<PAGE>
FORM 10-Q SB
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 September 30, 1997
------------------
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 of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15300 Woodinville Redmond Road N.E., Woodinville, WA 98072
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(425) 482-3400
--------------
(Registrant's telephone number, including area code)
20121 - 48/th/ Avenue West, Lynnwood, WA 98036
(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, 1997, 3,888,474 shares of $.01 par value common stock
of the Registrant were outstanding.
Page 1 of 15 pages.
Exhibit Index appears at Page 14.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CARVER CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 114,000 $ 65,000
Marketable securities 5,000 5,000
Accounts receivable, trade, net 1,850,000 1,627,000
Inventories 4,644,000 4,176,000
Note receivable and other assets 104,000
Prepaid expenses 307,000 662,000
------------- ------------
Total current assets 6,920,000 6,639,000
Property and equipment,
less accumulated depreciation 837,000 2,444,000
Other assets 129,000 141,000
------------ ------------
Total Assets $ 7,886,000 $ 9,224,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Note payable $ 1,329,000 $ 1,110,000
Accounts payable 985,000 410,000
Accrued liabilities
Commissions and advertising 78,000 127,000
Payroll and related taxes 189,000 264,000
Warranty 84,000 113,000
Other 221,000 42,000
------------ ------------
Total current liabilities 2,886,000 2,066,000
------------ ------------
Shareholders' equity
Preferred shares, par value $.01 per share
2,000,000 shares authorized, 1,411,764
shares issued and outstanding 14,000 14,000
Common shares, par value $.01 per share
20,000,000 shares authorized, 3,888,474
shares issued and outstanding 39,000 37,000
Additional paid-in capital 19,303,000 19,006,000
Accumulated deficit (14,356,000) (11,899,000)
------------ ------------
Total shareholders' equity 5,000,000 7,158,000
------------ ------------
Total liabilities and shareholders' equity $ 7,886,000 $ 9,224,000
============ ============
</TABLE>
(See Notes to Consolidated Financial Statements)
<PAGE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $2,511,000 $4,336,000 $ 7,054,000 $11,729,000
Cost of sales 2,185,000 3,093,000 6,290,000 9,148,000
---------- ---------- ----------- -----------
Gross profit 326,000 1,243,000 764,000 2,581,000
Operating expense
Selling 427,000 674,000 1,593,000 1,856,000
General & administrative 586,000 461,000 1,758,000 1,470,000
Engineering, research & development 278,000 176,000 783,000 507,000
---------- ---------- ----------- -----------
1,291,000 1,311,000 4,134,000 3,833,000
---------- ---------- ----------- -----------
Loss from operations (965,000) (68,000) (3,370,000) (1,252,000)
Other income (expense)
Gain on sale of headquarters facility - - 859,000 -
Interest expense (34,000) (37,000) (87,000) (180,000)
Interest income - 1,000 7,000 50,000
Other - 15,000 316,000 (62,000)
---------- ---------- ----------- -----------
Net loss $ (999,000) $ (89,000) $(2,275,000) $(1,444,000)
========== ========== =========== ===========
Loss per common share $(0.26) $(0.02) $(0.59) $(0.39)
========== ========== =========== ===========
</TABLE>
(See Notes to Consolidated Financial Statements)
<PAGE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
----------- -----------
<S> <C> <C>
Operating Activities:
Net loss $(2,275,000) $(1,444,000)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation and amortization 616,000 179,000
Gain on sale of headquarters facility (859,000)
Changes in:
Accounts receivable (223,000) (272,000)
Inventories (468,000) (155,000)
Prepaid expenses - (578,000)
Accounts payable and accrued liabilities 601,000 (571,000)
Other assets (11,000) (18,000)
----------- -----------
Net cash used by operating activities (2,615,000) (2,859,000)
Investing Activities:
Acquisition of property, plant and equipment, net (493,000) (69,000)
Proceeds from note receivable 104,000 1,093,000
Net proceeds from sale of headquarters facility 2,808,000
----------- -----------
Net cash used by investing activities 2,419,000 1,024,000
----------- -----------
Financing Activities:
Increase (Decrease) in notes payable 219,000 (505,000)
Repayment of long-term debt - (696,000)
Issuance of common shares 26,000
Issuance of Preferred Stock - 2,912,000
----------- -----------
Net cash provided by financing activities 245,000 1,711,000
----------- -----------
Increase (decrease) of cash and cash equivalents 49,000 (124,000)
Cash and cash equivalents:
Beginning of period 65,000 261,000
----------- -----------
End of period $ 114,000 $ 137,000
=========== ===========
Supplemental cash flow information:
Interest paid $ 79,000 $ 180,000
Non cash financing:
Dividend on preferred shares $ 182,000
</TABLE>
(See Notes to Consolidated Financial Statements)
<PAGE>
CARVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
In the opinion of management, the consolidated financial statements include all
adjustments necessary (consisting only of normal recurring adjustments) 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, 1996.
NOTE 2 - INCOME TAXES - For tax reporting purposes, the Company has
approximately $18,800,000 of net operating losses which may be utilized to
offset future taxable income. These loss carryforwards expire between the years
2004 and 2011. Under FAS109 the Company is required to recognize the future
benefit of its net operating loss carryforwards. Management is of the opinion
that it is not appropriate to record such a benefit at this time. As future
operating results improve, management will re-assess its position in this
matter.
NOTE 3 - COMMITMENTS - As of November 11, 1997, the Company has open purchase
orders for finished goods of approximately $3,008,000 of inventory expected to
be received in 1997 from various vendors, a portion of which may be cancelable.
NOTE 4 - SALE OF HEADQUARTERS FACILITY - On April 16, 1997, the Company sold
its headquarters facility in Lynnwood, Washington for $3,100,000, resulting in a
gain of $859,000 recognized in the second quarter. In June 1997, the Company
moved to a smaller more appropriate leased facility in Woodinville, Washington.
<PAGE>
PART 1. FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's product
development and introduction plans and various statements concerning the
Company's expectations for growth and the ability to generate additional working
capital, constitute forward-looking statements which are subject to a number of
known or unknown risks, uncertainties and other factors which might cause actual
results to differ materially from stated expectations. These risks and
uncertainties include product development or production difficulties or delays
due to supply constraints, technical problems or other factors; technological
changes; the effect of global, national and regional economic conditions;
changes in consumer preferences; the impact of competitive products and pricing;
changes in demand; increases in component prices or other costs; inventory risks
due to shifts in market demand, product obsolescence or other factors; greater
than anticipated need for working capital and a number of other risks including
those risks and uncertainties described under the caption "Risk Factors" in the
Company's Annual Report on Form 10K and those identified by the Company from
time to time in other filings with the Commission, press releases and other
communications. Although the Company believes that all forward-looking
statements are reasonable, there can be no assurance that actual results,
achievements, performance or developments will not differ materially from those
expressed or implied by such forward-looking statements.
RECENT DEVELOPMENTS -
- -------------------
Personnel Matters
On November 11, 1997 Stephen M. Williams the Company's President and Chief
Executive Officer and Director resigned as an officer and employee of the
Company. Mr. Williams will continue as a director and consultant of the
Company. As a special consultant to the Company, Mr. Williams will work with
the Company's Investment Banker on certain strategic projects.
On October 14, 1997, James Croft resigned as the Company's Vice President of
Research and Development to accept employment as the Vice President of
Engineering of American Technology Corporation (OTC:ATCO), a developer of
electronic and acoustic technologies.. Mr. Croft has worked closely with ATC
over the last year and a half in the development of high fidelity stereo and
multi-channel audio application of ATC's patented HyperSonic Sound technology.
As a future licensee of this technology for consumer audio applications, the
Company believes that Mr. Croft's employment by ATC may expedite the development
process which could allow the Company to bring products incorporating the
technology to market sooner. Mr. Croft will continue to advise the Company on
product development matters and marketing strategies.
<PAGE>
RESULTS OF OPERATIONS -
- ---------------------
The following tables set forth items in the consolidated statement of income as
a percentage of net sales for the quarter and nine-month periods ended September
30, 1997 and 1996:
<TABLE>
<CAPTION>
Percentage of Net Sales
-----------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of Sales 87.0 71.3 89.2 78.0
------ ----- ------ ------
Gross Profit 13.0 28.7 10.8 22.0
Operating Expenses
Selling 17.0 15.5 22.6 15.8
General and Administrative 23.3 10.6 24.9 12.5
Engineering, research and development 11.1 4.1 11.1 4.3
------ ----- ------ ------
Loss from Operations (38.4) (1.6) (47.8) (10.7)
Gain on sale of headquarters facility - - 12.2 -
Interest Expense (1.4) (0.9) (1.2) (1.5)
Interest Income - - 0.1 0.4
Other Income (Expense) - (0.3) 4.5 ( 0.5)
------ ----- ------ ------
Net Loss (39.8)% (2.1)% (32.3)% (12.3)%
====== ===== ====== ======
</TABLE>
Net sales for the quarter ended September 30, 1997 were $2,51,000, a decrease of
42% from net sales of $4,336,000 for the same period of 1996. Net sales for the
nine months ended Sept 30, 1997 were $7,054,000, a 40% decrease from net sales
of $11,729,000 in the first nine months of 1996.
Sales in 1997 have been affected by vendor delivery delays on three key
products. During the second quarter, the Company began receiving limited
quantities of two of these products: a new two-channel preamplifier/tuner and a
new five disc compact disc changer. The third product, a multi-channel, AC-3(R)
ready, preamplifier/tuner has been canceled. In its place a line of Dolby
Digital(R) 5.1 electronics is in development by the Company to be manufactured
at its US factory for expected introduction in the first quarter of 1998. As a
result of these delivery delays, the Company believes that its inability to
offer a complete product line had an adverse affect on sales of other related
products such as amplifiers and
<PAGE>
receivers. In addition, market conditions for audio equipment have softened,
contributing to the decline in sales compared to the prior year. Also, recent
limitations on product availability may have adversely affected relationships
with distributors and dealers which may adversely affect future sales.
Domestic sales of the Company's consumer products decreased 42% to $6,037,000
compared to sales of $9,672,000 in the first nine months of 1996. Of the
domestic sales, approximately $2,044,000 or 34% were sales made by the Company
to Circuit City, down from sales of $5,206,000 to Circuit City in the first nine
months of 1996. Management believes this decline is primarily attributable to
initial stocking orders in the prior year, as well as the delivery delays and
market conditions previously discussed. Other domestic sales decreased 24% in
the third quarter and 11% for the nine months ended June 30, 1997. Sales outside
of the United States decreased approximately 40% from $985,000 to $595,000 in
the first nine months of 1997. Management believes this is attributable to
limited availability of international product versions to sell to its
international distributors. Several new international products were introduced
in August 1997 at a major European tradeshow. Also, the first nine months of
1996 included $432,000 of residual sales of professional products. This product
line was sold in 1995. Approximately 50% of the Company's sales in the first
nine months of 1997 were attributable to products which the Company sources
offshore compared to 58% for the first nine months of 1996.
Gross profit declined as a percent of net sales to 13% in the third quarter of
1997 from 29% in the third quarter of 1996. Gross profit for the first nine
months of 1997 was 11%, down from 22% in the same period of the prior year. The
Company is currently operating at significantly less than its production
capacity which increases its cost of goods sold. In addition, the Company
reduced prices on its older model products sold during the quarter ended
September 30, 1997. Also during the third quarter the Company made price
concessions on previously sold older model products held by its customer.
Management believes that it may experience improvements in gross profit as it
increases its domestic production. However, there can be no assurance that
sales will increase or that cost increases or other factors will not negatively
impact the Company's gross profit. (See "Liquidity and Capital Resources".)
Operating expenses increased significantly as a percentage of net sales in the
third quarter and the first nine months of 1997 compared to the corresponding
periods of the prior year. These increases were due primarily to increased
research and development expense associated with new product development and
introduction activities as well as the expense associated with the use of
management consultants of which $90,000 represents non cash expense associated
with the issuance of warrants in the second quarter. Decreased expenses in
actual dollars in the third quarter of 1997 are due to ongoing cost containment
efforts.
Other income during the nine months ended Sept 30, 1997, includes a $859,000
gain on the sale of the Company's headquarters facility in Lynnwood, Washington
(See "Liquidity and Capital Resources".); a $202,000 payment from Phoenix Gold
International, Inc. from the November 1995 sale of the Company's professional
product line which had been previously reserved for; and a $114,000 tax refund
received in the second quarter of 1997.
Net losses for the quarter and nine month period ended September 30, 1997, were
$999,000 (39.8% of net sales) or $0.26 per share and $2,275,000 (32.3% of net
sales) or $0.59 per share, respectively. Excluding the gain on the sale of the
headquarters facility, net losses for the nine months ended
<PAGE>
September 30, 1997 would have been $3,134,000 (44% of net sales) or $0.82 per
share. This compares to net losses of $89,000 (2.1% of net sales) or $0.02 per
share for the third quarter of the prior year and $1,444,000 (12.3% of net
sales) or $0.39 per share for the nine month period ended September 30, 1996.
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 period-to-
period comparisons. Demand for audio products also exhibits some cyclicality,
reflecting the general state of the economy and consumer expectations.
LIQUIDITY AND CAPITAL RESOURCES -
- -------------------------------
The Company's inventory increased $468,000 from December 31, 1996, to September
30, 1997, due to the production on a new line of home theater loudspeakers as
well as higher levels of finished goods in anticipation of higher level of sales
during the fourth quarter.
Accounts payable and accrued liabilities have increased $601,000 during the nine
months ending September 30, 1997. During the third quarter the Company made
payments to its suppliers later than their agreed upon terms. Management has
subsequently negotiated improved payment terms with some of its suppliers, many
of whom had previously required payment in advance. On November 11, 1997,
approximately $318,000 would be needed to satisfy its payment obligations which
are past due.
On April 16, 1997, the Company sold its headquarters facility in Lynnwood,
Washington for $3,100,000, resulting in a gain of $859,000 which was recognized
in the second quarter. Net proceeds of approximately $2,800,000 from this sale
were used to pay down the bank line of credit and to provide working capital.
The Company moved to a smaller, more appropriate leased facility in Woodinville,
Washington in July 1997.
In the first nine months of 1997, the Company incurred $379,000 in capital
expenditures primarily attributed to the purchase of a new computer system as
well as manufacturing tooling for its Woodinville factory. In addition, the
Company incurred $114,000 in leasehold improvements associated with the move to
its new facility.
On November 11, 1997, the Company's immediate sources of working capital
consisted of approximately $50,000 in cash (and cash equivalents) and its line
of credit. The Company has an agreement with a financial institution which
provides for working capital advances up to $6,000,000. A maximum of $1,000,000
of this line may be used to secure letters of credit of which $150,000 in
letters of credit were outstanding on November 11, 1997. Funds available under
this agreement are restricted, however, to a portion of eligible accounts
receivable and inventories. Advances are collateralized by substantially all
assets of the Company and bear interest at the prime lending rate plus 2%.
There was $1,500,000 outstanding on the line of credit at November 11, 1997, and
approximately $100,000 was additionally available to be borrowed. The agreement
expires on July 31, 1998.
<PAGE>
As announced earlier this year, the Company had planned to ship the first of
three models of home theater loudspeaker systems in the third quarter.
However, production of the loudspeakers was delayed until late September. The
first loudspeaker deliveries were made in late September 1997. The Company has
received an initial forecast for orders from its dealers for approximately $5.5
million. Approximately $3.4 million of these forecasted orders are scheduled
for delivery through the end of the fourth quarter 1997. Management has been
attempting to obtain additional working capital financing and has thus far been
unsuccessful in doing so. This lack of additional financing may inhibit the
Company's ability to deliver sufficient quantities to fully satisfy actual
orders.
For the last several months the Company has experienced a shortfall in working
capital which has required the Company to reduce marketing and sales
expenditures, seek extended payment terms from its suppliers, delay purchases of
inventory and take other steps to conserve operating capital. These measures
have had and will continue to have an adverse affect on the Company's sales.
Management has determined that the Company must obtain additional working
capital in the near term in order to execute its business plan. The exact
amount and timing of the Company's need for additional working capital will be
determined by numerous factors including: the timing, level of and margin on
sales; the extent to which the Company is able to negotiate more favorable
payment terms with the Company's suppliers and customers; the ability to revise
purchase orders; and the occurrence of unanticipated expenses. The Company is
actively seeking additional working capital from a variety of sources. As
previously announced, the Company has retained outside advisors to help explore
and advise on its strategic alternatives.
There can be no assurance that the Company will be able to obtain additional
equity or debt financing on terms that the Company finds acceptable, or at all,
if and when needed. Any additional equity or debt financing may involve
substantial dilution of the Company's shareholders. If the Company is unable
to generate additional working capital it may need to further curtail
operations, sell assets or reorganize.
EFFECTS OF INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
- --------------------------------------------------------------------
All sales of the Company's products are in U.S. dollars. Since 1996, the
Company has purchased the majority of its materials at an agreed per unit price
payable in U.S. Dollars. Accordingly, fluctuations in foreign currency rates
had no material impact on the Company's gross margin in the first nine months of
1997.
<PAGE>
PART II. OTHER INFORMATION
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
(c) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
In accordance the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CARVER CORPORATION
Dated: November 11, 1997 /s/ Debra L. Griffith
Debra L. Griffith
Vice President Finance and
Administration (Principal Financial
and Chief Accounting Officer)
<PAGE>
CARVER CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Title Page
- ------- ----- ----
<S> <C> <C>
11 Computation of Earnings Per Share 15
</TABLE>
<PAGE>
EXHIBIT 11
CARVER CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER
SHARE NET LOSS $ (999,000) $ (89,000) $(2,275,000) $(1,444,000)
---------- ---------- ----------- -----------
Weighted average number
of shares outstanding 3,862,969 3,709,101 3,831,747 3,697,965
Add shares issuable from
the assumed exercise
of options or
conversion of
preferred stock * * * *
Add shares issuable from
the assumed conversion
of preferred shares * * * *
---------- ---------- ----------- -----------
Weighted average number
of shares outstanding,
as adjusted 3,862,969 3,709,101 3,831,747 3,697,965
---------- ---------- ----------- -----------
LOSS PER COMMON SHARE $ (0.26) $ (0.02) $ (0.59) $ (0.39)
========== ========== =========== ===========
</TABLE>
*Effect on loss per share is antidilutive
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 114,000
<SECURITIES> 5,000
<RECEIVABLES> 1,850,000
<ALLOWANCES> 94,000
<INVENTORY> 4,644,000
<CURRENT-ASSETS> 307,000
<PP&E> 837,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,886,000
<CURRENT-LIABILITIES> 2,886,000
<BONDS> 0
0
14,000
<COMMON> 39,000
<OTHER-SE> 4,947,000
<TOTAL-LIABILITY-AND-EQUITY> 7,886,000
<SALES> 7,054,000
<TOTAL-REVENUES> 7,054,000
<CGS> 6,290,000
<TOTAL-COSTS> 6,290,000
<OTHER-EXPENSES> 4,134,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,000
<INCOME-PRETAX> (2,275,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,275,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,275,000)
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
