<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1998.
[ ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
COMMISSION FILE NUMBER 0-14482
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CARVER CORPORATION
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(Exact name of small business issuer as specified in its charter)
WASHINGTON 91-1043157
---------- ----------
(State or 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
--------------
(Issuer's telephone number)
__________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ___
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
AT AUGUST 11, 1998, 9,798,277 SHARES OF $.01 PAR VALUE COMMON STOCK OF THE
ISSUER WERE OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes ___ No X
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Page 1 of ___ pages.
Exhibit Index appears at Page ___.
<PAGE>
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARVER CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
June 30, December 31
1998 1997
(Unaudited)
Current Assets
Cash and cash equivalents $ 171,000 $ 228,000
Marketable securities -- 5,000
Accounts receivable, trade, net 167,000 1,876,000
Inventories 3,857,000 4,758,000
Prepaid expenses 178,000 221,000
------------ ------------
Total current assets 4,371,000 7,088,000
Property and equipment,
less accumulated depreciation 694,000 805,000
Other assets 104,000 106,000
------------ ------------
Total Assets $ 5,169,000 $ 7,999,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Note payable $ 506,000 $ 2,094,000
Accounts payable 1,471,000 1,134,000
Accrued liabilities
Commissions and advertising 11,000 77,000
Payroll and related taxes 114,000 350,000
Warranty 66,000 135,000
Other -- 158,000
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Total current liabilities 2,168,000 3,948,000
------------ ------------
Shareholders' equity
Preferred shares, par value $.01
per share, 2,000,000 shares
authorized, no shares issued
and outstanding -- 14,000
Common shares, par value $.01 per
share, 20,000,000 shares
authorized, 9,707,444 shares
issued and outstanding 97,000 40,000
Additional paid-in capital 20,124,000 19,371,000
Accumulated deficit (17,220,000) (15,374,000)
------------ ------------
Total shareholders' equity 3,001,000 4,051,000
------------ ------------
Total liabilities and
shareholders' equity $ 5,169,000 $ 7,999,000
============ ============
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<PAGE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
____ ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 699,000 $ 3,045,000 $ 2,637,000 $ 4,543,000
Cost of sales 701,000 2,186,000 2,366,000 4,106,000
----------- ------------ ------------ ------------
Gross profit (2,000) 256,000 271,000 437,000
Operating expense
Selling 237,000 562,000 606,000 1,166,000
General & administrative 421,000 683,000 971,000 1,170,000
Engineering, research & development 151,000 271,000 394,000 505,000
----------- ------------ ------------ ------------
809,000 1,516,000 1,971,000 2,841,000
----------- ------------ ------------ ------------
Loss from operations (811,000) (1,260,000) (1,700,000) (2,404,000)
Other income (expense)
Gain on sale of headquarters facility -- 859,000 859,000
Interest expense (26,000) (13,000) (56,000) (53,000)
Interest income -- 5,000 -- 7,000
Other 29,000 214,000 31,000 316,000
----------- ------------ ------------ ------------
Net loss $ (808,000) $ (195,000) $ (1,725,000) $ (1,275,000)
=========== ============ ============ ============
Loss per common share $ (0.12) $ (0.05) $ (0.29) $ (0.34)
=========== ============ ============ ============
</TABLE>
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<PAGE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,725,000) $(1,275,000)
Adjustments to reconcile net loss to cash flows from
(used by) operating activities:
Depreciation and amortization 214,000 506,000
Gain on sale of headquarters facility (859,000)
Changes in:
Accounts receivable 1,709,000 (84,000)
Inventories 901,000 205,000
Prepaid expenses (39,000) (353,000)
Accounts payable and accrued liabilities (192,000) 49,000
Other assets (1,000) 8,000
----------- -----------
Net cash provided from (used by) operating activities 867,000 (1,803,000)
----------- -----------
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment, net (16,000) (244,000)
Proceeds from note receivable 104,000
Net proceeds from sale of headquarters facility 2,808,000
----------- -----------
Net cash used by investing activities (16,000) 2,668,000
----------- -----------
FINANCING ACTIVITIES:
Increase (Decrease) in notes payable (1,588,000) (621,000)
Issuance of common shares 689,000 4,000
Conversion of Preferred Stock (14,000)
----------- -----------
Net cash provided by financing activities (913,000) (617,000)
----------- -----------
Increase (decrease) of cash and cash equivalents (62,000) 248,000
CASH AND CASH EQUIVALENTS:
Beginning of period 233,000 65,000
----------- -----------
End of period $ 171,000 $ 313,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 56,000 $ 49,000
NON CASH FINANCING:
Dividend on preferred shares $ 121,000 $ 121,000
</TABLE>
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<PAGE>
CARVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
These statements are unaudited but, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the changes in financial condition and results of operations for
the interim periods reported. The results of operations for any interim period
are not necessarily indicative of the results that may be expected for the
entire year. These financial statements should be read with reference to
"Management's Discussion and Analysis or Plan of Operation" contained herein,
and in conjunction with both the annual audited financial statements and the
accompanying notes in the Company's form 10-KSB for the year ended December 31,
1997 and the Auditor's Report, which discloses substantial doubt about the
Company's ability to continue as a going concern.
NOTE 2 - INCOME TAXES
For tax reporting purposes, the Company has approximately $20,800,000 of net
operating losses which may be utilized to offset future taxable income. These
loss carryforwards expire between the years 2004 and 2012. Under FAS109 the
Company is required to recognize the future benefit of its net operating loss
carryforwards. The Company has recorded a valuation allowance of 100% of the
computed deferred tax assets.
NOTE 3 - COMMITMENTS
As of August 11, 1998, the Company has open purchase orders for finished goods
of approximately $3,057,000 of inventory expected to be received in 1998 from
various vendors, a portion of which may be cancelable.
NOTE 4 - PRIVATE PLACEMENT OF SECURITIES
On June 5, 1998, the Company closed a transaction with Oscar Investment Fund,
L.P. ("Oscar"), by which the Company sold 666,667 shares of its unregistered
Common Stock to Oscar for $250,000 or $0.375 per share. The price was the
average closing bid price over the ten consecutive trading days immediately
prior to closing. The 666,667 shares represent 6.8% of the outstanding shares
of the Company's Common Stock. The subscription agreement entered into by the
Company and Oscar provides for demand registration rights with regard to these
shares. During the period of time ending one year from the date of closing, the
costs of registering the stock will be the sole expense of Oscar. Thereafter,
such costs will be the sole expense of the Company.
NOTE 5 - CONVERSION OF SHARES OF PREFERRED STOCK
On June 26, 1998, Renwick Alpha Fund, L.P. ("RAF") and Renwick Special
Situations Fund, L.P. ("RSSF") converted the shares of Series A Cumulative
Convertible Preferred Stock of the Company into shares of the Company's Common
Stock on a one for one basis. RAF and RSSF held 470,588 and 941,176 shares of
Preferred Stock, respectively. Raj K. Bhatia and James R. McCullough, both
directors of the Company, are the Co-Presidents, sole directors and only
shareholders of Renwick Capital Management, Inc. ("Renwick") and the sole
general partners of RAF and RSSF. Prior to this conversion, RAF beneficially
owned directly 342,074 shares of Common Stock and 470,588 shares of Preferred
Stock and RSSF beneficially owned directly 3,316,222 shares of Common Stock and
941,176 shares of Preferred Stock. In addition, Renwick holds currently
exercisable warrants to purchase 250,000 shares of Common Stock. The
subscription agreement entered into by the Company and RAF and RSSF provides for
demand registration rights with regard to all shares of unregistered Common
Stock owned by each. During the period of time ending one year from the date of
acquisition of the unregistered stock, the costs of registering the stock will
be the sole expense of RAF and RSSF. Thereafter, such costs will be the sole
expense of the Company.
<PAGE>
On July 1, 1998, the Board of Directors of the Company approved the issuance of
warrants to RAF and RSSF for the purchase of 646,038 and 1,292,075 shares,
respectively, of the Company's Common Stock at a purchase price of $0.125 per
share. The warrants expire to the extent that they have not been previously
exercised on June 30, 2003.
NOTE 6 - NONCOMPLIANCE WITH CERTAIN NASDAQ REQUIREMENTS
The Company currently does not meet Nasdaq's minimum public float, bid price
continued listing requirements, and minimum net tangible asset requirements of
$5,000,000, $1.00 per share, and $4,000,000, respectively. The Company had
until May 28, 1998 to satisfy these requirements. The Company's appeal of the
decision of Nasdaq to delist the Company's stock from Nasdaq was held on July
23, 1998. The Company anticipates an imminent decision on its appeal. The
inability of the Company to comply with these listing requirements likely will
result in the delisting of the Company's common stock from Nasdaq. Delisting of
the Company's common stock would likely have an adverse effect on the liquidity,
trading price and ability to obtain quotations on a timely basis for the common
stock. If the Company's common stock should cease to be listed on Nasdaq, it
may continue to be quoted on the OTC Bulletin Board.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's strategy,
product development and introduction plans and various statements concerning the
Company's expectations for its growth and for the consumer electronics industry
and generation of additional working capital, constitute forward-looking
statements which are subject to a number of known or unknown risks,
uncertainties and other factors that might cause actual results to differ
materially from those expressed or implied by such statements. These risks and
uncertainties include the ability of the Company to obtain additional working
capital sufficient to meet its working capital requirements, production
difficulties or delays due to supply constraints, technical problems, payment
delays or other factors; technological changes; the effect of global, national
and regional economic conditions; reliability of offshore OEM suppliers; changes
in the Company's channels of distribution; 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 and a number of other risks including
those risks and uncertainties described under the caption "Risk Factors" in this
report and those identified by the Company from time to time in other filings
with the Commission, press releases and other communications. All forward-
looking statements contained in this report reflect the Company's expectations
at the time of this report, and the Company disclaims any responsibility to
revise or update any such forward-looking statement except as may be required by
law.
RECENT DEVELOPMENTS
PRIVATE PLACEMENT OF SECURITIES
On June 5, 1998, the Company closed a transaction with Oscar Investment Fund,
L.P. ("Oscar"), by which the Company sold 666,667 shares of its unregistered
Common Stock to Oscar for $250,000 or $0.375 per share. The price was the
average closing bid price over the ten consecutive trading days immediately
prior to closing. The 666,667 shares represent 6.8% of the outstanding shares
of the Company's Common Stock. The subscription agreement entered into by the
Company and Oscar provides for demand registration rights with regard to these
shares. During the period of time ending one year from the date of closing, the
costs of registering the stock will be the sole expense of Oscar. Thereafter,
such costs will be the sole expense of the Company.
CONVERSION OF SHARES OF PREFERRED STOCK
On June 26, 1998, Renwick Alpha Fund, L.P. ("RAF") and Renwick Special
Situations Fund, L.P. ("RSSF") converted their shares of Series A Cumulative
Convertible Preferred Stock of the Company into shares of the Company's Common
Stock on a one for one basis. RAF and RSSF held 470,588 and 941,176 shares of
Preferred Stock, respectively. Raj K. Bhatia and James R. McCullough, both
directors of the Company, are the Co-Presidents, sole directors and only
shareholders of
<PAGE>
Renwick Capital Management, Inc. ("Renwick") and the sole general partners of
RAF and RSSF. Prior to this conversion, RAF beneficially owned directly 342,074
shares of Common Stock and 470,588 shares of Preferred Stock and RSSF
beneficially owned directly 3,316,222 shares of Common Stock and 941,176 shares
of Preferred Stock. In addition, Renwick holds currently exercisable warrants to
purchase 250,000 shares of Common Stock. The subscription agreement entered into
by the Company and RAF and RSSF provides for demand registration rights with
regard to all shares of unregistered Common Stock owned by each. During the
period of time ending one year from the date of acquisition of the unregistered
stock, the costs of registering the stock will be the sole expense of RAF and
RSSF. Thereafter, such costs will be the sole expense of the Company.
On July 1, 1998, the Board of Director's of the Company approved the issuance of
warrants to RAF and RSSF for the purchase of 646,038 and 1,292,075 shares of the
Company's Common Stock at a purchase price of $0.125 per share. The warrants
expire to the extent that they have not been previously exercised on June 30,
2003.
APPOINTMENT OF INDEPENDENT DIRECTORS
In July 1998, Paul Leung was appointed to the Company's Board of Directors. Mr.
Leung has been the president of Amipo International Corporation ("Amipo") since
1988. Amipo is one of the largest unpaid unsecured creditors of the Company
which arose from the Company's purchase of certain finished goods from Amipo.
For a period ending in 1996, Mr. Leung was a director of Advanced Gravis
Computer Technologies Ltd., a company whose stock was traded on Nasdaq.
In April 1998, Clifford J. Schorer, Jr. was appointed to the Company's Board of
Directors. For the past twenty five years, Mr. Schorer has been engaged in
creating and developing various entrepreneurial businesses. He is a Professor
in the Columbia University Executive Education Department and an Adjunct
Professor at the Columbia University Graduate School of Business. As a
consultant, Mr. Schorer works with a diverse group of clients including Lucent
Technologies, Con Edison, AT&T, Brooklyn Union Gas, Glaxo Welcome
Pharmaceutical, Spectrum Management, Isolyzer and others.
In March 1998, Benjamin Ben-Attar was appointed to the Company's Board of
Directors. Mr. Ben-Attar has worked for several years in corporate finance as
an associate with BNY Capital Markets, Inc., a subsidiary of The Bank of New
York. In that position, he focuses on middle market mergers and acquisitions,
private placements and leveraged finance, and has experience in the structuring
of senior credit facilities.
APPOINTMENT OF INTERIM C.E.O.
Raj K. Bhatia was appointed interim C.E.O. effective June 1, 1998. Mr. Bhatia
is the Chairman of the Company's Board of Directors, a co-President of Renwick
and general partner of RAF and RSSF.
RESIGNATION OF VICE PRESIDENT OF FINANCE
In July 1998, Debra L. Griffith, the Company's Vice President of Finance and
Chief Financial Officer since July 1996 resigned to accept employment elsewhere.
TERMINATION OF DISTRIBUTION AGREEMENT WITH CIRCUIT CITY
In early May, the Company and Circuit City agreed to terminate their
distribution agreement for mutual business reasons. Circuit City plans to sell
through its existing inventory of Carver products by September 1998. Prior to
this termination, sales to Circuit City (except those attributable to new Cinema
Loudspeaker system stocking orders) were declining. In 1997, Circuit City
accounted for 40% of the Company's revenue, and in the first quarter of 1998,
that percentage declined to 28%. Furthermore, due to Circuit City's buying
power, the Company realized a smaller margin on sales to Circuit City than that
realized by the Company on sales to most other customers. The Company believes
that the termination of its relationship with Circuit City may negatively effect
sales of Carver products by other Carver dealers and may result in decreased
sales of existing products to those dealers in the short term. The Company also
believes that its future introduction of new products, and its implementation of
a direct sales plan and increased dealer support may generate sales that may
offset the loss of revenue associated with the termination of the distribution
agreement with Circuit City. There can be no assurance that such sales will
increase in the amount necessary to offset such loss of revenue or that the
margins associated with such sales will increase.
<PAGE>
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1998 were $699,000, a decrease of 71%
from net sales of $2,442,000 for the same period of 1997. Net sales for the six
months ended June 30, 1998 were $2,637,000, a 42% decrease from net sales of
$4,543,000 for the first six months of 1997. This decrease is due primarily the
Company's lack of working capital which limited activities during the first half
of 1998. (See "Liquidity and Capital Resources".)
Domestic sales decreased 50% to $1,918,000 compared to sales of $3,848,000 in
the first half of 1997. Of the domestic sales, approximately $566,000 or 30%
were sales made by the Company to Circuit City, a decrease from sales of
$1,183,000 to Circuit City in the first half of 1997. This decrease was
primarily due to the termination of the distribution agreement between Circuit
City and the Company. Sales outside of the United States decreased
approximately 46% from $197,000 to $106,000 in the second quarter of 1998
primarily due to softening conditions in Asian markets. Approximately 41% of the
Company's sales in the first half of 1998 were attributable to products which
the Company sources compared to 47% for the first half of 1997.
There was no gross profit in the second quarter of 1998 compared to gross profit
of 10% of net sales in the second quarter of 1997. Gross profit was 10% of net
sales for the first six months of 1998 and 1997. Since 1995, the Company has
been operating at significantly less than its production capacity, resulting in
an increase in cost of goods sold. In addition, the Company has made price
concessions on the sale of certain models. In June 1998, the Company
discontinued most of its manufacturing and product development functions
pursuant to its new business plan. Early in the second quarter, the Company
began to sell its product directly to consumers over the Internet and by
telephone. Management believes that gross profit may improve as direct sales
over the Internet and by telephone grow. However, there can be no assurance
that such 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 decreased 47% when compared to the second quarter of 1997 and
31% in the first half of 1998 compared to the first half of the prior year.
These decreases were due to cost reduction efforts associated with the new
business strategy discussed below.
Net losses for the quarter ended June 30, 1998, were $808,000 (116% of net
sales) or $0.12 per share. This compares to net losses of $195,000 (8% of net
sales) or $0.05 per share for the second quarter of 1997. Net losses for the
six months ended June 30, 1998 were $1,725,000 (65% of net sales) or $0.29 per
share compared to $1,275,000 (28% of net sales) or $0.34 per share for the first
half of 1997.
DEVELOPMENT OF NEW BUSINESS STRATEGY
The primary short term goal of the Company is to further reduce overhead and
fixed expenses so as to operate the Company on a break even basis. The Company
will pursue a "back to basics" strategy which focuses on the Company's core
competency- its amplifiers. The Company believes that it's reputation is based
upon its production of award winning and innovative amplifier designs. As it
grew, the Company lost this focus as it expanded its product lines of signal
source products. Management is currently focusing on again manufacturing its
best selling amplifiers at its facility and instituting a marketing program
support that plan.
As the Company's sales have declined and the Company has experienced a severe
shortage in working capital, the Company has determined the need to develop a
new business strategy which will enable it to increase revenues and operate with
lower overhead. This new business model, which is still under development but
which the Company began to implement in the first quarter of 1998, included the
use of a new direct marketing strategy, a reduction in the number of products
offered by the Company and the elimination of the Company's manufacturing
operations. The Company has subsequently decided to manufacture its amplifier
product in its facility and is evaluating the cost of resuming production.
Since the Company sold much of the equipment which it used to produce products,
it will be required to purchase certain equipment to resume production.
The Company is currently in discussions with several entities that would be
candidates for a joint venture to manufacture products locally.
<PAGE>
Under the direct marketing strategy and since May 1, 1998, the Company offers
its products directly to consumers in addition to sales through dealers and
distributors. The Company's products are offered for sale to consumers via the
Internet at a Company Web site (www.carver.com) and through a toll-free number
(1-877-2-Carver).
Based upon the Company's new business plan, and the condensed product line that
the Company plans to offer, Carver is evaluating whether it is advantageous to
source certain products from selected and qualified strategic vendor partners.
If sourced, products will be built to the Company's specifications and,
consistent with its commitment to quality, the Company will continue to maintain
strict testing procedures. The Company retests products manufactured by its
suppliers on a statistical sample basis at its Woodinville facility to monitor
quality control. To help insure availability of its products, the Company will
form relationships with vendors from whom the Company has obtained high quality
products delivered on a timely basis. As the Company continued to restructure
its operations during the second quarter to implement its direct sales and
sourced product plans, most of its production employees, its research and
development employees and several other employees, were laid off. The Company
has reduced the number of its employees from 84 on January 1, 1998 to 28 on
August 11, 1998. The final decision of the Company regarding which models of its
products to manufacture and which models to obtain from vendors will impair the
value of its raw material and work-in-process inventories may become impaired.
The Company is presently negotiated with a third party to assign or sub-lease
all or a portion of its current facility. If these or similar negotiations are
successful, the monthly overhead of the Company may be further reduced.
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 cyclically,
reflecting the general state of the economy and consumer expectations.
LIQUIDITY AND CAPITAL RESOURCES
At August 11, 1998, the Company's immediate capital resources consisted of
approximately $171,000 in cash. The Company had an agreement with a financial
institution that provided for working capital advances of up to $6,000,000,
subject to borrowing base limitations tied to 70% of eligible accounts
receivable and 50% of eligible inventory. A maximum of $1,000,000 of this line
could have been be used to secure letters of credit (the "Credit Facility").
Advances are collateralized by substantially all of the assets of the Company
and bear interest at the prime lending rate plus 6%. The outstanding balance on
the line of credit as of August 11, 1998 was $517,470. The Credit Facility
expired on July 31, 1998. The lender has notified the Company that all of the
Company's indebtedness to it must be paid in full by close of business on August
11, 1998, or it will exercise its rights and remedies under the default
provisions of the Company's agreements with its lender. The Company is
negotiating a potential postponement of the exercise of the lender's rights and
remedies on default, but there can be no assurance that the Company will
continue to be successful in doing so. As of today, the Company has assigned a
letter of credit in the amount of approximately $235,000 which it received from
one of its distributors to its lender. The Company believes it will pay the
balance due to its lender by the end of August. The rights and remedies of the
lender upon the Company's default include the lender's rights to take possession
of the Company's accounts receiveables, inventory and equipment. The Company has
been unable to obtain a replacement line of credit as of August 11, 1998. There
can be no assurance that the Company will obtain a replacement line of credit,
or if so, on terms that the Company finds acceptable. However, the Company
believes that a new line of credit may be secured, if it can obtain agreements
from its creditors to payment plans and if financing is secured in the near
future.
Accounts payable and accrued liabilities were $1,662,000 at June 30, 1998, a
decrease of $338,000 during the second quarter. The Company has been unable to
make payments to suppliers in accordance with agreed upon terms and is currently
negotiating a payment schedule. On August 11, 1998, approximately $1,400,000
would be needed to satisfy the Company's past-due payment obligations excluding
accrued interest and other associated costs and fees. As of August 11, 1998,
five of the Company's vendors have filed suits against the Company. See Item 1.
Legal Proceedings, below.
The Company's inventory decreased $901,000 from December 31, 1997 to June 30,
1998, due to decreased production of amplifiers manufactured in the U.S. and
decreased procurement of loudspeakers and other electronics. Accounts
receivable decreased $1,725,000 from the end of 1997 due to lower sales in the
first half of 1998.
On May 5, 1998, the Company closed a transaction with Renwick Special Situations
Fund L.P. ("RSSF"), by which the Company sold 3 million shares of its
unregistered Common Stock to RSSF for $375,000 or $0.125 per share. The 3
million
<PAGE>
shares represent 39% of the outstanding shares of the Company's Common Stock.
Raj A. Bhatia and James R. McCullough, both directors of the Company, are the
Co-Presidents, sole directors and only shareholders of Renwick Capital
Management, Inc. ("Renwick") and the sole general partners of Renwick Alpha
Fund, L.P. ("RAF") and RSSF. Prior to this sales, RAF beneficially owned
directly 185,211 shares of Common Stock and 470,588 shares of Preferred Stock
and RSSF beneficially owned directly 2,497 shares of Common Stock and 941,176
shares of Preferred Stock. The shares of Preferred Stock were convertible into
shares of Common Stock at any time at the option of the holder on a one for one
basis, subject to potential antidilution adjustment. In addition, Renwick holds
currently exercisable warrants to purchase 250,000 shares of Common Stock. As a
result of this transaction, RSSF owns directly 3,002,497 shares, or 41%, of the
Common Stock. The subscription agreement entered into by the Company and RSSF
provides for demand registration rights with regard to these shares. During the
period of time ending one year from the date of closing, the costs of
registering the stock will be the sole expense of RSSF. Thereafter, such costs
will be the sole expense of the Company. As a condition to closing, RSSF and RAF
each waived its rights to cause the Company to adjust, or to benefit from an
adjustment to the Conversion Ratio adjustment rights which were granted them by
the Company in June 1997, Renwick waived its exercise price adjustment rights
with respect to its warrants.
On June 5, 1998, the Company closed a transaction with Oscar Investment Fund,
L.P. ("Oscar"), by which the Company sold 666,667 shares of its unregistered
Common Stock to Oscar for $250,000 or $0.375 per share. The price was the
average closing bid price over the ten consecutive trading days immediately
prior to closing. The 666,667 shares represent 6.8% of the outstanding shares
of the Company's Common Stock. The subscription agreement entered into by the
Company and Oscar provides for demand registration rights with regard to these
shares. During the period of time ending one year from the date of closing, the
costs of registering the stock will be the sole expense of Oscar. Thereafter,
such costs will be the sole expense of the Company.
The Company currently does not meet Nasdaq's minimum public float, bid price
continued listing requirements, and minimum net tangible asset requirements of
$5,000,000, $1.00 per share, and $4,000,000, respectively. The Company had
until May 28, 1998 to satisfy these requirements. The Company's appeal of the
decision of Nasdaq to delist the Company's stock from Nasdaq was held on July
23, 1998. The Company anticipates an imminent decision on its appeal. The
inability of the Company to comply with these listing requirements likely will
result in the delisting of the Company's common stock from Nasdaq. Delisting of
the Company's common stock would likely have an adverse effect on the liquidity,
trading price and ability to obtain quotations on a timely basis for the common
stock. If the Company's common stock should cease to be listed on Nasdaq, it
may continue to be quoted on the OTC Bulletin Board.
In the first quarter of 1998, the Company purchased $15,000 of capital
equipment, of which $14,000 represented leasehold improvements which were
incurred in conjunction with the move to a new leased facility. The Company
expects minimal purchases of capital equipment in the near future.
The Company believes that its current sources of operating capital are not
adequate to fund the Company's operations through the end of 1998, however the
Company has identified potential financing sources. Even if the Company is
successful in raising additional financing, unforeseen costs and expenses or
lower than anticipated revenues could accelerate or increase the financing
requirements. There can be no assurance that the Company will be able to secure
a line of credit to replace the Credit Facility which expired on July 31, 1998,
or that the Company's efforts to secure financing will be successful. Failure to
obtain sufficient additional capital to satisfy the Company's working capital
requirements, repay its current lender, or obtain an extension of the August 11,
1998 repayment deadline would force the Company to cease, further curtail or
restructure operations, sell assets, continue to seek extended payment terms
from its creditors and/or seek protection under the federal bankruptcy laws.
The Company is aggressively pursuing strategic alternatives which include the
sale of the Company or its assets or a merger with another entity.
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 six months of
1998.
PART II--OTHER INFORMATION
<PAGE>
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to the following legal proceedings:
Suit filed in Los Angeles Municipal Court, Rio Hondo Judicial District,
California, Case No. 98C01244 by Marshall Industries, a corporation, vs. Carver
Corporation, et al. on June 22, 1998. The plaintiff seeks a money judgment for
merchandise and/or services allegedy sold and delivered to the Company in the
amount of $8,955.33 plus costs, interest and attorney's fees.
Suit filed in the King County District Court, Northeast Division, State of
Washington, Case No. 98001500 by Insight Electronics, Plaintiff, against the
Company as defendant on July 31, 1998. The plaintiff seeks a money judgment for
goods allegedly sold to the Company in the amount of $5,035.92 plus interest,
court costs and attorney's fees.
Suit filed in the County Court, Adams County, Colorado, Case No. 98C8823 by
Advanced Circuits, Inc., Plaintiff, against the Company, as defendant, on July
28, 1998. The plaintiff seeks a money judgment for goods allegedly sold to the
Company in the amount of $3,329.90 plus interest, court costs and attorney's
fees.
Suit filed in the Superior Court of the State of Washington for King County,
Case No. 98-2-18512-1SEA, by Elite Enterprise Co., plaintiff, against the
Company, as defendant, on July 29, 1998. The plaintiff seeks a money judgment
for goods allegedly sold the Company in the amount of $92,879.82 plus interest,
court costs and attorney's fees.
Suit filed in the Superior Court of Washington for King County, Case No.
unknown, on an unknown filing date, but which suit was served on the Company on
July 29, 1998 by USF Reddaway, Plaintiff, against the Company, as defendant.
Plaintiff seeks a money judgment for services allegedly provided the Company in
the amount of $1,633.36 plus court costs, interest and attorney's fees.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 5, 1998, the Company closed a transaction with Renwick Special Situations
Fund L.P. ("RSSF"), by which the Company sold 3 million shares of its
unregistered Common Stock to RSSF for $375,000 or $0.125 per share. The 3
million shares represent 39% of the outstanding shares of the Company's Common
Stock. Raj K. Bhatia and James R. McCullough, both directors of the Company,
are the Co-Presidents, sole directors and only shareholders of Renwick Capital
Management, Inc. ("Renwick") and the sole general partners of Renwick Alpha
Fund, L.P. ("RAF") and RSSF. Prior to this sale, RAF beneficially owned
directly 185,211 shares of Common Stock and 470,588 shares of Preferred Stock
and RSSF beneficially owned directly 2,497 shares of Common Stock and 941,176
shares of Preferred Stock. The shares of Preferred Stock were convertible into
shares of Common Stock at any time at the option of the holder on a one for one
basis, subject to potential antidilution adjustment. In addition, Renwick holds
currently exercisable warrants to purchase 250,000 shares of Common Stock. As a
result of this transaction, RSSF owns directly 3,002,497 shares, or 41%, of the
Common Stock. The subscription agreement entered into by the Company and RSSF
provides for demand registration rights with regard to these shares. During the
period of time ending one year from the date of closing, the costs of
registering the stock will be the sole expense of RSSF. Thereafter, such costs
will be the sole expense of the Company. As a condition to closing, RSSF and
RAF each waived its rights to cause the Company to adjust, or to benefit from an
adjustment to the Conversion Ratio adjustment rights which were granted them by
the Company in June 1997, and Renwick waived its exercise price adjustment
rights with respect to its warrants.
On June 5, 1998, the Company closed a transaction with Oscar Investment Fund,
L.P. ("Oscar"), by which the Company sold 666,667 shares of its unregistered
Common Stock to Oscar for $250,000 or $0.375 per share. The price was the
average closing bid price over the ten consecutive trading days immediately
prior to closing. The 666,667 shares represent 6.8% of the outstanding shares
of the Company's Common Stock. The subscription agreement entered into by the
Company and Oscar provides for demand registration rights with regard to these
shares. During the period of time ending one year from the date of closing, the
costs of registering the stock will be the sole expense of Oscar. Thereafter,
such costs will be the sole expense of the Company.
<PAGE>
On June 26, 1998, Renwick Alpha Fund, L.P. ("RAF") and Renwick Special
Situations Fund, L.P. ("RSSF") converted the shares of Series A Cumulative
Convertible Preferred Stock of the Company into shares of the Company's Common
Stock on a one for one basis. RAF and RSSF held 470,588 and 941,176 shares of
Preferred Stock, respectively. Prior to this conversion, RAF beneficially owned
directly 342,074 shares of Common Stock and 470,588 shares of Preferred Stock
and RSSF beneficially owned directly 3,316,222 shares of Common Stock and
941,176 shares of Preferred Stock. In addition, Renwick holds currently
exercisable warrants to purchase 250,000 shares of Common Stock.
On July 1, 1998, the Board of Director's of the Company approved the issuance of
warrants to RAF and RSSF for the purchase of 646,038 and 1,292,075 shares of the
Company's Common Stock at a purchase price of $0.125 per share. The warrants
expire to the extent that they have not been previously exercised on June 30,
2003.
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) EXHIBITS
Exhibit 11 Computation of Earnings per Share
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
In accordance the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARVER CORPORATION
Dated: August 12, 1998 /s/ Raj A. Bhatia
-----------------------------------------
Raj A. Bhatia, Chairman and Interim Chief
Executive Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT TITLE PAGE
- -------------------------------------------------------------------------------
11 Computation of Earnings Per Share 14
27 Financial Data Schedule 15
<PAGE>
EXHIBIT 11
CARVER CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER
SHARE NET LOSS $ (808,000) $(1,260,000) $(1,700,000) $($2,404,000)
---------- ----------- ----------- ------------
Weighted average number
of shares outstanding 6,997,960 3,803,384 5,989,247 3,781,862
Add shares issuable from
the assumed exercise
of options or
conversion of
preferred stock * * * *
---------- ----------- ----------- ------------
Weighted average number
of shares outstanding,
as adjusted 6,997,960 3,803,384 5,989,247 3,781,862
---------- ----------- ----------- ------------
LOSS PER COMMON SHARE $ (0.12) $ (0.33) $ (0.28) $ 0.63)
========== =========== =========== ============
</TABLE>
*Effect on loss per share is antidilutive
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 171,000
<SECURITIES> 0
<RECEIVABLES> 167,000
<ALLOWANCES> 189,000
<INVENTORY> 3,857,000
<CURRENT-ASSETS> 4,371,000
<PP&E> 1,905,000
<DEPRECIATION> 1,211,000
<TOTAL-ASSETS> 5,169,000
<CURRENT-LIABILITIES> 2,168,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,169,000
<SALES> 699,000
<TOTAL-REVENUES> 699,000
<CGS> 701,000
<TOTAL-COSTS> 701,000
<OTHER-EXPENSES> 780,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,000
<INCOME-PRETAX> (808,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (808,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (808,000)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
