SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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 0-19540
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CUSTOM CHROME, INC.
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(Exact name or registrant as specified in its charter)
Delaware 94-171638
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(State or other jurisdiction IRS Employer Identification
or incorporation or organization)
16100 Jacqueline Court, Morgan Hill, California 95037
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(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code 408-778-0500
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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 .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1996
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Common Stock, $.001 par value 5,261,453
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CUSTOM CHROME, INC.
FORM 10-Q
FOR THE SIX-MONTH PERIOD ENDED JULY 31, 1996
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets at
July 31, 1996 and January 31, 1996 3
Consolidated Statements of Operations for the
three and six month periods ended July 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
six month periods ended July 31, 1996 and 1995 5
Note to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signature 10
Exhibit 11 Statement Regarding Computation of Earnings Per Share 11
Exhibit 27 Financial Data Schedule
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CUSTOM CHROME, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
July 31, January 31,
1996 1996
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................... $ 963 $ 312
Accounts receivable, net...................... 10,591 9,529
Merchandise inventories....................... 46,683 51,165
Deferred income taxes......................... 2,115 2,115
Prepaid income taxes.......................... -- 1,709
Deposits and prepaid expenses................. 2,292 2,564
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62,644 67,394
Property and equipment, net..................... 14,466 14,066
Other assets.................................... 8,143 8,252
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$85,253 $89,712
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations.................... $ 305 $ 263
Bank borrowings............................... 2,551 14,766
Accounts payable.............................. 3,549 4,587
Accrued expenses and other liabilities........ 2,056 2,068
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8,461 21,684
Long-term debt and capital lease obligations.... 19,084 19,489
Deferred income taxes........................... 567 567
Shareholders' equity:
Common stock, $.001 par value: 20,000,000
shares authorized: 5,261,453 and 5,090,385
shares issued and outstanding................ 6 5
Additional paid-in capital.................... 31,145 27,761
Retained earnings............................. 25,990 20,206
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57,141 47,972
Commitments and contingencies
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$85,253 $89,712
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See accompanying note to condensed consolidated financial statements.
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CUSTOM CHROME, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the three months ended For the six months ended
July 31, July 31,
1996 1995 1996 1995
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Sales, net............................. $30,357 $25,951 $60,984 $50,444
Cost of sales.......................... 18,133 14,992 35,768 28,956
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Gross profit.......................... 12,224 10,959 25,216 21,488
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Operating expenses:
Selling, general and administrative... 6,769 6,223 13,573 11,767
Product development................... 434 473 954 919
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7,203 6,696 14,527 12,686
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Operating income..................... 5,021 4,263 10,689 8,802
Interest expense....................... 405 337 1,032 678
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Income before income taxes........... 4,616 3,926 9,657 8,124
Income taxes........................... 1,840 1,294 3,873 2,947
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Net income........................... $ 2,776 $ 2,632 $ 5,784 $ 5,177
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Per share data:
Net income per share................. $ 0.52 $ 0.51 $ 1.09 $ 1.01
======= ======= ======= =======
Weighted average shares outstanding.... 5,358 5,189 5,309 5,147
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See accompanying note to condensed consolidated financial statements.
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CUSTOM CHROME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the six months ended
July 31,
1996 1995
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Cash flows from operating activities:
Net income................................................... $ 5,784 $ 5,177
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization............................. 876 884
Deferred income taxes..................................... -- 33
Changes in items affecting operations:
Accounts receivable...................................... (1,062) (398)
Merchandise inventories.................................. 4,482 (8,915)
Deposits & prepaid expenses.............................. 1,949 189
Accounts payable, accrued expenses & other liabilities... (1,050) 743
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Net cash provided (used) by operating activities............... 10,979 (2,287)
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Cash flows from investing activities:
Additions to property and equipment.......................... (1,135) (2,386)
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Cash flows from financing activities:
Bank (repayment) borrowings, net............................. (12,049) 899
Borrowing (repayment) on capital lease obligations and
long-term debt.............................................. (529) 142
Issuance of common stock..................................... 3,385 584
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Net cash provided by (used in) financing activities............ (9,193) 1,625
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Net change in cash and cash equivalents........................ 651 (3,048)
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Cash and cash equivalents at beginning of period............... 312 8,957
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Cash and cash equivalents at end of period..................... $ 963 $ 5,909
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Supplemental disclosures of cash paid during the period:
Interest..................................................... $ 1,159 $ 625
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Income taxes................................................. $ 1,284 $ 2,220
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See accompanying note to condensed consolidated financial statements.
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NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Note 1 - Basis of Presentation
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The accompanying unaudited interim condensed consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles, consistent with those applied in and should be read in conjunction
with, the audited consolidated financial statements for the fiscal year ended
January 31, 1996 included in the Annual Report on Form 10-K filed by Custom
Chrome, Inc. (the "Company") with the Securities and Exchange Commission.
The interim financial information is unaudited, but reflects all normal
recurring adjustments which are, in the opinion of management, necessary to
provide a fair statement of results for the interim periods presented. The
results for the interim periods are not necessarily indicative of results to be
expected for the fiscal year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTE: Except for that disclosure that reports the Company's historical
results, the statements set forth in this section are forward looking
statements. Actual results could differ materially from those projected in the
forward looking statements. Additional information concerning certain factors
that could cause actual results to differ materially from those in such forward
looking statements is contained under the heading "Additional Factors That May
Affect Future Results" on page 8 of the Company's Annual Report on Form 10-K for
the Fiscal Year Ended January 31, 1996, filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Comparison of the three and six month periods ended July 31, 1996 and 1995
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Net sales increased 17.0% to $30,357,000 for the three months ended July
31, 1996 from $25,951,000 for the same period of last year. Net sales increased
20.9% to $60,984,000 for the six months ended July 31, 1996 from $50,444,000,
for the same period of the prior fiscal year. Sales growth was primarily a
result of higher shipment levels to customers in North America who initiated
business with the Company last year and in the current year, higher sales to the
European market (primarily West Germany) and improved growth in sales to
customers in the Western United States. Sales growth was lower in the most
current three months compared to the six month period presented due to inclement
weather conditions during May, 1996 in the Eastern and Mid-Western United States
and Europe which diminished the demand for the Company's products which are sold
for use principally in an outdoor leisure activity.
Gross profit increased 11.5% to $12,224,000 for the three months ended July
31, 1996 from $10,959,000 for the same period of last year. Gross profit
increased 17.4% to $25,216,000 for the six month period ended July 31, 1996 when
compared to the same period of the prior fiscal year. The increase in both
periods over the prior year comparable amounts was principally the result of
higher shipment levels. Gross profit as a percentage of sales was 40.3% and
41.3% respectively, in the three and six month periods ended July 31, 1996,
compared with 42.2% and 42.6%, respectively, in the same period of last year.
The decrease in gross profit as a percentage of sales in the current three and
six month period was the result of sales discounts and sales price decreases
resulting from sales and marketing initiatives to stimulate sales growth in
response to poor weather conditions in some of the Company's markets.
Selling, general and administrative expenses increased 8.8% to $6,769,000
and 15.3% to $13,573,000, respectively for the three and six months ended July
31, 1996. The increase in both periods over the prior year comparable amounts
was principally a result of higher compensation related to staff additions to
support the Company's growth, higher advertising and promotion costs, including
increased freight incentives and higher warehousing costs, including rent and
equipment leasing and depreciation costs.
Product development expenses decreased 8.2% to $434,000 for the three
months ended July 31, 1996 from $473,000 for the same period of last year.
Product development expenses increased 3.8% to $954,000 for the six months ended
July 31, 1996 from $919,000 for the same period of last year. These expenses as
a percentage of sales were 1.4% and 1.6%, respectively, for the three and six
month periods ended July 31, 1996, compared with 1.8% for both of the comparable
periods of last year. The increase in product
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development expenses in the six month period is due to the Company's intention
to increase the introduction of new proprietary products.
Interest expense increased 20.2% to $405,000 for the three months ended
July 31, 1996 from $337,000 for the same period last year. Interest expense
increased 52.2% to $1,032,000 for the six months ended July 31, 1996 from
$678,000 for the same period last year. The increase in both periods was due to
higher average borrowings in the current periods to support higher working
capital requirements and modestly higher borrowing rates in the same periods.
The Company's effective income tax rate was 39.9% and 40.1% for the three
and six months ended July 31, 1996 as compared to 33.0% and 36.3%, respectively,
for the same periods of last year. The reduced income tax rate last year was
due to the recognition of state income tax refunds from prior years as the
result of filing amended tax returns with revised income allocation bases.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a $15,000,000 working capital line of credit and a
$10,000,000 foreign exchange facility with a bank, which expires on June 30,
1997. The Company uses the working capital line of credit, which is subject to
certain restrictions and covenants, for seasonal cash requirements, which
typically peak during the Company's fourth fiscal quarter when inventories are
increased in anticipation of sales in the first and second fiscal quarters.
Borrowings under the working capital line of credit bear interest at the bank's
prime rate. Under the working capital line of credit, the bank will create
short term fixed borrowings at the Company's request. The Company was
contingently liable under letters of credit in the amount of $436,000 at July
31, 1996.
On December 19, 1994 the Company issued $15,000,000 in Senior Secured Notes
to a life insurance company, which are repayable, as to principal, in five
annual payments in the years 1997 to 2001. The Notes carry an interest rate of
8.01% and are secured by substantially all of the assets of the Company.
Proceeds from the issuance of the Notes are being used to support the Company's
working capital requirements and other corporate purposes.
In the six month period ended of July 31, 1996, the Company made capital
expenditures for an expansion to its Louisville, Kentucky distribution location,
tooling for new products, computer equipment and for equipment purchases at its
warehouses in Visalia, CA, Louisville KY and Harrisburg, PA.
Net cash provided by operating activities in the six months ended July 31,
1996, was $10,979,000 compared with $2,287,000 used by operating activities in
the prior year. Net cash provided by operations in the current six months
primarily resulted from net income derived from the Company's operations and
merchandise inventory reductions as a result of sales in the period.
Additionally $3,385,000 cash was provided to the Company in the period by the
proceeds from the exercise of stock options by Company employees.
The Company believes that cash flow from operations and funds from the
working capital line of credit will be adequate to meet its capital cash
requirements for the foreseeable future.
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CUSTOM CHROME, INC.
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 11 - Statement Regarding Computation of Earnings Per
Share
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
None.
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SIGNATURE
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.
CUSTOM CHROME, INC.
Date: September 12, 1996 /s/ James J. Kelly, Jr.
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James J. Kelly, Jr.
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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