-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UK8cG87nOn5Ab2ADlW6Kw1LWB1XiW6uUqXWs6QzOvPUAKiMnfVUQBYpRFy5tduqQ hgOTf+1s6AAaN0TFAWK7ng== 0000912057-96-026381.txt : 19961118 0000912057-96-026381.hdr.sgml : 19961118 ACCESSION NUMBER: 0000912057-96-026381 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARVER CORP CENTRAL INDEX KEY: 0000766177 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 911043157 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14482 FILM NUMBER: 96664206 BUSINESS ADDRESS: STREET 1: 20121 48TH AVE W STREET 2: P O BOX 1237 CITY: LYNNWOOD STATE: WA ZIP: 98036 BUSINESS PHONE: 2067751202 MAIL ADDRESS: STREET 1: 20121 48TH AVE CITY: LYNNWOOD STATE: WA ZIP: 98036 10-Q 1 FORM 10-Q 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 SEPTEMBER 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 of 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 SEPTEMBER 30, 1996, 3,719,832 SHARES OF $.01 PAR VALUE COMMON STOCK OF THE REGISTRANT WERE OUTSTANDING. Page 1 of 27 pages. Exhibit Index appears at Page 18. PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CARVER CORPORATION CONSOLIDATED BALANCE SHEET ASSETS Sept. 30, December 31, 1996 1995 (Unaudited) Current Assets Cash and cash equivalents $ 137,000 $ 261,000 Marketable securities 5,000 5,000 Accounts receivable, trade, net 2,576,000 2,304,000 Raw materials 689,000 893,000 Working 1,389,000 1,284,000 Finished 2,004,000 1,750,000 ------------ ------------- Inventories 4,082,000 3,927,000 Current portion of note receivable 249,000 1,342,000 Prepaid expenses 955,000 377,000 ------------ ------------- Total current assets 8,004,000 8,216,000 Property and equipment, Land 440,000 440,000 Buildings and improvements 2,452,000 2,452,000 Equipment 2,006,000 2,019,000 ------------ ------------- 4,898,000 4,911,000 less accumulated depreciation (2,717,000) (2,620,000) ------------ ------------- 2,181,000 2,291,000 Other assets and deferred charges 185,000 167,000 ------------ ------------- Total Assets $ 10,370,000 $ 10,674,000 ------------ ------------- ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Notes payable $ 711,000 $ 1,216,000 Accounts payable 389,000 842,000 Accrued liabilities Commissions and advertising 148,000 104,000 Payroll and related taxes 161,000 198,000 Warranty 83,000 73,000 Other 22,000 156,000 Current portion of long-term debt 696,000 ------------ ------------- Total current liabilities 1,514,000 3,285,000 ------------ ------------- Shareholders' equity Preferred Stock, par value $.01 per share 2,000,000 shares authorized, 1,411,764 shares issued and outstanding 14,000 Cstock, par value $.01 per share 20,000,000 shares authorized, 3,719,832 shares issued and outstanding 37,000 37,000 Additional paid-in capital 18,882,000 15,940,000 Accumulated deficit (10,077,000) (8,588,000) ------------ ------------- Total shareholders' equity 8,856,000 7,389,000 ------------ ------------- Total liabilities and shareholders' equity $ 10,370,000 $ 10,674,000 ------------ ------------- ------------ ------------- (SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS) 2 CARVER CORPORATION CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Net sales $ 4,336,000 $ 4,494,000 $ 11,729,000 $ 14,655,000 Cost of sales 3,093,000 3,416,000 9,148,000 11,689,000 ------------ ------------ ------------ ------------ Gross profit 1,243,000 1,078,000 2,581,000 2,966,000 Operating expense Selling 674,000 702,000 1,856,000 2,750,000 General & administrative 461,000 340,000 1,470,000 1,294,000 Engineering, research & development 176,000 117,000 507,000 685,000 ------------ ------------ ------------ ------------ 1,311,000 1,159,000 3,833,000 4,729,000 ------------ ------------ ------------ ------------ Loss from operations (68,000) (81,000) (1,252,000) (1,763,000) Other income (expense) Interest expense (37,000) (82,000) (180,000) (274,000) Interest income 1,000 22,000 50,000 65,000 Other 15,000 (10,000) (62,000) (114,000) ------------ ------------ ------------ ------------ Net loss $ (89,000) $ (151,000) $ (1,444,000) $ (2,086,000) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Loss per common share $ (0.02) $ (0.04) $ (0.39) $ (0.57) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ *Weighted average number of shares outstanding 3,709,101 3,679,538 3,697,965 3,679,106 *Options outstanding and Preferred Stock conversion are excluded as the effect on loss per share is antidilutive.
3 CARVER CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1996 1995 ------------ ------------ OPERATING ACTIVITIES: Net loss $ (1,444,000) $ (2,086,000) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization 179,000 311,000 Changes in: Accounts receivable (272,000) 1,117,000 Inventories (155,000) 1,929,000 Prepaid expenses (578,000) 204,000 Accounts payable and accrued liabilities (571,000) (401,000) Other assets & deferred charges (18,000) (45,000) ------------ ------------ Net cash (used) provided by operating activities (2,859,000) 1,029,000 ------------ ------------ INVESTING ACTIVITIES: Acquisition of property, plant and equipment, net (69,000) (42,000) Proceeds from notes receivable 1,093,000 7,000 ------------ ------------ Net cash (used) provided by investing activities 1,024,000 (35,000) ------------ ------------ FINANCING ACTIVITIES: Increase (decrease) in notes payable (505,000) (1,183,000) Repayment of long-term debt (696,000) (15,000) Issuance of common stock 2,000 Issuance of Preferred Stock 2,912,000 ------------ ------------ Net cash (used) provided by financing activities 1,711,000 (1,196,000) ------------ ------------ Decrease of cash and cash equivalents (124,000) (202,000) CASH AND CASH EQUIVALENTS: Beginning of period 261,000 249,000 ------------ ------------ End of period $ 137,000 $ 47,000 ------------ ------------ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 180,000 $ 274,000 4 CARVER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 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 application of SFAS 123 and APB25 to warrants granted by the Company may result in compensation expense to the Company depending on the terms of each agreement. NOTE 2 - EARNINGS PER COMMON SHARE The earnings per share computations are based upon the weighted average number of shares outstanding for the interim periods presented. The earnings per share calculation for periods in which a loss is recorded excludes common share equivalents because the effect would be antidilutive. NOTE 3 - INCOME TAXES - 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 $14,960,000 at this time. As future operating results improve, management will re-assess its position in this matter. NOTE 4 - COMMITMENTS - As of November 12, 1996, the Company has committed to purchase approximately $2,722,000 of inventory expected to be received in 1996 from various offshore vendors most of which is payable in U.S. dollars. 5 NOTE 5 - STOCKHOLDERS EQUITY - Under the terms of the Stock Purchase Agreement with Renwick Capital Management (See Item 2. "Changes in Securities") dividends paid in Common Stock are reflected in the stockholders equity section of the Balance Sheet as a decrease in Retained Earnings and increase to Common Stock and Paid in Capital. As of September 30, 1996 15,323 shares of Common Stock have been issued under the terms of this agreement. 6 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 anticipated improvements in gross margin, constitute forward-looking statements which are subject to a number of known and unknown risks, uncertainties and other factors which might cause actual results to differ materially from those expressed or implied by such statements. These include the risks and uncertainties described below or 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 nine-month periods ended September 30, 1996 and 1995. PERCENTAGE OF NET SALES Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- Net Sales 100% 100% 100% 100% Cost of Sales 71.3 76.0 78.0 79.7 ---- ---- ---- ---- Gross Profit 28.7 24.0 22.0 20.2 Operating Expenses Selling 15.5 15.6 15.8 18.7 G & A 10.6 7.6 12.5 8.8 Engineering, research and development 4.1 2.6 4.3 4.7 ---- ---- ---- ---- Loss from operations (1.6) (1.8) (10.7) (12.0) Interest expense (0.9) (1.9) (1.5) (1.9) Interest income 0.0 0.5 0.4 0.5 Other expense (0.3) (0.2) (0.5) (0.8) ---- ---- ---- ---- Net loss (2.1)% (3.4)% (12.3)% (14.2)% ---- ---- ---- ---- ---- ---- ---- ---- 7 RECENT DEVELOPMENTS - BOARD MEMBER RESIGNATION. On August 14, 1996 the Board of Directors accepted the resignation of Robert W. Carver, who had rejoined the Board in December 1995. PRIVATE PLACEMENT OF SECURITIES. As described more fully under the caption "Liquidity and Capital Resources" below in this Item 2, on June 12, 1996, the Company entered into a Stock Purchase Agreement with Renwick Capital Management, Inc. ("Renwick") and certain Renwick affiliates (the "Agreement"). Pursuant to the Agreement, during June and the third quarter of 1996 the Company sold 1,411,764 shares of Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") and issued five year warrants (the "Warrants") to acquire up to 300,000 shares of the Company's Common Stock yielding gross proceeds to the Company of $3,000,000. The proceeds from this offering have been used, among other things, to bring current a number of payment obligations and purchase inventory. SALE OF THE COMPANY'S BUILDING. Previously the Company reported that it had entered into an agreement to sell its Lynnwood, Washington headquarters and manufacturing facility which was expected to close by the end of 1996, subject to satisfaction of a number of conditions. Certain of these conditions have not been satisfied and the purchaser has elected to terminate the agreement. Accordingly, the property has been relisted for sale. 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, 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. If sales to Circuit City fall short of expectations for any reason, 8 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 September 30, 1996 were $4,336,000, a decrease of 4% from net sales of $4,494,000 for the third quarter of 1995. Net sales for the nine months ended September 30, 1996 were $11,729,000, a 20% decrease from net sales of $14,655,000 for the first nine months of 1995. These decreases are attributable largely to the November 1995 sale of the Company's professional product line and certain related OEM accounts to Phoenix Gold. In the first nine months of 1995 net sales included sales of professional products of $3,801,000 and OEM sales of $1,348,000 of which $967,000 and $699,000, respectively, were sold in the third quarter. In the first nine months of 1996, net sales included sales of professional products of $432,000 and OEM sales of $118,000 of which $62,000 and $91,000, respectively, were sold in the third quarter. 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 $9,672,000 or 42% compared to sales of $6,808,000 in the first nine months of 1995. Of the domestic sales, approximately $5,206,000 or 53% were sales made by the Company to Circuit City. During the quarter ending September 30, 1996 domestic consumer products sales increased to $3,767,000 or 90% when compared to the same period of the prior year, of which $2,021,000 or 54% were sales to Circuit City. Sales outside of the United States decreased approximately 55% from $2,185,000 to $985,000 in the first nine months of 1996. In addition, international sales for the quarter decreased 53% to $293,000 when compared to the prior year. The Company believes this is attributable to limited availability of product to sell to its international distributors. Approximately 58% of the Company's sales in the first nine months of 1996 were attributable to products which the Company sources offshore compared to 45% for the same period of the prior year. The Company's sales of consumer products, although higher in 1996 than in the corresponding period last year, were negatively affected by the 9 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. In addition, one of the Company's offshore vendors failed to deliver two products on their scheduled delivery dates due to production problems. As a result, the Company was not able to stock enough of the products which its sources offshore to consistently fill orders. In addition, most of the products sourced offshore are products which often generate additional sales of products manufactured by the Company (e.g. preamplifier/tuners and compact disc players). Also, the Company's inability promptly to fill orders from dealers in some cases caused dealers to cancel orders. The Company believes these factors had a significant negative impact on the Company's sales during the first nine months of 1996. (See "Liquidity and Capital Resources" below.) Net losses for the quarter and nine month periods ended September 30, 1996 were $89,000 (2.1% of net sales) or $0.02 per common share and $1,444,000 (12.3% of net sales) or $0.39 per common share, respectively. This compares to net losses of $151,000 (3.4% of net sales) or $0.04 per share for the quarter and $2,086,000 (14% of net sales) or $0.57 per share for the nine months ended September 30, 1995. GROSS PROFIT - Gross profit increased as a percent of net sales to 28.7% in the third quarter of 1996 from 24% in the third quarter of 1995. Gross profit for the first nine months of 1996 increased to 22% from 20.2% in the same period of the prior year. Sales during the nine months ended September 30, 1996 included $432,000 of sales of professional products 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, these sales were at the Company's cost and, therefore, yielded no margin. In addition, approximately $5,206,000 in sales to Circuit City in the first nine months were at a lower margin than the Company realizes on its sales to other domestic customers. Despite these negative factors, the Company experienced improvements in gross profit as it 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. However, there can be no assurance that foreign exchange rates, cost increases or other factors will not negatively impact margins. (See "Liquidity and Capital Resources" below.) 10 OPERATING EXPENSE - Operating expense decreased in the first nine months of the year in comparison to the prior year by 19% 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. Operating expense increased in the quarter to quarter comparison by 13% due to increased research and development investment, use of consultants as well as increased field sales support and media advertising OTHER INCOME AND EXPENSE - Average borrowings were down in the first nine months of 1996 from the same period of 1995, and therefore interest expense decreased approximately $94,000 and $45,000 during the nine months and quarter ended September 30, 1996 when compared to the corresponding periods in 1995. LIQUIDITY AND CAPITAL RESOURCES - The Company's working capital on September 30, 1996 was $6,490,000 which included cash and short term investments aggregating approximately $137,000. This compares with working capital of $4,931,000 and cash and short-term investments of $266,000 at December 31, 1995. At November 8, 1996, the Company's immediate capital resources consisted of approximately $46,000 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 November 8, 1996, the Company had borrowed $291,000 of the $2,968,000 then available under this facility. The line is collateralized by substantially all assets of the Company and bears interest at the lender's prime rate plus 2%. The lender has 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 March 31, 1997, $500,000 through April 30, 1997, and $250,000 through May 31, 1997. 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. 11 The Company's inventory has increased $155,000 from December 31, 1995 primarily due to receipt of finished goods from offshore suppliers. Accounts receivable has increased $272,000 from the end of 1995 due to increased sales. During most of 1995 and the first half of 1996 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. As the Company's borrowing base is dependent on its inventory and receivables, the borrowing availability had contracted to a level at 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. Several of the Company's major suppliers changed payment terms in 1996 to require prepayment. The Company believes that it has lost sales in the first nine months of 1996 due to lack of availability of product. Late in the second quarter and during the third quarter of 1996 the Company sold 1,411,764 shares of Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") and issued five year warrants (the "Warrants") to acquire up to 300,000 shares of the Company's Common Stock pursuant to a Stock Purchase Agreement with Renwick Capital Management, Inc. ("Renwick") and certain Renwick affiliates (the "Agreement"). The Shares of Preferred Stock and Warrants are convertible into or exercisable for 1,711,764 shares of Common Stock, or approximately 46% of the current shares outstanding. The price of the Preferred Stock was $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 and has been 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 number of shares of Common Stock which might be issued over the life of the dividend cannot be determined at this time as such number will vary with the market price of the Common Stock. 12 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 two representatives to the Company's Board of Directors. The Company's Board of Directors was increased by two positions, and Raj K. Bhatia and James R. McCullough have been appointed to the Board of Directors to represent holders of the Preferred Stock. Messrs. 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. 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 had entered into an agreement to sell its headquarters in Lynnwood, Washington for $3,675,000. The Purchaser did not remove the necessary contingencies required for the sale to be consummated. As such, the property remains listed for sale. The Company believes that its available working capital and anticipated cash flows from operations will satisfy the Company's projected working capital and capital expenditure requirements for at least the next 12 months. However, if the Company's sales do not increase or if the Company incurs unanticipated expenses, existing sources of working 13 capital may not be sufficient and there can be no assurance that additional financing would be available on acceptable terms, or at all, if and when needed. Any additional financing may involve substantial additional dilution to the interests of the Company's shareholders. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS. The Company's operating results may fluctuate due to factors such as the timing of new product announcements and introductions by the Company, its major customers and its competitors, market acceptance of new or enhanced versions of the Company's products, changes in the product or customer mix of revenues, changes in the level of operating expenses, competitive pricing pressures, the gain or loss of significant customers, increased research and development expense associated with new product introductions, and general economic conditions. All of the above factors are difficult for the Company to forecast, and these or other factors can materially adversely affect the Company's business and operating results for one quarter or a series of quarters. 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 43% of the Company's net sales in 1995 and 58% 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. 14 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. At November 11, 1996, the Company had committed to the purchase of approximately $2,722,000 of inventory scheduled for delivery in 1996. Of this amount, approximately $35,000 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. ITEM 2. CHANGES IN SECURITIES. As described more fully under the caption "Liquidity and Capital Resources" in Item 2 of Part I above, late in the second quarter and during the third quarter of 1996 the Company sold 1,411,764 shares of Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") and issued five year warrants (the "Warrants") to acquire up to 300,000 shares of the Company's Common Stock pursuant to a Stock Purchase Agreement with Renwick Capital Management, Inc. ("Renwick") and certain Renwick affiliates (the "Agreement"). The Shares of Preferred Stock and Warrants are convertible into or exercisable for 1,711,764 shares of Common Stock or 46% of the current shares outstanding. 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 cumulative dividends at the annual rate of $0.17 per share 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 15 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 by two positions, 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. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit 10.42 Agreement for Financial Public Relations Services (b) Exhibit 10.43 Sixteenth Amendment to Carver Corporation Accounts Financing Agreement 16 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 ---------------------- Vice President - Finance 17 CARVER CORPORATION EXHIBIT INDEX EXHIBIT TITLE PAGE - -------------------------------------------------------------------------- 10.42 Agreement for Financial Public 19 Relations Services 10.43 Sixteenth Amendment to Carver Corporation 25 Accounts Financing Agreement 18 EX-10.42 2 EXHIBIT 10.42 EXHIBIT 10.42 [LETTERHEAD] AGREEMENT FOR FINANCIAL PUBLIC RELATIONS SERVICES THIS AGREEMENT is entered into on this 22nd day of August 1996 by and between CORPORATE RELATIONS GROUP (hereinafter "CRG") , with its principal place of business at 2030 Main Street, Suite 620, Irvine, California 92614 and CARVER CORPORATION hereinafter ("Client"), a Washington corporation, with its principal place of business at 20121 48th Avenue West, Lynnwood, WA 98036 -- 206 -775-1202 . HEREAFTER, the Client and CRG are referred to collectively as "Parties", and singularly as "Party". WHEREAS, the Parties desire to set forth the terms and conditions under which the said services shall be performed. NOW, THEREFORE, in consideration of these promises of the mutual covenants herein, the Parties hereto agree as follows: ARTICLE I - SCOPE OF SERVICES CRG agrees to perform for the Client the financial services described as follows: (a) CRG will develop, implement, and maintain an ongoing stock market support system with the general objective of expanding stockbroker awareness of the Client's activities, and hence to commensurate interest in the Client's stock. This market support system will have a four part approach: (i) A SHAREHOLDER COMMUNICATION SYSTEM to keep existing stockholders informed about the Client's activities and potential. (ii) A STOCKBROKER SUPPORT SYSTEM to build a national network of stockbrokers who are informed about and interested in the Client. (iii) AN INVESTOR GENERATION SYSTEM to develop leads for selected brokers and to assist them in their marketing activity of the Client's stock. (iv) A MEDIA RELATIONS SYSTEM to increase corporate visibility through informational press releases, placement of articles and copy consulting on annual and quarterly reports. -1- (b) Optional Services. Additional projects, such as design and production of annual and quarterly reports, video or slide presentations, speech writing, and consulting related to financing activities, will be performed and billed as mutually agreed upon by both Parties. (c) CRG agrees to provide the Client with a written investor relations update each quarter which outlines activities undertaken by CRG on the Client's behalf and to be available to meet with the Client to evaluate the program's progress and direction. ARTICLE II - PERIOD OF PERFORMANCE The period of performance under this agreement shall be for a primary term of six (6) months from the date hereof. This Agreement may be terminated at the end of the six (6) month period by either Party upon at least 30 days written notice. Notice of termination may only be given on or before the last day of the initial six month term. If no notice of termination is received at that time the Agreement automatically renews for one successive six (6) month period under the same terms and conditions. Adjustments in compensation structure and the issuance of additional options (a new Option Agreement) will be considered after each year of service under the Agreement (two six month periods). ARTICLE III - CONTRACTUAL RELATIONSHIP In performing the services under this Agreement, CRG shall operate as, and have the status of an independent contractor. The Client and CRG will be mutually responsible for determining the means and the methods for performing the services described in ARTICLE I. ARTICLE IV - COMPENSATION As full consideration for the performance of the basic (four-part) services described above, the Client shall pay CRG compensation as follows: (a) CASH: $3,000 per month, which includes expenses for telephone/facsimile charges and postage for press release mailings. (i) Initial payment for the first month and an equal amount as a deposit against expenses and/or retainer amounts shall be due at the time this Agreement is signed ($6,000). Following the initial payment, ensuing payments are payable monthly in advance to CRG's principal place of business and are due on the first day of each month. (b) EXPENSES: Additional expenses include, but are not limited to, the following: travel and lodging; fare of public carrier; photocopy and printing; wire service (PR Newswire) charges; and postage for specially targeted mailings other than press releases. CRG agrees to obtain prior client approval for any single expense over $50.00. CRG shall submit a monthly invoice to the Client, which covers the monthly fee and reimbursable expenses. The Client agrees to indemnify and pay CRG for all authorized expenses committed to on behalf of the Client prior to termination of this Agreement for any reason. -2- (c) OPTIONS: Three Options (or Warrants) to purchase the Client's common stock shall be granted to CRG. (i) OPTION A - Immediately exercisable option to purchase 60,000 shares of Client's Common Stock at an exercise price equal to the closing bid price on the date of this Agreement (subject to adjustment as provided herein). This Option A may be exercised from the date of this Agreement until 11:59 p.m. (Los Angeles time) on the date that is 12 months after the date of this Agreement. Any portion of this Option A not exercised on or before its expiration date shall expire. (ii) OPTION B - Immediately exercisable option to purchase 60,000 shares of Client's Common Stock at an exercise price equal to 150% of the closing bid price on the date of this Agreement (subject to adjustment as provided herein). This Option B may be exercised from the date of this Agreement until 11:59 p.m. (Los Angeles time) on the date that is 18 months after the date of this Agreement. Any portion of this Option B not exercised on or before its expiration date shall expire. (iii) OPTION C - Immediately exercisable option to purchase 60,000 shares of Client's Common Stock at an exercise price equal to 200% of the closing bid price on the date of this Agreement (subject to adjustment as provided herein). This Option C may be exercised from the date of this Agreement until 11:59 p.m. (Los Angeles time) on the date that is 24 months after the date of this Agreement. Any portion of this Option C not exercised on or before its expiration date shall expire. (iv) MISCELLANEOUS: The Options pursuant to this Agreement may not be transferred, assigned, pledged or hypothecated in any manor (whether by operation of law or otherwise) without the prior written consent of Client. The Options may be exercised in whole or in part by means of a written notice of exercise delivered to Client accompanied by payment of the full exercise price in cash or by certified or cashier's check. CRG agrees that it will also pay to Client, the amount necessary , if any, for Client to satisfy its withholding obligations imposed by the Internal Revenue Code. CRG acknowledges that the issuance of shares of Common Stock upon exercise of the forgoing Options, and any resale of the shares of Common Stock, may only be affected in accordance with applicable state and federal laws and regulations. CRG shall furnish evidence satisfactory to Client (including a written and signed representation letter and a consent to be bound by all transferred restrictions imposed by applicable law) to that effect upon exercise of any of the Options and that it is not entitled to any rights as a shareholder with respect to any shares of Common Stock issuable pursuant to the Options until the Options have been exercised. (v) PIGGYBACK REGISTRATION RIGHTS: If at any time prior to August 31, 1999, Client proposes to register any of its Common Stock under the Securities Act Of 1933 in connection with a firmly underwritten public offering of Common Stock for cash for its own account on a registration form that may be used for the registration of the sale of Common Stock issued upon exercise of the Options ( "Registerable Shares" ), at least 20 days before filing such registration statement Client will notify CRG of such determination, and upon the request of CRG given in writing, within twenty (20) days after receipt of the Client's notice, Client shall use its reasonable best efforts to cause any of the Registerable Shares specified by CRG to be included in such registration statement. -3- (ARTICLE IV (C) (V) - CONTINUED) However, if any managing underwriter for such public offering determines in its reasonable good faith judgment that the inclusion of all Registerable Shares requested by CRG and the Common Stock proposed to be offered by Client and by other shareholders, whether originally covered by requests for registration or otherwise included, might interfere with the successful marketing of such securities within a price range reasonably acceptable to Client, then Client shall be required to include in the registration only that number of securities, including Registerable Shares, which the managing underwriter believes will not jeopardize the success of the offering and the number of shares otherwise to be included in the registration statement shall be reduced as follows: (1) there shall first be excluded Common Stock proposed to be included by other shareholders not possessing legal rights to include the same pursuant to this Agreement or any similar agreement; and (2) any further reduction shall be pro rata among all other shareholders (having such legal rights) requesting inclusion of there Common Shares in such registration (with the exception of holders of rights pursuant to the Registration Rights Agreement dated June 12, 1996 among Client and Renwick Capital Management, Inc. and its affiliates (the "Senior Registration Rights Agreement")), in the proportion of the number of shares of Common Stock then owned by each with respect to which it has registration rights; and (3) any further reduction shall be determined in accordance with the terms of the Senior Registration Rights Agreement. CRG agrees not to seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. Client shall not be required to include any Registerable Shares in a registration pursuant to this Agreement unless CRG accepts the terms of the underwriting as agreed upon between Client and the underwriters selected by Client. CRG shall cooperate with Client in connection with the preparation of a registration statement, and shall provide to Client, in writing, for use in the registration statement, all such information regarding CRG and his or its plan of distribution with respect to the Registerable Shares covered thereby as Client from time to time may reasonably request to prepare the Registration Statement and prospectus covering the Registerable Shares, to maintain the currency and effectiveness thereof and otherwise to comply with all applicable requirements of law in connection therewith. (vi) S-8 REGISTRATION: If Client has not registered shares as described above, then upon the written request of CRG thereafter, the Client shall use its reasonable best efforts to cause all shares underlying the Options granted to CRG to be registered via an S-8 Registration. ARTICLE V - ADJUSTMENTS TO OPTIONS The Exercise Price and the number of shares of Common Stock and classes of capital stock of the Company purchasable upon the exercise of each Option are subject to adjustment from time to time as follows: (a) If the Company: (i) pays a dividend or makes a distribution on its Common Stock, in each case, in shares of its Common Stock; (ii) subdivides its outstanding shares of Common Stock into a greater number of shares; (iii) combines its outstanding shares of Common Stock into a smaller number of shares; (iv) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock or (v) issues by reclassification of its shares of Common Stock any shares of its capital stock; then the number and classes of shares purchasable upon exercise of each Option in effect immediately prior to such action shall be adjusted so that the holder of any Option thereafter exercised may receive the number and classes of shares of capital stock of the Company which such holder would have owned immediately following such action if such holder had exercised the Option immediately prior to such action. -4- (b) If the Client is a party to a consolidation, merger or transfer of assets which reclassifies or changes its outstanding Common Stock, the successor corporation (or corporation controlling the successor corporation or the Company, as the case may be) shall by operation of law assume the Client's obligations under this Agreement. (c) Upon consummation of such transaction the Options shall automatically become exercisable for the kind and amount of securities, cash or other assets which the holder of an Option would have owned immediately after the consolidation, merger or transfer if the holder had exercised the Option immediately before the effective date of such transaction. As a condition to the consummation of such transaction, the Client shall arrange for the person or entity obligated to issue securities or deliver cash or other assets upon exercise of the Option to, concurrently with the consummation of such transaction, assume the Client's obligations hereunder by executing an instrument so providing and further providing for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided herein. ARTICLE VI - CLIENT INFORMATION Since CRG must at all times rely upon the accuracy and completeness of information supplied to it by the Client's officers, directors, agents, and employees, the Client agrees to indemnify, hold harmless, and defend, CRG, its officers, agents, employees at the Client's expense, in any proceeding or suit which may arise out of and/or due to any inaccuracy or incompleteness of such material supplied by the Client to CRG. ARTICLE VII - GRANT OF LICENSE (a) CRG hereby grants a license to the Client, through the duration of this Agreement, to use CRG's exclusive system, lists, manuals and trademarked and copyrighted materials. Due to the unique and proprietary nature of these systems and materials, CRG will revoke this license upon termination of this Agreement for any reason and all such materials and lists must be returned to CRG immediately thereafter and their use by the Client discontinued. (b) CRG agrees that all information disclosed to it about the Client's products, processes and services are the sole property of the Client and it will not assert any rights to any confidential or proprietary information or material, nor will it directly or indirectly, except as required in the conduct of its duties under the Agreement, disseminate or disclose any such confidential information; and (c) Upon termination of this Agreement, CRG will return to the Client all documents, records, notebooks and similar items of or containing confidential information then in its possession, including copies thereof, whether prepared by CRG or others. ARTICLE VIII - REPRESENTATIVE AND NOTICES Notices provided for hereunder shall be in writing and may be served personally to the Client's Representative and CRG's representative at their respective place of business or by registered mail to the address of each Party as first set forth herein above or may be transmitted by FAX. -5- ARTICLE IX - ARBITRATION/JURISDICTION OF COURT Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the County of Orange, California, in accordance with the rules of the American Arbitration Association there in effect, except that the parties thereto shall have any right to discovery as would be permitted by the Federal Rules of Civil Procedure and the prevailing Party shall be entitled to actual costs and actual attorney's fees from arbitration or any other civil action. Judgment upon the award rendered therein may be entered in any Court having jurisdiction thereof. Jurisdiction for any legal action is stipulated between the Parties to lie in the County of Orange, California. ARTICLE X - MISCELLANEOUS This Agreement constitutes the entire agreement between the Client and CRG relating to providing financial relations services. It supersedes all prior or contemporaneous communications, representations or agreements, whether oral or written, with respect to the subject matter hereof and has been induced by no representations, statements or agreements other than those herein expressed. No agreement hereafter made between the Parties shall be binding on either Party unless reduced to writing and signed by an authorized officer of the Party bound thereby. This Agreement shall in all respects be interpreted and construed, and the rights of the Parties hereto shall be governed by the laws of the State of California. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized officers. CARVER CORPORATION CORPORATE RELATIONS GROUP By: /s/J.P.WORLD By: /s/SHANNON T. SQUYRES ------------------ ----------------------- Shannon T. Squyres Date: 9-9-96 Date: 8/22/96 ---------------- --------------------- -6- EX-10.43 3 EXHIBIT 10.43 EXHIBIT 10.43 November 11, 1996 Congress Financial Corporation (Northwest) 101 S.W. Main Street, Suite 725 Portland, OR 97204 Re: SIXTEENTH AMENDMENT TO CARVER CORPORATION ACCOUNTS FINANCING AGREEMENT Ladies and Gentlemen: This Sixteenth Amendment to Accounts Financing Agreement (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: 1. Section 2.7 is revised in its entirety as follows: "2.7 In addition to amounts otherwise available under the formulas described above, and notwithstanding the Maximum Credit limit, you will temporarily allow us an overadvance of up to the lesser of (i) fifty percent of the market value of that certain real property in Lynnwood, Washington, more fully described in Exhibit C hereto (the "Lynnwood Property") as established by an MAI appraisal satisfactory to you; or (ii)$1,000,000 (the lesser of (i) or (ii) being referred to hereinafter as 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 or before the dates listed below: DATE REDUCTION AMOUNT 3/1/97 $500,000 4/1/97 $250,000 5/1/97 $250,000 Any remaining balance of the overadvance shall be repaid in full on May 1, 1997. 25 2. For the accommodation described in this Amendment, we agree to pay you a fee in the sum of $5,000. 3. 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, the Accounts Financing Agreement, and the Deed of Trust 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. 4. 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. 5. Except as specifically provided above, the Accounts Financing Agreement remains fully valid, binding, and enforceable according to its terms. 6. 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 Section 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 Section 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." 26 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 27 EX-27 4 FINANCIAL DATA SCHEDULE
5 3-MOS JUN-30-1996 SEP-30-1996 137,000 5,000 2,576,000 202,934 4,082,000 8,004,000 4,898,000 2,717,000 10,370,000 1,514,000 0 0 14,000 37,000 8,805,000 10,370,000 4,336,000 4,336,000 3,093,000 3,093,000 1,362,000 23,730 37,000 (89,000) 0 (89,000) 0 0 0 (89,000) (.02) (.02)
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