events or trends, including the discussion of the
Company's strategy, product development and introduction plans and generation of
additional working capital, constitute forward-looking statements which are
subject to a number of risks and uncertainties which might cause actual results
to differ materially from those expressed or implied by such statements. These
include the risks and uncertainties under the caption "Risk Factors" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
those identified by the Company from time to time in other filings with the
Commission, press releases and other communications.
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 and six-month periods ended June
30, 1996 and 1995.
<TABLE>
<CAPTION>
Percentage of Net Sales
-----------------------
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.6 85.7 81.9 81.4
----- ----- ----- -----
Gross profit 16.4 14.3 18.1 18.6
Operating expenses
Selling 17.8 21.4 16.0 20.1
G & A 19.3 9.6 13.6 9.4
Engineering, research
and development 5.9 6.4 4.5 5.6
----- ----- ----- -----
Loss from operations (26.6) (23.1) (16) (16.5)
Interest expense (2.9) (2.0) (1.9) (1.9)
Interest income 0.8 0.5 .6 .4
Other expense (3.2) (1.8) (1.0) (1.0)
----- ----- ----- -----
Net loss (31.9)% (26.4)% (18.3)% (19.0)%
===== ===== ===== =====
</TABLE>
7
<PAGE>
RECENT DEVELOPMENTS -
- -------------------
Employment of Vice President Finance. On July 15, 1996 the Company employed
- ------------------------------------
Debra L. Griffith as its Vice President - Finance thereby filling the vacancy
that had existed since February 15, 1996. Ms. Griffith, a Certified Public
Accountant and a University of Washington honors graduate, has over 16 years
experience in finance with Teltone Corporation and Deloitte & Touche.
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 would assess a penalty up to approximately $400,000. The
Company had provided documentation to the Customs Service which significantly
mitigated the penalty. In July 1995, the Company paid the Customs Service
$50,000 as an offer in compromise of the penalty. In June 1996 the Customs
Service notified the Company that it had accepted that payment as settlement in
full of the assessed penalties.
Private Placement of Securities. On June 12, 1996 the Company entered into a
- -------------------------------
Stock Purchase Agreement with Renwick Capital Management, a New York-based
investment fund. The agreement provides for an infusion of capital of
approximately $3,450,000 in return for shares of Series A Preferred Stock
convertible into shares of the Company's Common Stock and warrants, which, if
fully exercised and converted, would involve the issuance of 1,700,000
additional shares of Common Stock or 47% of the current shares outstanding. (See
"Liquidity and Capital Resources.")
Renewal of Line of Credit. On May 24, 1996, the Company's line of credit was
- -------------------------
renewed on substantially the same terms and conditions for a two year term
ending on July 31, 1998. At the same time, the lender agreed to make temporary
advances to the Company over the amount otherwise available. The terms of the
temporary accommodation allow the Company to borrow amounts up to $1,000,000
through September 30, 1996, $500,000 through October 31, 1996, and $250,000
through November 30, 1996. (See "Liquidity and Capital Resources.")
Sale of the Company's Building. The Company has entered into an agreement to
- ------------------------------
sell its headquarters in Lynnwood, Washington for $3,675,000. The Purchase and
Sale Agreement contains several contingencies which the Purchaser must remove
before the sale can be closed. There can be no assurance that the prospective
Purchaser will remove the contingencies or that the sale will be consummated.
Even if the Purchaser removes the contingencies, the sale is unlikely to
generate additional cash for the Company's operations before December 1996. (See
"Liquidity and Capital Resources.")
8
<PAGE>
Sale of Professional Audio Product Line. In November 1995, the Company sold all
- ---------------------------------------
of the tangible and intangible assets related to its professional audio products
line to Phoenix Gold International, Inc. ("Phoenix Gold"). The transaction
included a license which allows Phoenix Gold to use the name "Carver
Professional", and an agreement by the Company not to compete against Phoenix
Gold in the professional audio market for a period of five years from the date
of the sale.
Circuit City Distribution Agreement. Late in 1995, the Company entered into a
- -----------------------------------
distribution arrangement with Circuit City. Sales to Circuit City are projected
to be as much as 50%, or more, of the Company's revenue in 1996. However, the
Company has no prior sales experience with Circuit City on which to base its
projection. Circuit City may not be able to successfully market and sell the
Company's products. Factors which could affect the volume of sales by Circuit
City include factors which generally influence retail sales of electronic
products. The agreement between the Company and Circuit City may be terminated
by either party for any reason upon 30 days advance, written notice without
penalty. In the event of an unexpected termination of this agreement, the
Company may not be able to change its operations quickly enough to respond to a
significantly lower level of sales.
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 June 30, 1996 were $3,045,000, a decrease of
38.2% from net sales of $4,931,000 for the second quarter of 1995. Net sales
for the six months ended June 30, 1996 were $7,393,000 a 27.2% decrease from net
sales of $10,161,000 for the first six months of 1995. In mid-November 1995,
the Company sold its professional product line. First half 1995 net sales
included sales of professional products of $2,849,000 and OEM sales of $631,000
of which $1,302,000 and $368,000 respectively were sold in the second quarter.
In the first half of 1996, net sales of professional products were $432,000 of
which $62,000 was sold in the second quarter and the Company had no OEM sales.
Contracts which represented 95% of the Company's 1995 OEM sales were included in
the assets sold with the professional products line.
Domestic sales of the Company's consumer products increased to $5,634,000 or 22%
compared to sales of $4,600,000 in the first six months of 1995. Of the
domestic sales, approximately $3,185,000 or 56% were sales made by the Company
to Circuit City. Sales outside of the United States decreased approximately 59%
from $1,536,000 to $637,000 in the first six months of 1996. The Company
believes this is attributable to limited availability of product to sell to its
9
<PAGE>
international distributors. Approximately 55% of the Company's sales in the six
months of 1996 were attributable to products which the Company sources offshore
compared to 47% for the same period of the prior year. During the quarter
ending June 30, 1996 domestic sales increased to $2,634,000 or 11% when compared
to the same period of the prior year, of which $1,385,000 or 53% represents
sales made to Circuit City. In addition, international sales for the quarter
decreased 70% to $200,000 when compared to the prior year due to limited product
availability.
The Company's sales of consumer products, although higher in 1996 than in the
corresponding period last year, were affected by the Company's strategy in 1995
of reducing its product line, especially those at the low end of the price range
and with low margins. Also, both domestic and export sales have been adversely
effected by a severe shortfall in working capital during most of 1995 and in
the first half of 1996. One of the Company's offshore vendors failed to deliver
product on their scheduled delivery date in March and April 1996. As a result,
the Company was not able to stock enough of the products which its sources
offshore to consistently fill orders until the end of the second quarter. In
addition, most of the product sourced offshore are products which generate
additional sales of products manufactured by the Company (e.g.
preamplifier/tuners and compact disc players). As a result, the Company
believes its revenues for the first half of 1996 were further reduced.
Net losses for the quarter and six month periods ended June 30, 1996 were
$971,000 (31.9% of net sales) or $0.26 per common share and $1,356,000 (18.3% of
net sales) or $0.37 per common share respectively. This compares to net losses
of $1,303,000 (19.8% of net sales) or $0.35 per share for the quarter period and
$1,935,000 (19% of net sales) or $0.53 per share for the six month period ended
June 30, 1995.
GROSS PROFIT -
- ------------
Gross profit increased as a percent of net sales to 16.4% in the second quarter
of 1996 from 14.3% in the second quarter of 1995. Gross profit for the first six
months of 1996 was relatively unchanged from the prior year. Professional
product sales during the second quarter of 1996 of $432,000 were made to the
purchaser of the Company's professional product line pursuant to an agreement
entered into at the time of the sale of the line. Pursuant to the agreement,
the Company sells such professional products at cost. In addition, approximately
$3,185,000 in sales to Circuit City in the first six months were at a lower
margin than the Company realizes on its sales to other domestic customers.
Despite these adverse impacts on gross margin the Company has experienced
improvements in gross profit as it has increased its domestic production.
Margins are expected to continue to improve as the Company purchases new
products to be introduced in 1996 from offshore vendors located outside of
Japan. There can be no assurance that foreign exchange rates, cost increases or
other factors will not negatively impact margins on the Company's sourced
product. (See "Liquidity and Capital Resources".)
10
<PAGE>
OPERATING EXPENSE -
- -----------------
Operating expense decreased in both quarter to quarter and year to date
comparisons by 29% due to the elimination of expenses attributable to the
Company's professional products line. This reduction affected selling, general
and administrative as well as research and development. The Company expects
selling expense to increase slightly during the remainder of the year as it
increases its field support and media advertising. General and administrative
increased in the quarter ending June 30, 1996 due to additions to the reserve
for doubtful accounts.
OTHER INCOME AND EXPENSE -
- ------------------------
Average borrowings were down in the first six months of 1996 from the same
period of 1995, and therefore interest expense decreased by approximately
$49,000.
LIQUIDITY AND CAPITAL RESOURCES -
- -------------------------------
The Company's working capital on June 30, 1996 was $4,594,000 which included
cash and short term investments aggregating approximately $47,000. This
compares with working capital of $4,931,000 and cash and short-term investments
of $266,000 at December 31, 1995. At August 7, 1996, the Company's immediate
capital resources consisted of approximately $84,000 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. At August 7, 1996, the Company had borrowed $1,578,000 of the
$1,624,000 then available under this facility. The line is collateralized by
substantially all assets of the Company and bears interest at the prime lending
rate plus 2%. On May 24, 1996, the lender agreed to make temporary advances to
the Company over the amount otherwise available under the formulas described
above. The terms of the temporary accommodation allow the Company to borrow up
to an additional $1,000,000 through September 30, 1996, $500,000 through October
31, 1996, and $250,000 through November 30, 1996. The Company granted its
lender a deed of trust on Carver's Lynnwood, Washington facility as security for
the temporary accommodation. The Company has no borrowings against this over-
line availability. The Company's line of credit expires on July 31, 1998.
The Company's inventory has increased $623,000 from December 31, 1995 primarily
due to receipt of finished goods from offshore suppliers. Accounts receivable
has decreased $490,000 from the end of 1995 due to reduced sales.
As the Company's borrowing base is dependent on its inventory and receivables,
the borrowing availability had contracted to a level at
11
<PAGE>
which the Company was experiencing a cash shortfall and was forced to delay
payment of its accounts payable which delayed receipt of major sourced product
purchases. During most of 1995 the Company operated under a severe cash shortage
which caused it to push out payments to vendors, and defer the purchase of
source product for several months. Several of the Company's major suppliers have
changed payment terms to require prepayment. The Company believes that it has
lost sales in the first six months of 1996 due to lack of availability of
product.
Due to the Company's shortfall in working capital in the first half of 1996 and
the 90 to 120 delay between the dates on which the Company orders product and
its receipt of such product, the Company expects to continue to experience
shortages of certain models of its products over the next three months. While
the Company believes that such shortages will adversely effect sales in the
third quarter of 1996, it expects the impact to be less than the Company
experienced in the first half of 1996. (See "Liquidity and Capital Resources".)
On June 12, 1996 the Company entered into a Stock Purchase Agreement (the
"Agreement") with Renwick Capital Management Inc. ("Renwick"), a New York-based
investment fund. The Agreement provides for an infusion of capital of
approximately $3,450,000 in return for shares of Series A Preferred Stock
convertible into shares of the Company's Common Stock and warrants, which, if
fully exercised and converted, would involve the issuance of 1,711,764
additional shares of Common Stock or 47% of the current shares outstanding. The
Agreement provides that the Company will sell to Renwick or its affiliates up to
1,411,764 shares of Convertible Preferred Stock (the "Preferred Stock") and five
year warrants to acquire up to 300,000 shares of Common Stock (the "Warrants").
The financing is being made over a 90 day period in three tranches each
consisting of 470,588 shares of Preferred Stock and warrants to purchase up to
100,000 shares of Carver Corporation Common Stock. The price of the Preferred
Stock is fixed at $2.125 per share and each share of Preferred Stock is
convertible at any time at the option of the holder into one share of Common
Stock, subject to certain potential antidultion adjustments to be triggered by
the issuance of additional shares of Common Stock at less than the lesser of the
then current market price or $2.125. The Preferred Stock is entitled to an 8%
compounding annual dividend payable quarterly. In the first year such dividend
will be paid with shares of Common Stock. In years two and three (the Preferred
Stock will automatically be converted into Common Stock on the third anniversary
of issuance, thereby terminating the accruing dividend) the Company has the
option of paying the dividend either in cash or with shares of Common Stock. If
paid with Common Stock, the number of shares will be based on the greater of
$2.125 per share or the average of the closing bid prices for the Common Stock
for the 30 days prior to the dividend payment date.
The holders of the Preferred Stock are entitled to one vote for each share of
Common Stock into which the Preferred Stock is convertible. In addition, the
holders of the Preferred Stock are entitled to elect
12
<PAGE>
two representatives to the Company's Board of Directors. The Company's Board of
Directors has been increased to seven members, and Raj K. Bhatia and James R.
McCullough have been appointed to the Board of Directors to represent holders of
the Preferred Stock. Bhatia and McCullough are partners of Renwick. By virtue of
the number of votes to be controlled by Renwick and its affiliates, their right
to elect two of the Company's seven directors and the fact that various actions
may not be taken by the Company without the approval of the holders of at least
a majority of the Preferred Stock, such holders may be deemed to have acquired
control of the Company. Certain actions by the Company, such as a merger or
liquidation of the Company, the sale of substantially all of its assets, payment
of dividends, amendment of the Company's articles of incorporation, the issuance
of additional securities or the incurrence of certain indebtedness, will require
the approval of at least a majority of the Preferred Stock. The Agreement also
provides that the investors will have preemptive rights to subscribe for
additional shares issued by the Company and rights to have the Company register
shares of Common Stock issued upon conversion of the Preferred Stock or exercise
of the Warrants.
The exercise price of the Warrants is $1.50 per share of Common Stock, if
exercised from the date of the initial closing through the date two years from
the date of the initial closing, $1.75 for the next year, $2.00 for the next
year, $2.125 for the final year, again subject to certain potential antidilution
adjustments. The number of shares of Common Stock which might be issued in
payment of the dividend cannot be determined at this time as such number will
vary with the market price of the Common Stock. As of August 7, 1996,
$2,000,000 has been received in payment for the first 941,176 shares of
Preferred Stock and Warrants to acquire 200,000 shares of Common Stock.
Renwick is a New York-based investment banking firm founded in 1994 which
specializes in the identification of undervalued growth companies exhibiting the
potential for an operational turn-around. Renwick actively supports its
principal investments through the involvement of the industry and Wall Street
professionals familiar with turn-around situations.
The Company has entered into an agreement to sell its headquarters in Lynnwood,
Washington for $3,675,000. The sale would generate net cash proceeds of
approximately $3,454,000 and the Company would realize a gain on the sale of
approximately $1,478,000. The Purchase and Sale Agreement contains several
contingencies which the Purchaser must remove before the sale can be closed.
There can be no assurance that the prospective Purchaser will remove the
contingencies or that the sale will be consummated. Even if the Purchaser
removes the contingencies, the sale is unlikely to generate additional cash for
the Company's operations before December 1996.
The Line of Credit along with the sale of preferred stock previously discussed
should enable the Company to meet its operating needs.
13
<PAGE>
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 prices for its domestic products in January 1995
and its export products in July 1995 an average of 5%. The Company intends to
continue to monitor costs and its market and adjust prices taking into
consideration the Company's costs and competitive conditions. All sales of the
Company's products are in U.S. dollars.
Approximately 47% of the Company's net sales in 1995 and 55% year to date in
1996 were of products designed by and/or manufactured to the Company's
specifications by overseas suppliers. Historically, 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 in 1995. The
Company's 1996 plan presently is for 58% of its revenues to be from product
sourced offshore. The Company is in the process of replacing certain Japanese
built products with product sourced from countries that do not require payment
in Japanese Yen. However, the transition to alternate suppliers may involve
quality control issues, delays in delivery dates or other transitional problems.
Historically, the Company has had a policy of generally hedging its foreign
currency exposure between the date orders are placed with overseas suppliers and
the date at which payment is made. Due to credit restrictions under its line of
credit, the Company has not been hedging, and therefore does have exposure to
currency fluctuations which might adversely effect its gross profits in 1996.
At August 7, 1996, the Company had committed to the purchase of approximately
$2,400,000 of inventory scheduled for delivery in 1996. Of this amount,
approximately $20,000 is denominated for payment in Japanese Yen. As a result,
changes in the value of the Yen against the U.S. dollar would not have a
material effect on the amount the Company has committed to purchase.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
-----------------
None.
14
<PAGE>
ITEM 2. Changes in Securities.
---------------------
As described more fully under the caption "Liquidity and Capital
Resources" in Item 2 of Part I above, on June 12, 1996, the Company entered into
a Stock Purchase Agreement with Renwick Capital Management, Inc. ("Renwick") and
certain Renwick affiliates (the "Purchase Agreement"). The Purchase Agreement
provides for the sale to affiliates of Renwick of up to 1,411,764 shares of
Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") and the
issuance to Renwick of five year warrants (the "Warrants") to acquire up to
300,000 shares of the Company's Common Stock (the "Common Stock"). In the event
of liquidation of the Company, holders of the Preferred Stock are entitled to
receive the price paid for their shares of Preferred Stock plus accrued but
unpaid dividends before holders of the Company's outstanding shares of Common
Stock receive any distributions.
Each share of Preferred Stock is convertible at any time at the option of
the holder into one share of Common Stock, subject to certain potential
antidilution adjustments to be triggered by the issuance of additional shares of
Common Stock at less than the lesser of the then current market price or $2.125.
The Preferred Stock is entitled to an 8% compounding annual dividend payable
quarterly and the holders of Preferred Stock are entitled to one vote per share.
Certain actions by the Company, such as a merger or liquidation, the sale of
substantially all of its assets, payment of dividends, amendment of the
Company's articles of incorporation, the issuance of additional securities or
the incurrence of certain indebtedness, require the approval of the holders of
at least a majority (or in some cases, two-thirds) of the holders of the
Preferred Stock.
In addition, the holders of the Preferred Stock are entitled to elect two
representatives to the Company's Board of Directors. The Company's Board of
Directors has been increased to up to seven members, and Raj K. Bhatia and James
R. McCullough (principals of Renwick) have been appointed to the Board of
Directors to represent holders of the Preferred Stock. By virtue of the number
of votes to be controlled by Renwick and its affiliates, their right to elect
two of the Company's seven directors and the fact that various actions may not
be taken by the Company without the approval of the holders of at least a
majority of the Preferred Stock, such holders may be deemed to have acquired
control of the Company.
See "Liquidity and Capital Resources" in Item 2 of Part I above.
ITEM 3. Defaults Upon Senior Securities.
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The Company's Annual Meeting of Shareholders was held on May 21, 1996.
15
<PAGE>
(a) Election of Directors. The nominees identified in the following table
were elected for a term of one year or until their successors are duly elected
and qualified. Except as set forth in the following table, there was no director
of the Company whose term of office continued after the Annual Meeting.
<TABLE>
<CAPTION>
Against/ Abstentions/
Nominee's Name For Withheld Broker Non-votes
-------------- --- -------- ----------------
<S> <C> <C> <C>
Robert W. Carver 2,356,098 704,861 0
Robert A. Fulton 2,274,331 786,628 0
Thomas C. Graham 2,299,231 761,728 0
John F. Vynne 2,300,881 760,078 0
Stephen M. Williams 2,301,231 759,728 0
</TABLE>
(b) Proposal to Amend the Company's 1995 Stock Option Plan to increase the
number of shares available for grant by 300,000 shares, from 360,000 shares to
660,000 was approved
The proposal to approve the amendment of the Company's 1995 Stock Option Plan
received the following votes:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-votes
--- ------- ------- ----------------
<S> <C> <C> <C>
1,173,511 889,881 10,351 0
</TABLE>
ITEM 5. Other Information.
-----------------
None.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibit 10.41
Fifteenth Amendment to the Accounts Financing Agreement dated May
24, 1996 Congress Financial Corporation (Northwest) and the
Company.
(c) Exhibit 11
Computation of Earnings per Share
(d) Reports on Form 8-K
The Company filed two reports on Form 8-K during the quarter
ended June 30, 1996, the first report dated as of May 1, 1996 and
the second dated as of June 12, 1996. Both reported information
under item 5 concerning the financing described under the heading
"Liquidity and Capital Resources" in Item 2 of Part 1 above.
17
<PAGE>
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: /s/ Debra L. Griffith
------------------------
Debra L. Griffith
Vice President - Finance
18
<PAGE>
CARVER CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Title Page
- -------------------------------------------------------------------------------
<S> <C> <C>
10.41 Fifteenth Amendment to the Accounts Financing 20
Agreement dated May 24, 1996 Congress
Financial Corporation (Northwest)and the Company.
11 Computation of Earnings Per Share 23
27 Article 5 - Financial Data Schedule
</TABLE>
19
<PAGE>
EXHIBIT 10.41
May 24, 1996
Congress Financial Corporation (Northwest)
101 S.W. Main Street, Suite 725
Portland, OR 97204
Re: Fifteenth Amendment to Accounts Financing Agreement
---------------------------------------------------
Ladies and Gentlemen:
This Fifteenth Amendment to Accounts Financing Agreement, dated as of
the 24th day of May, 1996 (this "Amendment") is for the purpose of amending the
Accounts Financing Agreement [Security Agreement] which we entered into on or
about December 20, 1990, as it has been previously amended (the "Accounts
Financing Agreement").
For valuable consideration, receipt and sufficiency of which are
acknowledged, we agree as follows:
Section 2.6 of the Accounts Financing Agreement is hereby amended to
provide as follows:
"2.6 The amount of loans which you shall, in your discretion, make to
us from time to time under Section 2.1 above or under any supplement
to this Agreement shall be subject at all times to a reduction in the
amount of $250,000. Such reduction shall be referred to as the
"Availability Block."
Section 2.7 of the Accounts Financing Agreement is amended to provide
as follows:
"2.7 In addition to amounts otherwise available under the formulas
described above, and notwithstanding the Maximum Credit Limit, you
will temporarily, until December 1, 1996, allow us an overadvance of
up to $1,000,000, subject to the reductions provided below (the
"Overadvance Limit"). All overadvance amounts shall bear interest at
the rate prescribed in Section 3 hereof. The Overadvance Limit will be
reduced by the following amounts, and any overadvance amounts in
excess of such reduced Overadvance Limit must be repaid, on the dates
listed below:
20
<PAGE>
<TABLE>
<CAPTION>
Date Reduction Amount
---- ----------------
<S> <C>
10/1/96 $500,000
11/1/96 $250,000
12/1/96 $250,000
</TABLE>
Any remaining balance of the overadvance shall be repaid in full
December 1, 1996."
The first sentence of Section 9.1 of the Accounts Financing Agreement
is amended to provide as follows:
"9.1 This Agreement shall remain effective and shall continue in force
and effect for a term ending July 31, 1998 (the "Renewal Date") and
from year to year thereafter, unless sooner terminated pursuant to the
terms hereof."
Section 9.2 of the Accounts Financing Agreement is amended in its
entirety to provide as follows:
"9.2 If you terminate this Agreement upon the occurrence of an Event
of Default or at our request, in view of the impracticability and
extreme difficulty of ascertaining actual damages and by mutual
agreement of the parties as to a reasonable calculation of your lost
profits as a result thereof, we hereby agree that we shall pay to you,
upon the effective date of such termination, an early termination fee
in an amount equal to three percent (3%) of the Maximum Credit if such
termination occurs on or at any time prior to July 31, 1997 and one
percent (1%) of the Maximum Credit if such termination occurs at any
time thereafter, whether before or following the Renewal Date. Such
termination fee shall be presumed to be the amount of damages
sustained by you as a result of such early termination, and we agree
that it is reasonable under the circumstances currently existing. The
early termination fee provided for in this Section 9.2 shall be deemed
included in the Obligations."
As consideration for the accommodations reflected in this Amendment,
we shall pay to you a fee in the sum of $35,000, which you are authorized to
deduct from our loan account.
To induce you to accept this Amendment, we make the following
representations, warranties, and covenants:
(a) Each and every recital, representation, and warranty contained
in this Amendment and the Accounts Financing Agreement is correct as of the date
of this Amendment.
(b) No event has occurred or is continuing which constitutes or,
with the giving of notice, the passage of time, or both, would constitute, an
Event of Default under the Accounts Financing Agreement.
We shall pay all expenses, including attorney fees, which you incur
in connection with the preparation and implementation of this Amendment and any
related documents.
Except as specifically provided above, the Accounts Financing
Agreement remains fully valid, binding, and enforceable according to its terms.
21
<PAGE>
We waive and discharge any and all defenses, claims, counterclaims,
and offsets which we may have against you and which have arisen or accrued up to
the date of this Amendment. We acknowledge that you and your employees, agents
and attorneys have made no representations or promises to us except as
specifically reflected in this Amendment and in the written agreements which
have been previously executed. In this connection, we specifically waive the
provisions of California Civil Code (S) 1542, which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which, if known by him, must have materially affected his
settlement with the debtor."
Very truly yours,
CARVER CORPORATION
By /s/ John P. World
------------------
Its Executive Vice President
------------------------
The undersigned guarantor acknowledges that Congress Financial
Corporation (Northwest) ("Congress") has no obligation to provide it with notice
of, or to obtain its consent to, the terms of this Amendment. The undersigned
guarantor nevertheless hereby (i) acknowledges and agrees to the terms and
conditions of this Amendment; (ii) acknowledges that its guaranty remains fully
valid, binding and enforceable; and (iii) waives any and all defenses, claims,
counterclaims and offsets against Congress which may have accrued to date. In
connection with these waivers, the undersigned guarantor specifically waives the
provisions of California Civil Code (S) 1542, which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which, if known by him, must have materially affected his
settlement with the debtor."
USS CORPORATION, dba US Sound
By /s/ John P. World
-----------------
Its Secretary
----------------
ACCEPTED AND AGREED:
CONGRESS FINANCIAL CORPORATION (NORTHWEST)
By /s/ Drew Stawin
---------------
Its Vice President
---------------
22
<PAGE>
EXHIBIT 11
CARVER CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER
SHARE NET LOSS $ (971,000) $(1,303,000) $(1,356,000) $(1,935,000)
---------- ----------- ----------- -----------
Weighted average number
of shares outstanding 3,692,850 3,679,107 3,690,677 3,678,891
Add shares issuable from
the assumed exercise
of options or
conversion of
preferred stock * * * *
---------- ----------- ----------- -----------
Weighted average number
of shares outstanding,
as adjusted 3,692,850 3,679,107 3,690,677 3,678,891
---------- ----------- ----------- -----------
LOSS PER COMMON SHARE $ (0.26) $ (0.35) $ (0.37) $ (0.53)
========== =========== =========== ===========
</TABLE>
*Effect on loss per share is antidilutive
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 42,000
<SECURITIES> 5,000
<RECEIVABLES> 2,000,000
<ALLOWANCES> 186,000
<INVENTORY> 4,550,000
<CURRENT-ASSETS> 7,638,000
<PP&E> 0
<DEPRECIATION> 120,000
<TOTAL-ASSETS> 10,033,000
<CURRENT-LIABILITIES> 3,044,000
<BONDS> 0
0
5,000
<COMMON> 37,000
<OTHER-SE> 6,947,000
<TOTAL-LIABILITY-AND-EQUITY> 10,033,000
<SALES> 3,045,000
<TOTAL-REVENUES> 3,045,000
<CGS> 2,547,000
<TOTAL-COSTS> 2,547,000
<OTHER-EXPENSES> 1,307,000
<LOSS-PROVISION> 83,000
<INTEREST-EXPENSE> 89,000
<INCOME-PRETAX> (971,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (971,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (971,000)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
