<PAGE>   1
 
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
   
                                AMENDMENT NO. 1
    
   
                                       TO
    
                                   FORM 10-K
(MARK ONE)
   [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934
 
                      FOR THE FISCAL YEAR ENDED DECEMBER 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 0-27882
 
                       CRAIG CONSUMER ELECTRONICS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                           <C>
                   DELAWARE                                     95-4228391
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
 
13845 ARTESIA BOULEVARD, CERRITOS, CALIFORNIA                   90703-9000
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                     (ZIP CODE)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (562) 926-9944
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                         NAME OF EACH EXCHANGE ON
             TITLE OF EACH CLASS                             WHICH REGISTERED
--------------------------------------------------------------------------------------------
<S>                                           <C>
                     none
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                          common stock, $.01 par value
                                (TITLE OF CLASS)
 
     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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     [ ]
================================================================================
<PAGE>   2
 
INSTRUCTIONS:
 
     State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405, 17 CFR 230.405).
 
     NOTE: If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
 
     At April 11, 1997, the aggregate market value of common stock held by
non-affiliates (based on the closing sale price of the Registrant's common stock
on the NASDAQ, and for the purpose of this computation only, on the assumption
that all of the Registrant's directors, officers and holders of 10% or more of
the Registrant's common stock are affiliates) of the Registrant was
approximately $1,178,125.
 
             APPLICABLE ONLY TO REGISTRANTS 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 Section 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 REGISTRANTS
 
     Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
 
     At April 11, 1997, the number of shares of common stock outstanding was
3,434,441.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
INSTRUCTIONS:
 
     List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
 
                                                        Exhibit Index at page 32
<PAGE>   3
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                          PAGE
                                                                                          ----
<S>        <C>        <C>                                                                 <C>
PART I
           Item 1.    Business........................................................     1
           Item 2.    Properties......................................................     12
           Item 3.    Legal Proceedings...............................................     12
           Item 4.    Submission of Matters to a Vote of Security Holders.............     13
PART II
           Item 5.    Market for the Registrant's Common Stock and Related Stockholder
                        Matters.......................................................     13
           Item 6.    Selected Financial Data.........................................     14
           Item 7.    Management's Discussion and Analysis of Financial Condition and
                        Results of Operations.........................................     15
           Item 8.    Financial Statements and Supplementary Data.....................     23
           Item 9.    Changes in and Disagreements with Accountants on Accounting and
                        Financial Disclosure..........................................     24
PART III
           Item 10.   Directors and Executive Officers of the Registrant..............     24
           Item 11.   Executive Compensation..........................................     26
           Item 12.   Security Ownership of Certain Beneficial Owners and
                        Management....................................................     30
           Item 13.   Certain Relationships and Related Transactions..................     30
PART IV
           Item 14.   Exhibits, Financial Statement Schedules and Reports on Form
                        8-K...........................................................     32
SIGNATURES............................................................................     34
</TABLE>
<PAGE>   4
 
                                     PART I
 
ITEM 1.  BUSINESS
 
OVERVIEW
 
     Craig Consumer Electronics, Inc. (the "Company") designs and markets brand
name consumer electronic products under its trademark, "Craig."(R) The Company
offers value-oriented products with features the Company believes are comparable
to those of its higher-priced competitors. The Company's products are sold
through over 200 retailers with approximately 15,000 retail outlets, including
major retail chains, such as Best Buy, Circuit City, Thrifty Payless, Rex, Ames
Department Stores, Hills Department Stores, and Rite Aid, and other mass
merchandisers, such as K-Mart Corporation and Price Costco. The Company also
sells through catalog and direct marketing organizations, such as the QVC
Network, Fingerhut, and Amway.
 
     In 1989, the Company acquired certain assets of an operating division of
Bercor, Inc. ("Bercor"), a publicly-owned company. Bercor was, in turn, the
successor to Craig Corporation, which began to market and sell consumer
electronics products under the "Craig" brand name during the late 1950's. Craig
Corporation went public during 1968 and was listed on the New York Stock
Exchange.
 
     In 1985, Craig Corporation sold its consumer electronics division, along
with the rights to use the tradename and trademark "Craig" to Bercor, a
publicly-owned distribution company which distributed numerous products for
other manufacturers, including appliances, toys, hair care products, stationery,
and other unrelated product lines that are not sold by the Company. Bercor
continued to distribute other manufacturers' products including non-proprietary
and other non-branded products as an independent distributor and reseller. The
Company believes that the business currently conducted by the Company
constituted approximately 20% of the business of Bercor by 1988. During the late
1980's, Bercor suffered from the growth of mass merchandising and increasing
direct sales by manufacturers as well as other pressures endemic to independent
distribution businesses during such period. Bercor filed for bankruptcy
protection pursuant to Chapter 11 of the United States Bankruptcy Code on June
23, 1988.
 
     Bercor, of which Richard Berger was a founder, executive officer, and
director, attributed its need to file for bankruptcy to an unwillingness of
major suppliers to extend credit, difficulties in obtaining necessary capital
for operations from its principal secured lenders (a function of the
collectability of receivables, excess inventory in certain product categories,
and obsolescence), and excessive operating expenses given the cash flow impact
of the receivable and inventory problems that affected product supply and, in
turn, sales, in addition to the aforementioned problems endemic to the
independent distribution business.
 
     The Company acquired the assets of what was then the Craig Consumer
Electronics Division of Bercor pursuant to a Plan of Reorganization dated June
20, 1989 (the "Plan of Reorganization"). Since 1989, the Company has continued
to operate the business formerly conducted by the Craig Consumer Electronics
Division of Bercor. As part of the Plan of Reorganization, certain creditors of
Bercor received shares of capital stock of the Company. The shares of Common
Stock held by the Company's four principal stockholders (including the shares
distributed to former creditors of Bercor) were acquired by BJRM, Inc., an
affiliate of such stockholders, which was merged with the Company in December of
1992. The merger resulted in the four principal stockholders owning all of the
capital stock of the Company. On May 21, 1996, the Company completed an initial
public offering for the sale of 1,262,500 shares of Common Stock at a price of
$5.50 per share. Shortly thereafter, the underwriters exercised an
over-allotment option and purchased an additional 37,500 shares of Common Stock
from the Company.
 
     The Company has emphasized the design and marketing of mobile audio
electronic products (such as car stereos), portable audio products (such as
"boom boxes" and small personal stereos) and home audio systems (such as compact
music centers). The Company entered the telecommunications business in 1996
(principally, the sale of telephone products) as part of its strategy to expand
into related products. The Company has realized gross margins exceeding 16% over
the last three years on sales of its audio electronic products (excluding the
effect of the change in accounting -- see Note 1 to the financial statements).
The Company formerly sold video products (such as televisions and VCR's),
however, the Company's recent strategy has been to discontinue sales of video
products, and the Company did not make substantial sales of video products
 
                                        1
<PAGE>   5
 
during 1996. The Company will instead devote the principal portion of its
resources to the design and distribution of audio electronic and peripheral
products. Primarily due to its increasing focus on the sale of audio products,
the Company's operating income totalled $2.3 million in each of 1994 and 1995,
although overall sales were $16.9 million lower in 1995 than in 1994. Sales were
approximately $8.0 million lower in 1996 than in 1995, and the Company suffered
an operating loss of approximately $3.7 million in 1996. This loss is
attributable to several factors, including a weakening of the industry, and a
decrease in margins due to competitive pressures and a change in the Company's
accounting for certain "Vendor Credits". See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for an in-depth
discussion regarding the Company's financial results for these periods.
 
     According to the most recent data compiled by the Consumer Electronics
Manufacturers Association ("CEMA"), a section of the Electronics Industry
Association, it is estimated that total factory sales of consumer electronics
products were $65.7 billion during 1996 and will total $69.5 billion in 1997.
During 1996, according to CEMA data, it is estimated that approximately 7
million audio systems, 23 million compact disc ("CD") players (including
portables and home CD players), and 37 million tape players were sold. According
to the CEMA sales outlet figures, the estimated average price for these products
during the 1996 year is, in each category, greater than the Company's average
price for the same product categories.
 
BUSINESS STRATEGY
 
     In recent years, the Company has emphasized the design of audio products
marketed under the "Craig" brand name, including specifically products designed
for the home, mobile and portable user, including "boom boxes" and personal
stereos. The Company experienced lower and declining gross margins in its former
video product categories, due to returns, component supply, overall market
conditions, and associated problems. As a result, the Company severely limited
sales of video products during 1995, did not make substantial sales of video
products during 1996, and will continue to devote the principal portion of the
Company's resources to the design, sourcing, sale, and distribution of audio
electronic, and related products. The Company, assuming the necessary available
resources, also intends to more aggressively market telephone products and to
market all of its products internationally. Management believes growth in
international sales is critical to the Company's ability to expand its sales
base, particularly given the Company's focus on products using available
technology. The following table demonstrates the Company's increasing emphasis
on audio electronic products:
 
                        NET SALES BY PRODUCT CATEGORIES
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                     ---------------------------------------------------------
                                      1992         1993         1994        1995        1996
                                     -------     --------     --------     -------     -------
    <S>                              <C>         <C>          <C>          <C>         <C>
    Audio and audio peripherals....  $34,052     $ 53,029     $ 71,432     $80,710     $80,315
    Telephones.....................       --           --           --          --         398
    Video..........................   45,256       48,186       34,207       7,966         (81)
                                     -------     --------     --------     -------     -------
              Total................  $79,308     $101,215     $105,639     $88,676     $80,632
                                     =======     ========     ========     =======     =======
</TABLE>
 
     The Company's objective is to establish itself as a leading supplier of
brand name value-oriented audio electronic and peripheral products. The Company
has conceived various strategies to generate the revenue growth needed to
achieve this primary objective. In addition to the following strategies, the
Company will continue to be responsive to consumer demand in the design and
marketing of its audio and other products. In addition to the Company's current
business, future strategies include all of the following:
 
          - Expand Domestic Distribution.  The Company will continue to expand
     its domestic distribution channels and outlets. In this regard, during the
     fourth quarter of 1996 and the first quarter of 1997, the Company has
     established new distribution relationships with Future Shops, Service
     Merchandise and Venture Stores. The Company also intends to expand its
     presence in other channels of distribution. It has developed targeted
     programs to achieve greater market share in the drug, hardware and premium
 
                                        2
<PAGE>   6
 
     distribution channels. In order to support the aggressive sales and
     marketing strategies it has developed, the Company has added personnel
     staffing in both areas. The direct field sales organization has been more
     than doubled with three additional positions in the U.S. market and a
     direct sales person handling Canada. A dedicated marketing department has
     been formed of experienced professionals to act as the link between the
     factories in Asia and the customer.
 
          - Expand Internationally.  The Company currently sells its products
     for export to customers located in Australia, Brazil, Canada, Chile,
     Germany, Japan, Mexico, and Panama. However, less than 2% and 3% of 1995
     and 1996 net sales, respectively, were to customers located were in these
     foreign countries. The Company is working to improve its ability to enhance
     its sales and marketing efforts in these countries, as well as to market
     products in other countries throughout the world. The Company has also
     restructured its Canadian distribution relationships and sells directly to
     merchandisers in Canada, rather than through a third-party distributor.
 
          - Reduce Interest Expense.  Maintaining a reasonable cost of funds is
     important to the Company's business given competitive pressure on margins
     in the industry. Prior to the Company's initial public offering in May
     1996, the Company paid relatively higher average rates of interest on the
     unsecured portion of its borrowing used to finance its inventory purchases.
     See "Management's Discussion and Analysis of Financial Condition and
     Results of Operations." The Company's overall financial condition will
     likely have to improve somewhat in the foreseeable future to make available
     favorable vendor or other unsecured third-party financing. The Company has
     fully utilized its existing senior revolving bank line of credit more
     frequently during 1996, which is significantly less costly for greater
     amounts of purchasing. During 1997 and thereafter, the Company may be
     required to pay higher than historical rates for its financing due to its
     current financial condition. Management's strategy is to continue to
     negotiate with various financing sources as the Company's financial
     condition improves to attempt to reduce average overall rates. Management
     intends to continually focus on ways to reduce the cost of funds to the
     Company.
 
          - Expand Consumer Product Lines.  The Company believes that it can
     successfully enter new product categories due to the strong consumer
     acceptance the Craig brand has built during its more than 65 years in the
     U.S. market. The results of an April 1996 independent study conducted for
     the Company by the Verity Group, a market research firm specializing in the
     consumer electronics industry, indicates that customers display a strong
     brand recognition and product confidence level when purchasing Craig
     branded products. Despite the fact that industry-wide manufacturing delays
     of up to 120 days were created after President Clinton threatened to impose
     sanctions by the United States (to become effective June 17, 1996) which
     could have imposed a 100% tariff on telephones and answering devices made
     in the People's Republic of China (the "PRC"), the Company introduced
     various consumer telecommunications products during 1996, including a line
     of corded and cordless telephones, feature phones and digital answering
     systems. If the threatened tariffs had not been lifted as a result of the
     renewal of the PRC's Most Favored Nation trade status by the Clinton
     Administration, the Company's ability to undertake meaningful expansion
     into this product category would have been severely limited. The Company is
     continually exploring the market potential for other new product lines such
     as competitively priced audio home theater systems, microwave ovens,
     citizen's band radios, mobile security systems, mobile navigation systems,
     youth electronics and watches. Entry into these product categories may be
     implemented either through acquisition or direct entry into the such
     markets.
 
          The Company plans to expand its "sports audio" category with several
     personal CD and solar/DC portable audio models under the Craig "Marathon
     Sports" name. The Company also plans to introduce its first home theater
     surround sound system. The Company applied for and was granted trademarks
     including "Craig Home Theater...the best sound around," and "Craig Marathon
     Sports."
 
          - Increase Margins, Improve Cash Flow by Reconditioning at the Chinese
     Joint Venture Facility. The industry, in general, and the Company, in
     particular, incur costs of returned products, due to liberal return
     policies of American retailers and other causes. The Company has
     historically accepted products for return and reconditioning at its
     Cerritos facility (or returned them to vendors at Company expense).
 
                                        3
<PAGE>   7
 
     In 1995, the Company entered into a joint venture known as Shenzhen Kuoli
     Electronics, Ltd. (the "Initial Chinese Joint Venture"), of which it is a
     50% owner, for the purpose of establishing and operating a facility to
     recondition the Company's products. The Company commenced processing of
     products at the Initial Chinese Joint Venture facility, located in
     Shenzhen, PRC, in January, 1996. On January 23, 1997, the Company gave
     official notice to its joint venture partner of its intent to terminate and
     liquidate the Initial Chinese Joint Venture due to the fact that the
     Initial Chinese Joint Venture experienced unanticipated delays and
     difficulties in dealing with PRC Customs and it failed to attain production
     goals. The Company is currently finalizing negotiations to complete
     termination of the Initial Chinese Joint Venture Agreement. Effective
     February 1, 1997, the Company and Zhuhai Special Economic Zone Min Guang
     Industrial Co. entered into a new joint venture known as Zhuhai Craig
     Electronics Co. Ltd. (the "Chinese Joint Venture") for the same purposes as
     the Initial Chinese Joint Venture. Although the Company does not intend to
     use the joint venture facility in the immediate future for purposes other
     than reconditioning, it is possible that the Chinese Joint Venture could be
     used to assemble original products that are currently outsourced to other
     vendors and could recondition products for other manufacturers. The Company
     intends to conduct reconditioning of product returns and other ancillary
     manufacturing services predominately at a facility leased in the PRC by the
     Chinese Joint Venture. In 1996, the Company experienced unanticipated
     delays in reconditioning products at the Initial Chinese Joint Venture
     facility. See "Management's Discussion and Analysis -- Liquidity." Although
     there can be no assurances, the Company believes that, in 1997 and beyond,
     reconditioning products in the PRC will enhance cash flow by enhancing its
     ability to more quickly and efficiently process and sell reconditioned
     goods. Generally, the Company cannot borrow on "C goods" as it can against
     new inventory and receivables. Therefore, quicker turnaround or conversion
     of "C goods" into "A goods" and sale of reconditioned goods will generate
     greater borrowing availability under the Company's secured line of credit.
 
PRODUCT LINES
 
     The Company's core business will consist primarily of audio products for
the foreseeable future. The Company's positioning strategy is to design and sell
high quality, well featured products targeted to the value oriented consumer. In
1997, the Company offers more than 100 different products in well established
categories ranging in suggested retail price from approximately $7.00 to
$300.00.
 
     The Company's philosophy is to market products that are designed to be
attractive to the consumer seeking an alternative to higher priced audio
products. The Company believes, based on research and consumer feedback, that
the Craig brand name is well accepted among the large segment of value oriented
retail consumers, based on its ability to provide an attractive combination of
price and performance. The Company's presence in the U.S. market for over 65
years plays a significant value added benefit in this acceptance.
 
     A key to successfully positioning high quality, well featured products in
the value priced segment is the Company's primary pursuit of product categories
with well established technologies, eliminating a significant amount of up front
research and development expense and the high costs attributed to pioneering new
product concepts to the consumer. Among the Company's products are as follows:
 
     Home and Portable Audio Products.
     - Home stereo systems
     - Portable CD systems with detachable speakers
     - Portable CD systems with single cassette decks
     - Portable CD systems with dual cassette decks
     - Personal CD players
     - Portable single cassette recorders
     - Portable dual cassette recorders
     - Personal electronic devices
     - Marathon Sports electronics
 
                                        4
<PAGE>   8
 
     - Electronic clock radios
     - Hand-held microcassette recorders for voice-activated recording
 
     Mobile Audio Products.
     - Stereo CD players/receivers
     - CD changers
     - Stereo cassette players/receivers
     - Amplifiers
     - Speaker systems
 
     Telecommunications Products.
     - 10 and 25 channel cordless telephones
     - 10 and 25 channel cordless telephones with clock radios
     - 10 and 25 channel cordless telephones with caller ID
     - Digital answering systems
 
     The Company's philosophy is to market products that are designed to be
attractive to the consumer seeking an alternative to higher-priced audio
products. The Company believes the Craig brand name is well accepted among the
value-oriented retail consumer group based on the Company's ability to provide
an attractive combination of price, presentation, marketing, promotions and
performance. The Company believes that its engineering and quality assurance
controls help the Company maintain its competitiveness relative to other
entities that sell products in the same product categories at the same price
point. Timely response to market demand for design changes, selection of
features, and maintaining good relationships with its manufacturers are critical
to maintaining the quality of the Company's products and its ability to compete.
 
     The Company offers, at any given point in time, between six and ten
separate models of Home Audio Systems. Typically, these are micro and midi
systems that include single and multiple-disc CD players, cassette recorders,
and AM/FM stereo tuners. In addition, the Company markets and sells a wide
variety of portable and personal stereo models. The Company markets and sells
approximately 28 portable audio stereo systems that incorporate CD players,
cassette recorders and AM/FM stereo tuners, commonly referred to as "Boom
Boxes." The Company offers approximately 19 separate models of personal CD and
cassette players with AM/FM tuners. The Company's personal CD players are
adaptable to expand home audio systems or use in conjunction with mobile audio
systems. The Company also offers two handheld microcassette recorders with
voice-activated systems and seven models of clock radios.
 
     In the mobile audio category, the Company currently markets approximately
24 models of cassette stereos and CD players for automobiles. The Company
believes that its price for these automobile stereo systems is competitive given
the features employed in each device. The Company also markets a variety of
amplifiers and speakers to complement its mobile audio products.
 
MARKETING AND CUSTOMERS
 
     The Company sells its products through multiple channels such as large mass
merchandising retailers, including major retail chains (such as Best Buy,
Circuit City, Thrifty Payless, Rex, Ames Department Stores, Hills Department
Stores and Rite Aid) and general mass merchandisers (such as K-Mart Corporation
and Price Costco). Additionally, the Company offers its products through direct
marketing organizations such as QVC Network, Fingerhut, and Amway, and through
independent distributors.
 
     The Company has added three new regional vice presidents, bringing to six
the number responsible for sales in various geographic regions throughout the
United States. The Company has also added an individual responsible for sales
throughout Canada. The Company believes that these additions will enable the
Company to achieve significantly better market penetration and account coverage.
Additionally, the Company has 20 independent sales organizations that are paid
commission based on the amount of their net sales.
 
     The Company does not undertake any direct independent advertising.
Advertising of the Craig brand is done almost exclusively by the Company's
customers, at the request of the Company or in consideration of
 
                                        5
<PAGE>   9
 
payments or other concessions. Advertising undertaken by the Company's customers
generally tends to promote the Company's brand name by advertising in newspapers
and other publications, catalogs, flyers, and by display point-of-purchase
advertising. The amount of such advertising increased greatly during 1996 as a
result of aggressive consumer value added programs the Company offered. It is
anticipated similar programs will continue to generate similar support
throughout most of 1997.
 
     The Company markets its products through regional distribution channels and
its sales staff and by appearance at trade shows, including the annual Consumer
Electronics Show in Las Vegas, Nevada in January. The Company does not market
its products at "boutique" stereo stores or attempt to compete with products at
significantly higher price points. The Company does not have any long-term
commitments from its customers for the purchase of products on an ongoing basis.
 
     The Company's largest customers account for a significant portion of the
Company's sales. The Company's largest customer, Best Buy, accounted for
approximately 24%, 35% and 25% of the Company's sales during 1994, 1995 and
1996, respectively. With the exception of Circuit City, which accounted for
approximately 22% of the Company's sales in 1996, no other single customer
accounted for more than 10% of the Company's sales in those years. The Company's
top five customers accounted for approximately 59% of total sales during 1995
and approximately 55% of total sales in 1996. The Company believes its
relationship with these significant customers continues to be good. However, the
Company is attempting to diversify the Company's customer's base, including
diversification into other geographic markets.
 
DESIGN AND MANUFACTURE OF PRODUCTS
 
     The Company is responsible for the final design and manufacturing
specifications of its products. Actual assembly, utilizing components specified
by the Company, is outsourced to contract manufacturers in accordance with
specifications mandated by the Company. The Company determines the specific
options desired on each product and product line and makes decisions about the
product function features and cosmetic and packaging designs to be employed in
each product. The Company's Hong Kong office implements the selection and
acquisition process and oversees product sourcing and the design and development
that is undertaken in conjunction with the Company's contract manufacturers.
Personnel at the Hong Kong office also enable the Company to monitor quality
control and timeliness of product deliveries. The Company believes that such
oversight by its Hong Kong office will help the Company achieve its goal to
increase overall average margins for the Company's products, although no
assurances can be given that these objectives are obtainable.
 
     The Company's strategy does not involve extensive research and development
or significant marketing expenditures, which are typically associated with
bringing new technology to consumer markets at a price point that would allow
the Company to compete effectively. The Company believes that product
development employing technologically advanced "state of the art" products such
as digital audio tape ("DAT"), digital video disk ("DVD") and mini disc players
are not an effective use of the Company's resources and the Company's resources
do not allow this type of product development. The Company has relied instead
upon design and acquisition of its products and employment of market tested,
currently available technology to bring products to market in an expedient
fashion. The Company is dependent upon response to and incorporation of
technological developments in adding new products, new features and additional
stylistic modifications in order to continue to grow the business and effect
sales of products that satisfy consumer demand. The Company hopes to continue to
explore evolving technology without the expenditure of funds for progressive
research and development. Instead, the Company intends to focus its product
development efforts (including design, testing, and feature selection) on the
design and refinement of basic audio products that do not involve significant
technological advances.
 
     In designing products, the Company attempts to select features and cosmetic
characteristics that will enable the Company to compete at its price point.
Given the Company's technological limitations, selection of features and
appearance of the Company's products can be critical. Typically, the Company's
contract manufacturers produce prototypes that are examined and tested by the
Company's engineering and design
 
                                        6
<PAGE>   10
 
team, modifications are made, and manufacturing time is committed to create the
number of products in each product category selected by the Company's
management.
 
     The Company's four largest manufacturers/suppliers are Hong Kong companies
with facilities located in the PRC. During 1995 and 1996, these manufacturers
supplied over 50% of the Company's total product supply. Other manufacturers
utilized by the Company are located in South Korea and elsewhere in Asia. To the
extent any of these significant suppliers were unable to devote the necessary
manufacturing capacity to the production of the Company's products or to the
extent the Company suffered any other limitation in its ability to manufacture
products using these manufacturers, the Company's business could be interrupted
and adversely affected. Currently, the Company is purchasing products from
approximately 25 suppliers and plans to purchase from up to five to ten new
suppliers to limit the risk of supply concentration. The Company changes
suppliers from time to time as market conditions require. Substantially all of
these suppliers assemble products with some critical components manufactured by
third parties. The Company believes that this is the standard method of
operating and contracting for the manufacture of products in the consumer
electronics industry. The Company has on-site trained and skilled personnel to
monitor, inspect and facilitate timely manufacture and delivery of products
produced to the Company's specifications.
 
     The Company does not have long-term contractual relationships with its
manufacturers in the PRC and elsewhere. Instead, the Company must design and
source these products on a case-by-case basis in an attempt to meet the demand
of its customers. The Company imports products by ocean freight, typically to
Los Angeles, and stores the products in a warehouse for shipment to customers.
 
     The Company considers its relationships with its overseas manufacturers to
be good and believes that, absent extreme circumstances affecting the supply of
materials or the demand on manufacturing time, the supply of products should be
available when needed. Although the Company does believe that there are
alternative sources of supply, should the Company be required to obtain a
commitment for manufacturing time from a new manufacturer due to the failure of
any manufacturer to satisfactorily meet its commitments, it may be difficult to
produce and import products in a timely fashion that could be sold profitably.
 
PRODUCT DEVELOPMENT
 
     The Company does not devote a substantial amount of its resources to
research and development in order to create completely new products, but instead
devotes its resources to quality assurance, the upgrading of design of the
Company's products, and the testing and packaging of the Company's products. The
Company adopts existing technologies which are generally available to the
manufacturers with whom the Company contracts for production of its products. In
establishing the specification for the Company's contract manufacturers, the
products must be engineered and tested to produce cost-effective products which
adapt and implement the available technology and features that the Company
believes to be marketable to its target consumers. The Company and its contract
manufacturers utilize various processing laboratories, such as Underwriters'
Laboratories and other testing agencies to obtain laboratory approvals for its
products as required by the majority of the Company's customers and, in certain
circumstances, by applicable state laws relating to consumer protection.
 
PRODUCT RETURNS AND RECONDITIONED PRODUCTS
 
     As is typical of the consumer electronics industry, the Company incurs
expenses in connection with the return of products. Such returns may result from
defective goods, inadequate performance relative to customer expectations,
improper handling during transportation, improper packaging, liberal retailer
return policies and other causes which may be beyond the Company's control.
During 1994, 1995 and 1996, the Company received product returns totaling
approximately 13.5%, 12.9%, and 12.3% of total units shipped, respectively.
Although the Company experiences returns due to product defects, the Company
believes that the majority of returns are the result of liberal return policies
by retailers and are beyond the control of the Company. The Company attempts to
minimize returns due to product defects by imposing quality assurance and
engineering standards in order to limit the effect of returns for manufacturing
or other defects or operational problems. The Company's presence in Hong Kong
enables the Company to perform engineering evaluations and monitor the
 
                                        7
<PAGE>   11
 
quality controls of its various manufacturers. As a proposal to make a line of
products is evolving, the Company reviews the process and attempts to impose
engineering and product quality assurance standards upon the manufacturers. The
Company may discontinue purchasing from a manufacturer if that manufacturer
fails to satisfy the Company's specifications or if excessive returns result
from a given product or line of products despite a manufacturer's apparent
compliance with these quality control standards.
 
     At the Company's Cerritos, California headquarters and main operating
facility, the Company devotes a limited portion of its space to reconditioning
returned products for resale as "B goods" (specifically, goods manufactured,
reconditioned and sold "as is" or with a limited warranty). Regardless of the
reason for product returns, products that are returned may only be reconditioned
and resold as "B goods" in accordance with applicable Federal and State laws
regulating consumer trade. Such "B goods" are typically reconditioned and sold
at lower prices than comparable non-returned goods. The Company markets "B
goods" in the United States and to a lesser extent in Mexico and elsewhere in
Central and South America. The Company has attempted to phase out reconditioning
on any significant scale at its Cerritos facility in favor of using the Chinese
Joint Venture. The Company expects that the Chinese Joint Venture will allow the
Company to recondition returned products at a lower cost and to resell those
products more quickly and in certain cases, at higher prices than previously
realized on reconditioned goods.
 
     The Company entered into the Chinese Joint Venture for the operation of a
reconditioning and assembly facility in the area of Zhuhai, PRC. The Chinese
Joint Venture will recondition products for the Company and may eventually be
used as a manufacturing facility to manufacture certain audio products for the
Company. The Company's Chinese Joint Venture operates a 6,295 square meter
factory with an adjoining 3,505 square meter dormitory and canteen for local
employees working in the facility. The facility has the capacity to recondition
up to approximately 10,000 units per month, and the Company believes that, given
its current staffing, this capacity far exceeds the amount of product to be
reconditioned at the Chinese facility. The Initial Chinese Joint Venture
facility commenced limited operations to recondition products in January 1996,
and as of December 31, 1996, had effectively reconditioned approximately 82,000
units for return to the Company. Although the Company cannot estimate with any
certainty the cost savings associated with the operation of the Chinese Joint
Venture facility, the Company believes that there will be significant cost
savings associated with the reconditioning of products in China, assuming that
product returns continue to represent the same percentage of total units
shipped, and assuming a moderate amount of sales growth. The Company anticipates
that the majority of the products will be capable of being reconditioned at the
Chinese Joint Venture facility and sold in the United States and elsewhere as
original goods, not subject to the significant reduction in price associated
with "B goods." The Company's ability to sell reconditioned goods in the United
States as anything other than "B goods" is likely to be limited to goods that
have only cosmetic or packaging defects that can be corrected by complete
replacement of the affected part or packaging. The company cannot anticipate
what percentage of these returned products can be sold in the United States or
elsewhere as other than "B goods."
 
     The company's inventory of "B goods" has increased from 2.9% at December
31, 1994 to 5.4% at December 31, 1995, to 4.6% at December 31, 1996. This
aggregate increase is a result of a decrease in inventory levels as of year-end
1995 and of the Company's own efforts to minimize the amount of products that
are returned to vendors for repair (generally undertaken at the Company's
expense). The Chinese Joint Venture facility should allow the Company to employ
new components and other materials in the reconditioning process, which will
hopefully accelerate the processing of returned goods and enable the Company, in
certain instances, to sell these products as other than "B goods."
 
     The Company generally provides warranties on certain of its products which
range in duration from three months to one year. The Company does not currently
offer an extended service contract. The Company receives limited product support
from various of its manufacturers and certain major suppliers provide product
support or arrangements pursuant to which the Company may receive arrangements
that generally involve credits for defective merchandise. The Company processes
warranty claims through its main office and accepts returned merchandise and
reconditions that merchandise as an incident to the Company's warranties.
Certain of the Company's products are approved through Underwriters'
Laboratories or similar testing agencies.
 
                                        8
<PAGE>   12
 
BACKLOG
 
     The Company's larger customers typically place firm orders only 30 to 90
days in advance of the anticipated delivery date. Additionally, these customers
may from time to time publish forecasts for 90 days in advance of their
particular product needs. The Company, due to its method of designing and
supplying products, frequently obtains inventory in advance of orders to fill
forecasted demand. However, the Company periodically receives orders for
products for which the Company does not have supply commitments or inventory.
The Company's failure to fulfill an order in such a situation could result in a
loss of a significant customer or extraordinary expense in supplying the
particular product. The Company's attempt to obtain manufacturing commitments
based on the forecasted demand of its customers and consumer demand for the
Company's products does not generally create what in most industries would be
considered backlog that is material to the Company's business. The company does
receive orders for which supply commitments must be obtained. However, any
substantial backlog is eliminated at the end of the Company's fourth quarter.
 
PROPRIETARY PROTECTIONS AND TRADEMARKS
 
   
     The Company has ten registered trademarks in the United States. The most
critical trademark owned by the Company is the name "Craig" and the associated
script logo. The name CRAIG(R) has been trademarked or a trademark application
is pending in more than 64 countries. The Company believes that the CRAIG(R)
trademark is critical in order to continue to effectively market the Company's
products. The Company does not consider the other Company trademarks material to
its business, although the Company intends to protect its interest in those
trademarks.
    
 
     The Company believes that it has proprietary protection for the CRAIG(R)
trademark in those foreign countries in which sales of the Company's products
are currently targeted, with the exception of Argentina and Paraguay. In
Argentina, the Company is party to a dispute with an individual who has
evidently trademarked the name "Craig," but not for consumer electronics
purposes. The Company is unable to predict the outcome of this trademark
dispute. Additionally, the Company's trademark has not been perfected in
Paraguay.
 
COMPETITION
 
     The consumer electronics industry is extremely competitive and is dominated
by well-capitalized and diverse companies. Demand for products lessened
significantly during 1996 and the soft market has intensified competition. The
Company faces competition from both foreign manufacturers and importers of
products made by third-party manufacturers at its price point. The most
significant direct competitors to the Company are Emerson, RCA, Audiovox, Sanyo,
Koss, and International Jensen. Other competitors include the major brands such
as Sony, Panasonic, JVC, Kenwood, and Aiwa, and other companies that do not
necessarily emphasize the price point in which the Company attempts to sell its
products. The Company's current financing capacity could also affect its
competitive position inasmuch as better capitalized or financed entities may
have the ability to obtain a more consistent or less-costly supply of products
than is made available to the Company.
 
     Because the Company does not have the resources to undertake the research
necessary to implement significant technological advances, the Company is
dependent upon its ability to select products applying available technology and
to timely deliver them to market in order to maintain its competitive advantage
and margins. Although the capital requirements of the business and the ability
to obtain consumer electronic products do not provide a significant barrier to
entry, product and name recognition are likely to have a material impact on the
ability to effectively enter the market due to the associated marketing costs.
 
     At the price point at which the Company competes, several of the Company's
competitors have, and future potential competitors may have, substantially
greater financial, marketing, distribution, and other resources than the Company
and have, or may have, greater name recognition and market acceptance of their
products. There can be no assurance that product developments and technological
advances will not reduce the cost of higher-end products that would not directly
compete with the Company's products but for such advances which would adversely
affect the Company's ability to market its products in the value-oriented niche.
Notwithstanding the risk that technological developments will result in products
that the Company
 
                                        9
<PAGE>   13
 
cannot effectively acquire and market, the Company is at the same time dependent
upon technological advances in order to continue to market products that
continue to evolve in a manner that makes the products appealing to consumers on
a year-to-year basis.
 
OPERATIONS IN HONG KONG AND THE PRC
 
     As discussed earlier herein, the Company's four largest
manufacturers/suppliers are Hong Kong companies with facilities located in the
PRC, accounting for over 50% of the Company's total product supply. As a result,
changes in the political situation in Hong Kong or the PRC could significantly
affect the Company's ability to operate. On July 1, 1997, sovereignty over Hong
Kong will be transferred from the United Kingdom to the PRC, and Hong Kong will
become a Special Administrative Region ("SAR") of the PRC. As provided in the
Sino-British Joint Declaration on the Question of Hong Kong and the Basic Law of
the Hong Kong SAR of the PRC (the "Basic Law"), the Hong Kong SAR will have a
high degree of autonomy except in foreign affairs and defense. Under the Basic
Law, the Hong Kong SAR is to have its own legislature, legal and judicial system
and economic autonomy for 50 years. Based on the current political conditions
and the Company's understanding of the Basic Law, the Company does not believe
that the transfer of sovereignty over Hong Kong will have a material adverse
effect on the Company's business, financial condition or results of operations.
There can be no assurance, however, that changes in political, legal or other
conditions will not result in such an adverse effect.
 
     The PRC is controlled by the Communist Party of China. Under its current
leadership, the PRC has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the PRC government
will continue to pursue such policies, that such policies will be successful if
pursued, or that such policies will not be significantly altered from time to
time. Economic development may be limited as well by the imposition of austerity
measures intended to reduce inflation, the inadequate development or maintenance
of infrastructure or the unavailability of adequate power and water supplies,
transportation, raw materials and parts, or a deterioration of the general
political, economic or social environment in the PRC, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, economic reforms and growth in the PRC have
been more successful in certain provinces than others, and the continuation or
increase of such disparities could affect the political or social stability of
the PRC.
 
     The PRC currently enjoys Most-Favored-Nation ("MFN") status granted by the
United States, pursuant to which the United States imposes the lowest applicable
tariffs on PRC exports to the United States. The United States annually
reconsiders the renewal of MFN trading status for the PRC. No assurance can be
given that the PRC's MFN status will be renewed in future years. The PRC's loss
of MFN status could adversely affect the Company's business by raising prices
for its products in the United States, which could result in a reduction in
demand for the Company's products by its U.S. customers.
 
     If for any reason the Company were required to move its reconditioning
operations outside of the PRC, or if the Company's PRC manufacturers could not
produce products for the Company, the Company's profitability, competitiveness
and market position could be materially jeopardized, and there could be no
assurance that the Company could continue to effectively source its products.
The Company's business and prospects are dependent upon agreements with various
entities controlled by PRC governmental instrumentalities. Not only would the
Company's operations and prospects be materially and adversely affected by the
failure of such entities to honor contracts, but it might be difficult to
enforce these contracts in the PRC. There can be no assurance that assets and
business operations in the PRC will not be nationalized, which could result in
the total loss of the Company's investments and relationships in that country.
Following the formation of the PRC in 1949, the PRC government renounced various
debt obligations incurred by predecessor governments, which obligations remain
in default, and expropriated assets without compensation.
 
     The PRC only recently has permitted greater provincial and local economic
autonomy and private economic activities. The PRC central government has
exercised and continues to exercise substantial control over virtually every
sector of the PRC economy. Accordingly, PRC government actions in the future,
including any decision not to continue to support current economic reform
programs and to return to a more
 
                                       10
<PAGE>   14
 
centrally planned economy, or regional or local variations in the implementation
of economic reform policies, could have a significant effect on economic
conditions in the PRC or particular regions thereof.
 
     The PRC's legal system is a civil law system based on written statutes in
which decided legal cases have little value as precedents, unlike the common law
system in the United States. The PRC does not have a well-developed,
consolidated body of law governing foreign investment enterprises. As a result,
the administration of laws and regulations by government agencies may be subject
to considerable discretion and variation. In addition, the legal system of the
PRC relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. Definitive regulations and policies with
respect to such matters as the permissible percentage of foreign investment and
permissible rates of equity returns have not yet been published, statements
regarding these evolving policies have been conflicting, and any such policies,
as administered, are likely to be subject to broad interpretation and discretion
and to be modified, perhaps on a case-by-case basis. As the legal system in the
PRC develops with respect to these new types of enterprises, foreign investors
may be adversely affected by new laws, changes to existing laws (or
interpretations thereof) and the preemption of provincial or local laws by
national laws. In circumstances where adequate laws exist, it may not be
possible to obtain timely and equitable enforcement thereof. The Company's
activities in the PRC are by law subject, in some circumstances, to
administrative review and approval by various national and local agencies of the
PRC government.
 
GOVERNMENT REGULATION
 
     The Company is subject to numerous tariffs, duties, charges and assessments
on the import of its various products. The Company retains import agencies and
expediters to facilitate the import of its products and the payment of these
charges and duties. Although these duties and charges have not substantially
impacted the ability of the Company to market its products for delivery in the
United States and elsewhere, regulations affecting these charges and duties are
subject to change, which could have the effect of increasing the cost of goods
imported and sold by the Company. Currently, because the bulk of the Company's
products are manufactured in the PRC, the continual availability of "most
favored nation" status for the PRC pursuant to treaties with the United States
and stable diplomatic relations with the PRC are critical to the ongoing and
continuous supply of products. Additionally, the Company's investment in the
Chinese Joint Venture could be impacted by the loss of most favored nation
status by the PRC or adverse changes in diplomatic relations between the United
States and the PRC. See "Operating in Hong Kong and the PRC." Additional
regulation implemented in the United States or elsewhere could also limit the
ability to manufacture, transport, or import goods.
 
     The Company is subject to disclosure obligations associated with the sale
of "B goods" in accordance with the regulations of the Federal Trade Commission
and various state consumer protection laws. The Company undertakes to comply
with all fair pricing and consumer protection laws with respect to the resale of
the goods, and the Company believes that its procedures for complying with these
laws are adequate to assure continuing compliance with them.
 
EMPLOYEES
 
     As of December 31, 1996, the Company had a total of 84 full-time employees.
Among these employees, 54 were located in the Cerritos, California facility,
three were located elsewhere in the United States, and 27 were residing in Hong
Kong or China. Of the employees in the Cerritos facility, 16 were in management,
20 were clerical or administrative employees, five were in sales and marketing
and product development, and 13 were in warehouse, manufacturing, or quality
assurance operations. All United States employees located outside of Cerritos,
California, are sales and marketing personnel. The Hong Kong employees consist
of three in management and the balance in product design, quality control,
product development and support, export, and administrative functions. The
Company believes that its relationships with its employees are good. During May
1996, the Company, in connection with the reduction of reconditioning activity
at its Cerritos, California facility, laid off six quality control/assembly
employees. The Company believes termination of these employment arrangements was
appropriately undertaken and will have no material adverse impact on the
 
                                       11
<PAGE>   15
 
Company's business. The Company is not party to any collective bargaining
agreement, nor is the Company aware of any effort to organize employees of the
Company into any union or similar labor organization.
 
     The Chinese Joint Venture, in which the Company is a 50% partner, employs
approximately 200 persons, most of whom are factory workers engaged in the
reconditioning and manufacturing processes conducted at the facility. The
Chinese Joint Venture is obligated to provide dormitory space and board to these
employees, and the Chinese Joint Venture has 3,505 square meters of dormitory
space and a canteen for the provision of these services to the Chinese
employees.
 
ITEM 2.  PROPERTIES
 
     The Company's main office, administrative, warehouse, and reconditioning
facilities had been located in 68,300 square feet of space in two separate
buildings located in Cerritos, California. The Company's lease for this space
expired on March 31, 1996. Rent for such space was $28,000 per month. Due to the
reduced space required for reconditioning goods and related warehousing in the
United States, the Company has reduced the space leased at the Cerritos location
to approximately 45,000 square feet in one building. The lease provides for
monthly rent of $19,193 per month. The lease expires in the year 2000.
 
     The Company's Hong Kong facilities consist of office space totaling 3,032
square feet located in Kwai Fong, Hong Kong. Monthly rental on the Hong Kong
office facility is approximately $10,000 (U.S.) per month. The Company also
leases an apartment in Hong Kong provided to Bonnie Metz, the Company's Vice
President-Managing Director, Hong Kong. The monthly rental is approximately
$6,400 (U.S.). The lease for this apartment expires in April 1997 and will not
be renewed.
 
     The Company's Chinese Joint Venture's facilities consist of a 6,295 square
meter manufacturing facility with an adjoining 3,505 square meter dormitory and
canteen. The Chinese Joint Venture pays the rent at this facility, $15,925 per
month. The Company does not assert any direct ownership interest in the Chinese
Joint Venture facilities, and the Company's investment in those facilities will
be lost to the extent that the Company ceases to conduct active business in the
PRC through the Chinese Joint Venture.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company has been named as a defendant in a lawsuit filed in the United
States District Court for the Central District of California styled Robert
Jacobs, individually and on behalf of all others similarly situated v. Craig
Consumer Electronics, Inc., Richard I. Berger, Donna Richardson, Peter Behrendt,
Richard Miller, Bernard Taran and James Koblensky (the "Jacobs Litigation"). The
Jacobs Litigation is a purported class action on behalf of persons who purchased
the Company's common stock in its initial public offering and who purchased in
the marketplace thereafter and prior to March 10, 1997.
 
     The allegations in the Jacobs Litigation involve violations of sections
10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
and sections 11, 12 and 15 of the Securities Act of 1933. The claims are based
almost entirely on the restatement of the Company's 1995 financial statements
and allegations that a misleading financial statement was intentionally allowed
to remain in the marketplace from and after the date of the initial public
offering. Management believes that the adjustments giving rise to the
restatement to the 1995 financial statements are immaterial from an investment
point of view, and are particularly immaterial after giving effect to the
reversal of certain items in 1996 and 1997 that relate to 1995. Particularly,
(i) Richard Berger's agreement to repay his 1995 bonus (approximately $318,000),
which was computed based on the financial statements prior to the restatement,
and (ii) the booking during 1996 of approximately $100,000 of interest income
related to anti-dumping duty refunds due the Company that had not been accrued
as of December 31, 1995, render the restatement immaterial from an investment
perspective. All the allegations and causes of action based on intentional
misconduct are in Management's view based on Management's investigation,
completely unfounded.
 
     Management has instructed counsel to vigorously defend these claims and
believes the claims are without merit. If the case is not amicably settled in
the immediately foreseeable future, dedication of the Company's
 
                                       12
<PAGE>   16
 
resources to defending the litigation will be required and no assurance can be
given that the outcome of the litigation will not have a material adverse impact
upon the Company.
 
     Other than the Jacobs Litigation, the Company is not currently a party to
any pending legal proceedings, the adverse outcome of which, individually or in
the aggregate, would have a material adverse effect on the business, financial
condition or results of operations of the Company. The Company is from time to
time involved in various legal proceedings, including collection matters and
disputes over product defects, individual employment disputes, and similar
matters. The Company maintains insurance to attempt to insure against liability
associated with a product defect. However, to the extent that any such defect
were pervasive in any particular product or line of products, the Company could
be required to undertake to recall those products or could be subject to
significant exposure with respect to the institution of legal proceedings.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None.
 
                                    PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
 
     The Company's Common Stock has been quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system under the symbol CREG
since May 21, 1996. The Company estimates that there are approximately 27
holders of record and approximately 1,017 beneficial holders of its Common
Stock.
 
     Since its inception, the Company has not declared or paid any dividends on
shares of its Common Stock. The Company has previously paid dividends on its
outstanding Series A Preferred Stock, and has accrued dividends on the Series A
Preferred Stock during the years ended December 31, 1994 and 1995. In May 1996,
the 250,000 outstanding shares of Series A Preferred Stock were converted into
1,733,330 shares of Common Stock. Prior to the conversion, the four holders of
the Company's Common Stock owned all of the Series A Preferred Stock. On May 21,
1996, the Company delivered separate subordinated notes for a total of $780,798,
reflecting the Company's long-term obligation to pay accumulated, unpaid
dividends on its Series A Preferred Stock to its four preferred stockholders.
Each subordinated note is a general unsecured obligation maturing in four years.
These subordinated notes bear interest at the rate of 10% per annum. Semi-annual
interest payments commenced on November 1, 1996 and semi-annual, fully amortized
principal repayments commence May 1, 1997. Under the terms of the subordinated
notes, the four holders of the Series A Preferred Stock have agreed to
subordinate the Company's obligation to pay the accumulated dividend to payment
of all amounts owing to any secured lenders, and all trade vendors of the
Company, and acknowledge that no payment will be made to the extent that such
payment would cause any violation or default of any material agreement to which
the Company is a party, including its existing loan agreement with Bankers Trust
Commercial Corporation ("BTCC"). See "Certain Relationships and Related
Transactions." As a condition to waivers of the Company's defaults under the
BTCC Loan Agreement (as defined in "Management's Discussion and Analysis of
Financial Condition and Results of Operations"), the payments due on these
subordinated notes on May 1, 1997 will not be made, but additional notes of like
kind may be delivered to satisfy the Company's obligations under these notes.
 
     The Company's loan agreement with BTCC limits the payment of dividends. The
Company intends to retain all available funds for use in its business and
therefore, does not expect to pay any cash dividends in the foreseeable future.
Any future determination relating to dividend policy will be made at the
discretion of the Board of Directors of the Company and will depend on a number
of factors, including future earnings, capital requirements, financial
condition, future prospects of the Company and such other factors as the Board
of Directors may deem relevant.
 
                                       13
<PAGE>   17
 
     The following table sets forth the range of high and low closing prices for
the Common Stock for the periods indicated, as reported by NASDAQ, the principal
system or exchange on which such securities are quoted or traded.
 
<TABLE>
<CAPTION>
                                                                          COMMON STOCK
                          FISCAL YEAR ENDING                           -------------------
                           DECEMBER 31, 1996                            HIGH         LOW
    ---------------------------------------------------------------    ------       ------
    <S>                                                                <C>          <C>
    May 21, 1996 to June 30, 1996..................................    $ 7.50       $ 6.50
    Quarter ended September 30, 1996...............................    $6.625       $4.625
    Quarter ended December 31, 1996................................    $ 6.25       $ 3.00
</TABLE>
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The following selected statement of income data for each of the three years
in the period ended December 31, 1996, and the balance sheet data as of December
31, 1995 and 1996, are derived from and qualified by the audited financial
statements and the related notes thereto included elsewhere in this Form 10-K
Report that have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report. The statement of income data set
forth below with respect to the years ended December 31, 1992 and 1993 and the
balance sheet data as of December 31, 1994, are derived from audited financial
statements of the Company not included in this Form 10-K Report. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the financial
statements and the related notes thereto included elsewhere in this Form 10-K
Report.
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                       ---------------------------------------------------------------
                                        1992         1993         1994           1995           1996
                                       -------     --------     --------     -------------     -------
                                                                             (AS RESTATED)
                                                               (IN THOUSANDS)
<S>                                    <C>         <C>          <C>          <C>               <C>
STATEMENT OF INCOME DATA:
Audio sales........................    $34,052     $ 53,029     $ 71,432        $80,710        $80,713
Video and other product sales......     45,256       48,186       34,207          7,966            (81)
                                       -------     --------     --------        -------        -------
Net sales..........................     79,308      101,215      105,639         88,676         80,632
Cost of goods sold.................     69,292       89,359       91,334         75,113         71,950
                                       -------     --------     --------        -------        -------
Gross profit.......................     10,016       11,856       14,305         13,563          8,682
                                       -------     --------     --------        -------        -------
Selling expenses...................      3,361        4,809        5,165          4,664          5,422
General and administrative
  expenses.........................      4,111        4,611        6,681          6,424          6,842
Product development expenses.......        346          105          163            200            147
                                       -------     --------     --------        -------        -------
Operating expenses.................      7,818        9,525       12,009         11,288         12,411
                                       -------     --------     --------        -------        -------
Operating income (loss)............      2,198        2,331        2,296          2,275         (3,729)
Interest expense, net..............      1,029        1,221        1,692          2,200          2,251
                                       -------     --------     --------        -------        -------
Income (loss) before provision for
  taxes............................      1,169        1,110          604             75         (5,980)
Provision for taxes................        182           37           71             46             --
Extraordinary item.................         50           --           --             --             --
                                       -------     --------     --------        -------        -------
Net income (loss)..................    $   937     $  1,073     $    533        $    29        $(5,980)
                                       =======     ========     ========        =======        =======
</TABLE>
 
                                       14
<PAGE>   18
 
   
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                -------------------------------
                                                                 1994        1995        1996
                                                                -------     -------     -------
                                                                         (AS RESTATED)
<S>                                                             <C>         <C>         <C>
BALANCE SHEET DATA:
Working Capital.............................................    $ 3,528     $ 3,282     $ 3,610
Total Assets................................................     41,145      31,740      39,169
Notes payable under revolving line of credit................     20,914      15,530      20,714
Subordinated debt and capital lease obligations, net of
  current portion...........................................        634       1,048       1,150
Stockholders' equity........................................      4,581       4,172       3,917
</TABLE>
    
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this Form 10-K
report.
 
OVERVIEW AND OPERATING HIGHLIGHTS
 
     The Company derives substantially all of its revenues from sales of
consumer electronics products, including audio electronic products such as home,
portable and mobile audio systems and, previously, video products such as
televisions and video cassette recorders. Because the Company had experienced
lower and declining gross margins on sales of video products, the Company no
longer sells video products and focuses its resources on sales of audio
products. The Company does not anticipate sales of video products for the
foreseeable future, but does believe it will be necessary to expand into other
product categories. Management believes marketing telecommunication products and
home theater and OEM products are logical product categories capable of
development by the Company. During 1996, the Company began to market and sell
six models of telephones and two telephone accessory products, although sales
were not significant.
 
     The Company attempts to order products and maintain inventory controls in
an effort to control the costs and risks of inventory obsolescence and the
retention of significant inventories, either of which results in financing and
other costs. This inventory management philosophy is frequently difficult to
implement. Such difficulty is increased by the relatively long product
development and ordering cycle and the unpredictability of consumer demand.
Maintaining inventory levels at or just above normal demands throughout the year
is critical, given the Company's capital requirements and limitations. As was
experienced during 1996, an overall soft market can exacerbate inventory
management and liquidity, in which case margins are in turn affected due to
higher overall carrying and finance costs.
 
     The Company is subject to significant risks in connection with its
inventory management. Particularly, in order to assure an adequate supply of
products to meet the relatively high demand for products during the third and
fourth quarter of each year, the Company must commit to acquire products six to
nine months in advance of delivery, which commitment is based on the Company's
forecast of its customers' orders. If the Company underestimates its need for
inventory, the Company may have to pay a significant premium to obtain necessary
manufacturing time or may be unable to provide customers with the desired
products in the quantities requested. In such event, profit margins, sales
and/or customer relationships could be materially adversely affected. Similarly,
if the Company overestimates its inventory needs, the Company will be required
to reduce prices in order to dispose of such inventory, thereby adversely
affecting its profit margins, if any. In order to operate successfully, the
Company must adequately plan, time, and budget its acquisition of inventory in
each product category so as to avoid the need for significant cost increases or
price reductions in any product or product category. To the extent the Company
is unable to do so or incurs delays in delivery, or fails to adequately forecast
prices and demand or reduce costs when necessary, the Company's business and
financial condition could be materially adversely affected.
 
     The Company's business is highly seasonal, with operating results varying
substantially from quarter to quarter. Sales tend to be lowest in the first and
second quarters and highest in the third and fourth quarters of
 
                                       15
<PAGE>   19
 
the calendar year. The Company experienced losses during the first and second
quarters in the past and will likely continue to experience such seasonal losses
in the future, including during 1997. In order to facilitate sales during the
year-end buying season, the Company must make financial commitments and pay for
product inventory well in advance of any sales of such inventory. As a result,
if the timing or amount of customer orders, neither of which the Company can
control, fall below the Company's expectations, operating results and cash flow
could be materially adversely affected.
 
     The Company's product development activities generally involve designing
products from various prototypes manufactured by many consumer electronics
manufacturers. These designs generally involve the modification and application
of existing available technologies. The Company's product development is
therefore generally focused on selection of features, cosmetic design, and
obtaining a cost-effective means to incorporate available technology into the
Company's products, rather than attempting to develop new technology. Product
development costs are those costs typically associated with the Company's
packaging, cosmetic design, testing, and features of its products.
 
     Net sales represent gross sales after excluding product returns, but
include the resale of reconditioned products. For 1994, 1995, and 1996 product
returns approximated 13.5%, 12.9% and 12.3% respectively, of total units
shipped. Any increase in the rate of product returns would have a material
adverse effect on the Company's business and financial condition.
 
     The Company's sales are concentrated among its largest customers. During
1994, 1995, and 1996, sales to the Company's top five customers accounted for
approximately 47%, 59% and 55% of net sales, respectively. Approximately 24%,
35%, and 25% of net sales in 1994, 1995 and 1996, respectively, were
attributable to Best Buy, and Circuit City accounted for 22% of net sales during
1996. The Company is therefore highly dependent upon its largest customers, and
its business and financial condition could be adversely affected to the extent
that any of its largest customers discontinued the purchase of the Company's
products for any reason, including general economic conditions affecting the
demand for products at the Company's price point or other conditions affecting
business of any particular retail chain or other large customer. The Company
expects that concentration of sales will continue and may become more
concentrated as the retail end of the industry further consolidates.
 
     The Company's selling expenses are composed of both variable expenses,
which generally correlate to sales levels, and non-variable expenses. Variable
expenses averaged approximately 70% of selling expenses over the past three
years, and include primarily commissions, freight, and consumer rebates and
promotions. Non-variable expenses include, among other customary selling
expenses, the costs of attendance at the Las Vegas Consumer Electronics Show and
other trade shows. General and administrative expenses typically include office
and warehouse space and payroll, among other customary general and
administrative expenses.
 
     The Company opened an office in Hong Kong in February 1994, to facilitate
the selection and acquisition of products in a timely fashion and oversee
product sourcing, testing, modifications and packaging design and to promote the
Company's relationships with its contract manufacturers. Throughout 1996 and
during 1997, the Company has and will continue to conduct these activities in
Hong Kong primarily.
 
     Management of the Company believed and continues to believe that the high
rate of product returns and the relatively low cost of performing repairs in
China justified the entry into a joint venture in China to operate a
reconditioning facility for the Company's products, in lieu of a domestic
reconditioning facility. Although the logistics of opening the facility and risk
of doing business in China are significant, management believes that processing
returned goods in China is preferable to doing so in the United States. In
August of 1995 the Company entered into its original joint venture in China with
Peaceful High & New Technology Development Co. and formed Shenzhen Kuoli Elec.
Co. Ltd. (the "Initial Chinese Joint Venture," as defined above). The Initial
Chinese Joint Venture operated a facility in Shenzhen, PRC, which began
refurbishment activity in January 1996. From commencement to December, 1996,
approximately 82,000 units with a reconditioned value of approximately
$4,700,000 were returned to the Company. However, in approximately October,
1996, due to unanticipated delays and production levels significantly below
forecast from the factory, the Company began negotiating the termination of the
Initial Chinese Joint Venture, in favor of starting a new joint venture with
Zhuhai Special Economic Zone Min Guang Industrial Co. to form Zhuhai Craig
Electronics Co. LTD on February 1, 1997 (the "Chinese Joint Venture"). By reason
of the termination of the Initial Chinese Joint
 
                                       16
<PAGE>   20
 
Venture, certain costs for facilities, materials and other costs that may have
otherwise been capitalized were expensed by the Company. These expenses totalled
$136,000.
 
     The Chinese Joint Venture commenced operations on approximately March 1,
1997. Reconditioned product has just begun shipping from China in mid-March
1997. The Company has approximately $2.8 million in inventory at the Chinese
Joint Venture as of March 31, 1997. Management believes, that as product is
returned from the Chinese Joint Venture borrowings will be made available and
value realized for currently returned products. The Company will not realize the
benefits of its investment in the Chinese Joint Venture (through the
commencement of the return of reconditioned products) until the second and third
quarter of 1997, assuming timely satisfaction of the contingencies to such
deliveries.
 
     The Company, like most in the consumer electronics business and in the
ordinary course of its own, frequently negotiates amounts to be received from
certain vendors to compensate for defective products, returns, incidental costs,
and other charges -- in any case "Vendor Credits." Prior to 1996, the Company
accrued amounts to be received upon finalizing negotiations with the vendors,
primarily during the fourth quarter of each year, although amounts are regularly
realized during the subsequent year. Because of soft demand and the increased
competition in the consumer electronics industry, the importance of such charge-
backs to vendors increased significantly during 1996. In turn, because of the
increased magnitude of these Vendor Credits and the difficulty in estimating the
timing and amounts to be received, as well as the increased amounts of the
vendor credits, the Company has elected to change its method of accounting to
record such amounts when received, instead of when negotiated. This change is
accounted for as a change in accounting principle indistinguishable from a
change in estimate. During 1994, 1995 and 1996, the amount of these Vendor
Credits totaled approximately $1.7, $1.8 and $5.6 million respectively. Because
of the change in accounting, none of the negotiated amounts during 1996 are
accrued on the Company's balance sheet as of December 31, 1996. Although this
change in accounting results in a reduction to earnings equal to the amount
negotiated but not booked into income for 1996 for those Vendor Credits
subsequently realized, there is a corresponding direct benefit in income for
subsequent years, starting in 1997. Newly created Vendor Credits during 1997 and
thereafter will also be booked into earnings only when realized, likely in
subsequent periods.
 
     Management of the Company believes that its relationships with the
applicable vendors is good and that substantially all of Vendor Credits will be
received. Historically, substantially all of Vendor Credits have been realized.
In reviewing the 1996 financial results, the $5.6 million in negotiated Vendor
Credits should be part of the analysis.
 
     At year end, December 31, 1996, the Company's accounts receivable and
inventory were substantially higher than as of the prior year end. Accounts
receivable increased from approximately $13.2 million to $19.1 million from 1995
to 1996. Management attributes the increase in accounts receivable to increased
sales in November and December 1996 as compared to the same period last year.
Inventory levels as of December 31, 1996 increased from the same date in 1995.
Specifically, inventory increased to a net $17.7 million from $14.1 million for
the prior year. Management attributes the increase in retained inventory to a
number of factors, including higher level of goods at the joint venture factory
in China and more goods in transit to the U.S. from suppliers. Disposition of
this inventory may be undertaken during the first two quarters of 1997 at prices
that could impact the Company's margins, given the amount of such inventory and
current market conditions.
 
     Taxes were not material to the Company's financial condition during the
years ended December 31, 1993 and 1994, due to the ongoing availability of a net
operating loss ("NOL") carryforward. During the year ended December 31, 1995,
the Company applied a portion of its NOL carryforward to the reduction of its
federal income taxes. The State of California, the Company's principal place of
business, also has an income tax imposed on corporations subject to its
jurisdiction. In California, the availability and use of NOL carryforwards has
been severely limited. When reviewing the financial statements and related notes
thereto, provision for state income taxes should be taken into account inasmuch
as it is not anticipated that the NOL carryforwards will be available to reduce
tax liabilities to the State of California. There can be no assurance that the
availability and use of NOL carryforwards to reduce federal tax liabilities will
be continued in the future or that future legislation or the sale of securities
will not limit or eliminate the Company's use of NOL carryforwards. As of
December 31, 1996, the Company had an NOL carryforward for federal income tax
purposes of approximately $11,500,000.
 
                                       17
<PAGE>   21
 
     During its recent 1996 independent audit, certain bookkeeping errors and
irregularities for 1995 were discovered which management determined to reflect
through a restatement of its 1995 financial statements. The discussion herein of
1995 operating results reflects such restated financial information. For 1995,
the effect of all of the adjustments (which are, in management's view,
immaterial from an investment viewpoint) was to reduce net income by
approximately $763,000, a reduction in earnings of $0.32 per share.
 
     Richard Berger received a bonus for 1995 equal to $318,000, based on the
Company's prior reported earnings. By reason of the restatement of 1995
earnings, that bonus has been recomputed and will be repaid to the Company
during 1997. While there is no requirement for a refund, Mr. Berger has agreed
to refund this amount in 1997. Repayment may be effected by the set off against
the subordinated note owing by the Company to Mr. Berger on a dollar for dollar
basis or another negotiated payment will be made to reflect the return of the
bonus given the recomputation. Although relating to 1995 and, therefore, having
a positive impact on the net effect of the restated 1995 results, because of the
timing of the repayment, the return of the bonus will not be reflected in
financial reports until 1997.
 
RESULTS OF OPERATIONS
 
     The following tables set forth various items both in dollars and as a
percentage of net sales for the five years ended December 31, 1992, 1993, 1994,
1995 and 1996.
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                         ---------------------------------------------------------
                                          1992         1993         1994        1995        1996
                                         -------     --------     --------     -------     -------
                                                                           (AS RESTATED)
                                                              (IN THOUSANDS)
<S>                                      <C>         <C>          <C>          <C>         <C>
Audio sales............................  $34,052     $ 53,029     $ 71,432     $80,710     $80,713
Video and other product sales..........   45,256       48,186       34,207       7,966         (81)
                                         -------      -------      -------     -------     -------
Net sales..............................   79,308      101,215      105,639      88,676      80,632
Cost of goods sold.....................   69,292       89,359       91,334      75,113      71,950
                                         -------      -------      -------     -------     -------
Gross profit...........................   10,016       11,856       14,305      13,563       8,682
                                         -------      -------      -------     -------     -------
Selling expenses.......................    3,361        4,809        5,165       4,664       5,422
General and administrative expenses....    4,111        4,611        6,681       6,424       6,842
Product development expenses...........      346          105          163         200         147
                                         -------      -------      -------     -------     -------
Operating expenses.....................    7,818        9,525       12,009      11,288      12,411
Operating income (loss)................    2,198        2,331        2,296       2,275      (3,729)
Interest expense, net..................    1,029        1,221        1,692       2,200       2,251
                                         -------      -------      -------     -------     -------
Income (loss) before provision for
  taxes................................    1,169        1,110          604          75      (5,980)
Provision for taxes (income tax
  benefit).............................      182           37           71          46          --
Extraordinary item.....................       50           --           --          --          --
                                         -------      -------      -------     -------     -------
Net income (loss)......................  $   937     $  1,073     $    533     $    29     $(5,980)
                                         =======      =======      =======     =======     =======
</TABLE>
 
                                       18
<PAGE>   22
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                           -------------------------------------------------------
                                            1992        1993        1994        1995        1996
                                           -------     -------     -------     -------     -------
                                                                            (AS RESTATED)
<S>                                        <C>         <C>         <C>         <C>         <C>
Audio sales..............................    42.9%       52.4%       67.6%       91.0%      100.1%
Video sales..............................    57.1        47.6        32.4         9.0        (0.1)
                                            -----       -----       -----       -----       -----
Net sales................................   100.0       100.0       100.0       100.0       100.0
Cost of goods sold.......................    87.4        88.3        86.5        84.7        89.2
                                            -----       -----       -----       -----       -----
Gross profit.............................    12.6        11.7        13.5        15.3        10.8
Selling expenses.........................     4.2         4.7         4.9         5.3         6.7
General and administrative expenses......     5.2         4.6         6.3         7.2         8.5
Product development expenses.............     0.4         0.1         0.1         0.2         0.2
                                            -----       -----       -----       -----       -----
Operating income (loss)..................     2.8         2.3         2.2         2.6        (4.6)
Interest expense, net....................     1.3         1.2         1.6         2.5         2.8
                                            -----       -----       -----       -----       -----
Income (loss) before provision for
  taxes..................................     1.5         1.1         0.6         0.1        (7.4)
Provision for taxes (income tax
  benefit)...............................     0.2          --         0.1         0.1         0.0
Extraordinary item.......................     0.1          --          --          --          --
                                            -----       -----       -----       -----       -----
Net income (loss)........................     1.2%        1.1%        0.5%        0.0%       (7.4)%
                                            =====       =====       =====       =====       =====
</TABLE>
 
  Comparison of Years Ending December 31, 1995 and 1996
 
     As mentioned the Company restated its 1995 financial statement to reflect
certain adjustments. The following discussion applies those restated amounts.
 
     Net Sales.  Net Sales decreased by approximately $8 million dollars or 9%,
from $88.7 million in 1995 to $80.6 million during 1996. The decrease is
primarily a result of a soft market for consumer electronics products, including
those specifically marketed by the Company, and slower than anticipated
development of foreign sales and new product lines. However, Management expects
to devote resources to foreign sales and to attempt to increase sales of
telephone products (which accounted for only $398,000 during 1996 and none
during 1995) during 1997. Sales in additional product categories are subject to
various risks, including generally the risks of introduction of new products,
name recognition and the ability to adequately price them.
 
     Gross Profit.  Gross Profit decreased from $13.6 million to $8.7 million
from 1995 to 1996. The decrease in Gross Profit is directly attributable to an
overall soft demand for consumer electronics products, increased inventory
reserves (especially associated with products returned to the Chinese Joint
Venture) and to the change in accounting referred to above wherein unrealized
Vendor Credits were not accrued.
 
     Selling Expenses.  Selling costs increased both in absolute numbers and as
a percentage of sales. During 1996, selling expense was approximately $5.4
million dollars compared to $4.7 million for 1995. Selling expense increased by
reason of consumer rebates (which were significantly in excess of expectations)
and higher co-op advertising for customers.
 
     General and Administrative Expenses.  General and Administrative Expenses
also increased in both absolute numbers and as a percentage of sales. General
and Administrative Expenses were approximately $6.8 million during 1996,
compared to $6.4 million during 1995. Additionally, as a percentage of revenues
General and Administrative costs increased to 8.5% during 1996, compared to 7.2%
during 1995. The increase in General and Administrative Expense is primarily due
to operating inefficiencies associated with the reconditioning operations of the
Company, including increased expense associated with the Chinese Joint Venture.
 
     Product Development Expenses.  Product Development Expenses, which are not
included in the foregoing discussion with respect to selling or general
administrative expenses, decreased by approximately 26.5% from $200,000 during
1995 to $147,000 during 1996. The decrease is due to reduced product design
expense.
 
                                       19
<PAGE>   23
 
     Interest Expense.  Interest Expense as a percentage of sales remains
substantially the same, although increasing slightly in both absolute numbers
and as a percentage of sales. Interest expense during 1996 was approximately
$2.3 million, compared to $2.2 million during 1995. This increase is a result of
interest accrued for subordinated debt and delay charges associated with DA
Financing.
 
     Net Income.  Net Income decreased substantially during 1996 when compared
to 1995. Net income as restated during 1995 was approximately $29,000 and the
Company incurred a net loss for 1996 of approximately $6.0 million. The loss
during 1996 is substantially attributable to the change in accounting for Vendor
Credits discussed hereinabove. Additionally, the market for consumer electronics
products overall was soft during this period and the Company realized greater
redemption rates on rebate programs than was anticipated. Finally, the increase
of reserves associated with the net realizable value of inventory located in
China or in transit to China impacted the net loss.
 
  Comparison of Years Ended December 31, 1994 and 1995
 
     Net sales.  Net sales decreased by $16.9 million, or 16.0%, from $105.6
million in 1994 to $88.7 million for 1995. The decrease is primarily a function
of the planned reduction in sales of video products. Due to the Company's
efforts to reduce the sales of lower-margin video products, sales of such video
products decreased by $26.2 million, or 76.6%, from $34.2 million in 1994 to
$8.0 million in 1995. Home and portable audio and mobile audio sales increased
by $9.3 million, or 13%, from $71.4 million in 1994 to $80.7 million in 1995.
 
     Gross profit.  Gross profit decreased by $743,000, or 5.2%, from $14.3
million in 1994 to $13.6 million for 1995. As a percent of sales, gross profit
increased from 13.5% in 1994 to 15.3% in 1995. The percentage increase in the
gross profit margin is directly attributable to increased sales of higher-margin
audio products and a decrease in sales of lower-margin video products. The
restated gross profit amount for 1995 was $743,000 less than previously
reported, due to the adjustments to costs of goods accounts and related
adjustments undertaken by Management.
 
     Selling expenses.  Selling expenses decreased $0.5 million, or 9.7%, from
$5.1 million in 1994 to $4.7 million in 1995. The reduction in selling costs is
directly attributable to the corresponding decrease in net sales.
 
     General and administrative expenses.  General and administrative expenses
decreased $0.3 million, or 4.5%, from $6.7 million in 1994 to $6.4 million in
1995. The decrease in general and administrative expenses is primarily due to an
increase in operating efficiencies in the Company's reconditioning operations.
 
     Product development expenses.  Product development expenses, which are not
included in the foregoing discussion with respect to selling or general and
administrative expenses, increased $37,000, or 22.7%, from $163,000 in 1994 to
$200,000 in 1995.
 
     Interest expense.  Interest expense increased $0.5 million, or 29.4%, from
$1.7 million for 1994 to $2.2 million in 1995. Interest expense increased both
in absolute numbers and as a percentage of sales as a result of higher average
interest rates paid on the Company's borrowings.
 
     Net income.  Net income decreased from $533,000 in 1994 to $29,000 in 1995.
Given the relative consistencies in the relationships among sales and selling
and general and administrative expenses, the decrease is attributable to the
impact of the decrease in gross profit in absolute terms and the additional
interest expense associated primarily with unsecured third-party debt. During
1995, the NOL carryforward, by reason of changes in California law, could not be
applied to reduce California income taxes to which the Company is subject by
reason of its principal business location in that state. During 1994, net income
was increased by reason of the application of the NOL to both federal and
California state taxes, totalling $329,000 in tax savings for that year. The
Company does not anticipate and cannot assure that the NOL carryforward will
have a material beneficial effect on the Company's financial condition and
results of operations in the future.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since 1989, the Company has financed its operations, inventory needs, and
other capital requirements through a combination of bank borrowings, vendor
financing, and internally generated cash flow. The
 
                                       20
<PAGE>   24
 
Company's inventory and receivable line of credit is currently made available by
a syndicate of banks led by BTCC. The Company has determined and agreed to
replace the BTCC line of credit at or before expiration on August 5, 1997,
unless extended through subsequent negotiations. The Company is negotiating with
several other financing sources. The Company has not, to date, received any
commitment from any financing source and no assurance can be given that such
financing will be obtained following August 5, 1997. If such financing is not
made available, the Company's ability to continue to conduct business in the
manner conducted to date would be materially affected and could cause the
Company to cease as a going concern.
 
     Under the Company's existing loan agreement with BTCC and the syndicate
members (the "BTCC Loan Agreement"), borrowings are secured by inventory and
receivables, and the amount of available credit is based on the eligible amount
of inventory and receivables. The portion of inventory purchases that is not
financed through the BTCC line of credit is financed by suppliers or other
third-party financing sources and the Company's equity and cash flow. This line
of credit allows maximum borrowings of $40 million, the exact amount dependent
upon the amount of receivables and inventory meeting certain criteria. As of
April 9, 1997, the Company had borrowed $17,631,720, which was the maximum
available amount it could borrow at that date under the BTCC line of credit. The
interest rate on such line of credit was previously, at the Company's option,
tied to either the London Interbank Offered Rate ("LIBOR") plus 2.75% or the
prime rate plus 1.25% quoted by Bankers Trust Company, New York. For 1996, the
Company elected to utilize the LIBOR rate (which was 5.6875% at April 9, 1997)
plus 2.75%. As a condition of waivers by BTCC, the Company now may borrow only
at the prime rate of Bankers Trust Company, New York, plus 1.25%. The Company
also periodically finances its inventory acquisitions through supplier or other
third-party financing that is generally unsecured short-term financing, for
which the Company pays significantly higher interest rates than it pays under
its available line of credit with BTCC. Should the Company's financial condition
deteriorate, these unsecured financing sources could become unavailable, which
could preclude the Company from acquiring product. This would adversely affect
the Company's economies of scale and its overall financial condition.
 
     Significant deterioration in prevailing industry conditions or receivable
quality, through payment delay or other credit risks associated with the
Company's customers, could affect the Company's ability to finance inventory
acquisitions at any given point in time, which could materially adversely impact
the Company's business and financial operations. The Company cannot anticipate
the contingencies to borrowing availability, nor can management predict the
assessment of the contingencies by BTCC, acting as the agent on behalf of the
syndicate of banks that participates in the Company's loan, or any other
financing sources.
 
     The Company is subject to several affirmative and negative covenants
imposed pursuant to its loan agreement with BTCC. Such covenants include
covenants to provide quarterly and annual financial statements and to affirm the
"borrowing base" calculations (the formula of inventory and receivables applied
to determine the maximum of available borrowings). The Company is also subject
to various negative financial covenants that require the Company to maintain a
certain consolidated tangible net worth, a ratio of funded debt to earnings
before interest, taxes, depreciation and amortization and a ratio of earnings
before interest, taxes, depreciation and amortization to interest expense, among
others. Additionally, the Company is limited in the amount of additional
indebtedness it may incur, including indebtedness for equipment and other
capital expenditures, the granting of liens, and other limitations which are
intended to preserve the integrity and value of the assets of the Company that
are pledged to secure the borrowings from BTCC. The Company's financial results
have resulted in the breach of several of these financial covenants, however,
BTCC and the syndicate have waived such breaches, subject to future compliance
with amended covenants, and the line is in full force and effect until the end
of its primary term, August 5, 1997, assuming no future defaults.
 
     The Company is also limited in the amount of borrowings it may secure with
the receivables from certain of its largest customers, including, most notably,
Best Buy. There can be no assurance that borrowing availability will continually
be made available if one or more of these significant customers is perceived as
a credit risk.
 
     The Company's cash flow and the ability to finance inventory acquisitions
is affected by its concentration of customers. Particularly, the Company relies
on its five largest customers for a significant portion of its sales. The
Company's largest customer, Best Buy, accounted for 35% and 25% of net sales
during 1995 and 1996, respectively, and Circuit City accounted for 22% of net
sales during 1996. In addition, as of December 31,
 
                                       21
<PAGE>   25
 
1996, Best Buy accounted for approximately $3.5 million, or 18.6%, of the
Company's accounts receivable. To the extent the credit quality of any of the
Company's significant customers, including Best Buy, is significantly diminished
or in the event of the loss of any of these significant customers, the Company's
financial condition and cash flow could be materially adversely affected. To the
extent that Best Buy or any other major customer is unable to pay for products
sold by the Company at a point in time when a significant percentage of the
Company's sales is attributable to Best Buy or such other customers, the
Company's ability to finance inventory acquisitions and its results of
operations could be materially and adversely affected.
 
     To the extent the Company refinances its existing line of credit with BTCC,
any replacement line of credit will also likely be a revolving inventory and
receivable line of credit with borrowings tied to eligible receivables and
inventory. The Company will incur costs during 1997 associated with the
refinancing, estimated to be at least $350,000. If the Company were unable to
consummate a refinancing transaction with another suitable lender to provide an
inventory and receivable line of credit similar to that provided by BTCC, the
Company may be unable to finance ongoing inventory purchases and this inability
would have a material adverse effect on the Company's business and operations.
No assurance can be given that the Company will consummate a transaction with a
suitable lender to replace BTCC on acceptable terms. Such refinancing is likely
necessary for the Company to continue to meet its capital requirements after
August 5, 1997.
 
     The Company used net cash in operating activities and did not generate
positive cash flows from operations during 1996. Net cash used in operating
activities was approximately $11.3 million during 1996, compared to net cash
provided by operating activities of $5.3 million during 1995. The significant
decrease in cash (an increase in net cash used in operating activities) was
primarily from the net loss from operating activities suffered during 1996,
which was in large part due to a significant increase in both accounts
receivable and inventory as of the year ended December 31, 1996. The Company
also realized a decrease in "other assets" consisting of the reclassification of
long term inventory deposits from other assets to inventory and the
reclassification of fees incurred under the line of credit originally amortized
over five years.
 
     Net cash used in operating activities was $6.1 million in 1994 as compared
to net cash provided by operating activities of $5.3 million in 1995. The
increase in cash provided by operating activities was predominantly due to a
reduction in inventory and accounts receivable. The Company's net cash and
borrowing availability as of December 31, 1995 was improved over the prior two
fiscal years. Net cash flow from operating activities was applied to the
repayment and reduction of the outstanding balance of the Company's principal
credit line with BTCC and other vendors. Specifically, $5.4 million of the
increased cash flow was used to pay down the Company's indebtedness to the
syndicate of banks led by BTCC.
 
     In connection with the termination of the Company's phantom stock plan, the
Company issued subordinated notes aggregating $206,800. See "Certain
Transactions." The Company also issued subordinated notes in the aggregate
principal amount of $780,798 reflecting the Company's obligation to pay
accumulated, unpaid dividends on its Series A Preferred Stock. See "Dividend
Policy."
 
     The Company believes amounts available from bank borrowings (including from
BTCC until August 5, 1997, and thereafter from another source) and cash
generated by operations, including product deliveries from the Chinese Joint
Venture, will be adequate to meet the Company's anticipated cash needs for
working capital and capital expenditures through at least the next 12 months,
assuming some form of refinancing of the BTCC line is effected on or before
August 5, 1997. The Company's long-term capital requirements will depend on
numerous factors, including the rate of increases in revenues, if any, accounts
receivable aging, interest rate fluctuations, and the rate of product returns.
The Company's need for capital arises primarily from the acquisition of
inventory and related operational expenses. The Company does not have
significant capital expenditures, other than the expenditure for the Company's
share of improvement costs and related equipment for the Chinese Joint Venture
reconditioning facility. The Company will not likely be capable of financing its
ongoing working capital needs if the BTCC Loan Agreement is not extended beyond
August 5, 1997 or if suitable inventory and receivable financing is not
negotiated prior to that time. Management is continuing to negotiate with
various sources of financing to replace the BTCC line of credit and may pursue
certain sources of equity funding or unsecured debt to facilitate the Company's
capital needs. No assurance can be given that such replacement financing or
provision of equity will be made available prior to August 5, 1997.
 
                                       22
<PAGE>   26
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Report of Independent Public Accountants............................................     F-1
Financial Statements --
  Consolidated Balance Sheets -- December 31, 1996 and 1995 (as restated)...........     F-2
  Consolidated Statements of Operations for the years ended December 31, 1996, 1995
     (as restated) and 1994.........................................................     F-3
  Consolidated Statements of Shareholders' Equity for the years ended December 31,
     1996, 1995 (as restated) and 1994..............................................     F-4
  Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
     (as restated) and 1994.........................................................     F-5
  Notes to Consolidated Financial Statements........................................     F-6
Consolidated Financial Statement Schedule --
  Schedule II -- Valuation and Qualifying Accounts..................................     S-1
</TABLE>
 
     All schedules other than the Schedule listed above are omitted as the
information is not required, not material or otherwise furnished.
 
                                       23
<PAGE>   27
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Shareholders and Board of Directors
  of Craig Consumer Electronics, Inc.:
 
     We have audited the accompanying consolidated balance sheets of CRAIG
CONSUMER ELECTRONICS, INC. (a Delaware corporation) and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. (The December 31, 1995 consolidated balance
sheet and the related consolidated statements of operations, shareholder's
equity and cash flows for the year then ended have been restated -- see Note 9)
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Craig
Consumer Electronics, Inc. and subsidiary as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, in 1996 the Company had a net loss and also had
an operating cash flow deficit of $11.4 million. The Company's existing credit
facility expires in August, 1997. The Company has also been named in a class
action lawsuit. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
 
     As discussed in Note 1 to the consolidated financial statements, the
Company has changed its method of accounting for amounts to be charged back to
vendors.
 
     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
 
                                          ARTHUR ANDERSEN LLP
 
Orange County, California
April 2, 1997 (Except for the matter
discussed in the second paragraph of Note 2
as to which the date is April 14, 1997)
 
                                       F-1
<PAGE>   28
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                       1996            1995
                                                                    -----------     -----------
                                                                                        (AS
                                                                                     RESTATED)
<S>                                                                 <C>             <C>
ASSETS
CURRENT ASSETS:
  Cash............................................................  $       600     $   220,756
  Accounts receivable, net........................................   19,097,313      13,189,981
  Inventory, net..................................................   17,743,453      14,108,249
  Supplies and prepaid expenses...................................      561,572         220,981
  Other current assets............................................      309,338       2,063,014
                                                                    -----------     -----------
          Total current assets....................................   37,712,276      29,802,981
                                                                    -----------     -----------
PROPERTY AND EQUIPMENT, net.......................................      571,300         555,716
                                                                    -----------     -----------
OTHER ASSETS......................................................      885,529       1,381,707
                                                                    -----------     -----------
                                                                    $39,169,105     $31,740,404
                                                                    ===========     ===========
                             LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Note payable under revolving line of credit.....................  $20,713,828     $15,530,076
  Accounts payable................................................   10,912,430       9,773,820
  Bank overdraft..................................................      635,950              --
  Accrued liabilities.............................................    1,794,127       1,190,341
  Income taxes payable............................................       21,486           3,652
  Current maturities of capital lease obligations.................       24,842          22,768
                                                                    -----------     -----------
          Total current liabilities...............................   34,102,663      26,520,657
                                                                    -----------     -----------
CAPITAL LEASE OBLIGATIONS.........................................       41,377          66,220
                                                                    -----------     -----------
SUBORDINATED DEBT.................................................    1,108,339         981,961
                                                                    -----------     -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
17.5 percent series A cumulative preferred stock with a
  liquidation preference of $10 per share plus unpaid dividends;
  $.01 par value --
  Authorized -- 1,000,000 shares
  Issued and outstanding -- none at December 31, 1996 and 250,000
     at December 31, 1995.........................................           --       2,500,000
Common stock; $.01 par value --
  Authorized -- 15,000,000 shares
  Issued and outstanding -- 3,434,441 and 1,679,499 shares at
     December 31, 1996 and 1995, respectively.....................       34,344          16,795
Additional paid-in capital........................................    9,070,360         862,565
Retained earnings (deficit).......................................   (5,187,978)        792,206
                                                                    -----------     -----------
                                                                      3,916,726       4,171,566
                                                                    -----------     -----------
                                                                    $39,169,105     $31,740,404
                                                                    ===========     ===========
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
                                       F-2
<PAGE>   29
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                          1996           1995            1994
                                                       -----------    -----------    ------------
                                                                     (AS RESTATED)
<S>                                                    <C>            <C>            <C>
NET SALES............................................  $80,631,527    $88,675,516    $105,638,910
COST OF SALES........................................   71,949,827     75,113,096      91,333,942
                                                       -----------    -----------    ------------
          Gross profit...............................    8,681,700     13,562,420      14,304,968
                                                       -----------    -----------    ------------
OPERATING EXPENSES:
  Selling............................................    5,421,779      4,663,642       5,164,872
  General and administrative.........................    6,841,778      6,424,711       6,681,030
  Product development................................      146,729        200,199         163,562
                                                       -----------    -----------    ------------
          Operating expenses.........................   12,410,286     11,288,552      12,009,464
                                                       -----------    -----------    ------------
          Income (loss) from operations..............   (3,728,586)     2,273,868       2,295,504
                                                       -----------    -----------    ------------
OTHER INCOME (EXPENSE):
  Interest expense...................................   (2,336,182)    (2,193,414)     (1,701,118)
  Other..............................................       84,584         (5,955)          9,104
                                                       -----------    -----------    ------------
          Other expense, net.........................   (2,251,598)    (2,199,369)     (1,692,014)
                                                       -----------    -----------    ------------
          Income (loss) before provision for income
            taxes....................................   (5,980,184)        74,499         603,490
PROVISION FOR INCOME TAXES...........................           --         45,993          70,960
                                                       -----------    -----------    ------------
  Net income (loss)..................................  $(5,980,184)   $    28,506    $    532,530
                                                       ===========    ===========    ============
Net income (loss) per share..........................       $(2.04)         $0.01           $0.22
                                                            ======          =====           =====
Weighted average shares outstanding..................    2,935,811      2,373,051       2,373,051
                                                        ==========     ==========      ==========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   30
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                   SERIES A CUMULATIVE
                                     PREFERRED STOCK          COMMON STOCK
                                  ----------------------   -------------------
                                   NUMBER                   NUMBER               ADDITIONAL
                                     OF                       OF                  PAID-IN      RETAINED
                                   SHARES      AMOUNT       SHARES     AMOUNT     CAPITAL      EARNINGS
                                  --------   -----------   ---------   -------   ----------   -----------
<S>                               <C>        <C>           <C>         <C>       <C>          <C>
BALANCE, December 31, 1993......   250,000   $ 2,500,000   1,679,499   $16,795   $  862,565   $ 1,106,170
  Declaration of dividends on
     preferred stock............        --            --          --        --           --      (437,500)
  Net income....................        --            --          --        --           --       532,530
                                  --------    ----------   ---------   -------   ----------   -----------
BALANCE, December 31, 1994......   250,000     2,500,000   1,679,499    16,795      862,565     1,201,200
  Declaration of dividends on
     preferred stock............        --            --          --        --           --      (437,500)
  Net income (as restated-see
     Note 9)....................        --            --          --        --           --        28,506
                                  --------    ----------   ---------   -------   ----------   -----------
BALANCE, December 31, 1995
  (as restated-see Note 9)......   250,000     2,500,000   1,679,499    16,795      862,565       792,206
  Reclassification of preferred
     shares to common shares....  (250,000)   (2,500,000)    454,942     4,549    2,495,451            --
  Issuance of common stock......        --            --   1,300,000    13,000    5,712,344            --
  Net loss......................        --            --          --        --           --    (5,980,184)
                                  --------    ----------   ---------   -------   ----------   -----------
BALANCE, December 31, 1996......        --   $        --   3,434,441   $34,344   $9,070,360   ($5,187,978)
                                  ========    ==========   =========   =======   ==========   ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   31
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                         1996            1995            1994
                                                     ------------     -----------     -----------
                                                                    (AS RESTATED)
<S>                                                  <C>              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)................................  $ (5,980,184)    $    28,506     $   532,530
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities --
     Depreciation and amortization.................       342,892         283,331         214,533
     Accrued compensation attributable to
       subordinated debt...........................       126,378              --              --
     (Increase) decrease in accounts receivable,
       net.........................................    (5,907,332)      4,602,740        (356,517)
     (Increase) decrease in inventory, net.........    (3,635,204)      4,555,109      (5,539,231)
     (Increase) decrease in supplies and prepaid
       expenses and other current assets...........     1,413,085         262,578        (744,190)
     (Increase) decrease in other assets...........       496,178        (412,575)       (969,132)
     Increase (decrease) in accounts payable and
       accrued liabilities.........................     1,742,396      (3,993,417)        787,401
     Increase (decrease) in income taxes payable...        17,834         (34,368)            420
                                                      -----------      ----------      ----------
          Net cash provided by (used in) operating
            activities.............................   (11,383,956)      5,291,904      (6,074,186)
                                                      -----------      ----------      ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment..............      (358,476)       (149,951)       (636,809)
  Proceeds from sale of property and equipment.....            --          22,689              --
  Loss on disposal of property and equipment.......            --           5,955              --
                                                      -----------      ----------      ----------
          Net cash used in investing activities....      (358,476)       (121,307)       (636,809)
                                                      -----------      ----------      ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings (repayments) under notes payable
     to financial institutions.....................     5,183,752      (5,383,962)      6,436,163
  Preferred stock dividends paid...................            --              --        (437,500)
  Proceeds received from stock issuance............     5,725,343              --              --
  Increase (decrease) in capital lease
     obligation....................................       (22,769)        (21,373)        110,361
                                                      -----------      ----------      ----------
          Net cash provided by (used in) financing
            activities.............................    10,886,326      (5,405,335)      6,109,024
                                                      -----------      ----------      ----------
NET DECREASE IN CASH...............................      (856,106)       (234,738)       (601,971)
CASH, beginning of year............................       220,756         455,494       1,057,465
                                                      -----------      ----------      ----------
CASH, end of year..................................  $   (635,350)    $   220,756     $   455,494
                                                      ===========      ==========      ==========
Cash balances consist of:
  Cash.............................................  $        600     $   220,756     $   455,494
  Bank overdraft...................................      (635,950)             --              --
                                                      -----------      ----------      ----------
                                                     $   (635,350)    $   220,756     $   455,494
                                                      ===========      ==========      ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for --
  Interest.........................................  $  1,855,497     $ 2,193,414     $ 1,537,849
                                                      ===========      ==========      ==========
  Income taxes.....................................  $      9,904     $    71,660     $    70,540
                                                      ===========      ==========      ==========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   32
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1996, 1995, AND 1994
 
1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  a. Background and Organization
 
     The accompanying consolidated financial statements reflect the accounts of
Craig Consumer Electronics, Inc. and subsidiary (the Company), a Delaware
corporation. Located in Southern California, the Company designs and markets
consumer electronic products under its trademark, "Craig." The Company's
principle product lines are audio electronic and peripheral products sold to
wholesale distributors and retailers worldwide. The domestic market is the
primary source of sales.
 
     The Company has entered into a venture with a Chinese entity to establish
and operate a product reconditioning and manufacturing facility located in the
People's Republic of China (PRC). The accompanying consolidated financial
statements include the accounts of this venture since the Company controls the
entity and is recognizing all of the venture's costs. All significant
intercompany accounts and transactions have been eliminated.
 
  b. Going Concern Risk Factors
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company had a
net loss in 1996 and also had an operating cash flow deficit of $11.4 million.
Additionally, the Company's existing credit facility expires in August 1997 (see
Note 2). The Company has also been named in a class action lawsuit which the
Company intends to vigorously defend (see Note 4). These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans to address the above include: (1) Fully implementing the
operations of the Chinese Joint Venture; the Company entered into this venture
with the intent of reducing its product costs due to efficiencies to be achieved
by operating its own reconditioning facility. Management expects that the
Chinese facility will be fully operational during 1997, and (2) Replacing its
existing credit facility on terms acceptable to the Company; management is
currently in discussion with various lenders to replace the expiring facility.
 
     There can be no assurance that the Company will be successful in
implementing these plans. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
  c. Current Vulnerability Due to Certain Concentrations
 
     The Company currently acquires the majority of its products from four
manufacturers located in the PRC. The Company limits the number of suppliers
producing its goods in order to maintain the quality and exclusivity of its
products. A change in suppliers, however, could disrupt and adversely affect the
business due to the time it would take to contract with a new vendor. In order
to mitigate this risk, the Company has a full-time operations manager located in
Hong Kong to facilitate relationships with prospective vendors.
 
     The Company has assets, consisting primarily of inventory, with a carrying
value of approximately $6,481,000 which are physically located in the PRC or
in-transit.
 
     Sales to five domestic customers represented 55%, 59%, and 47% of net sales
for the years ended December 31, 1996, 1995 and 1994, respectively. Of that
amount, sales to one customer represented 25%, 35% and 24% of net sales for the
years ending December 31, 1996, 1995 and 1994, respectively. An additional
customer accounted for 22% of sales in 1996. The loss of any major customer
could have a material adverse affect on the Company's business.
 
  d. Use of Estimates
 
     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company's significant estimates
include, but are not limited to, product net
 
                                       F-6
<PAGE>   33
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
realizable values, product returns, and rebate experience. Actual results could
differ from those estimates.
 
     In the ordinary course of business, the Company negotiates amounts to be
charged back to certain of its vendors. Such amounts are in response to matters
affecting the relationship between the parties, including product defect
experience, profitability of the products, promotional costs incurred by the
Company to increase salability of the products and other factors. Prior to 1996,
the Company accrued amounts to be received upon finalizing negotiations with the
vendors, primarily during the fourth quarter. Such amounts are realized in the
subsequent year. As of December 31, 1995 and 1994, approximately $1.8 million
was accrued and is recorded as Other Current Assets in the consolidated balance
sheets.
 
     As the competitiveness of the consumer electronics business increased, the
significance of such chargebacks to vendors increased in 1996. As of December
31, 1996, the Company had negotiated amounts to be realized of approximately
$5.6 million. Because of the increased magnitude of such amounts and the
increased difficulty in estimating amounts to be realized, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 5 the Company has elected
to change its method of accounting to record such amounts as realized. Pursuant
to Accounting Principles Board Opinion (APBO) No. 20, this action is considered
to be a change in accounting principle indistinguishable from a change in
accounting estimate. Accordingly, the effect is recorded as a change in estimate
and none of the negotiated amounts for 1996 totaling approximately $5.6 million
have been accrued at December 31, 1996.
 
  e. Accounts Receivable
 
     Accounts receivable at December 31, 1995 and 1996, consist of the
following:
 
<TABLE>
<CAPTION>
                                                               1996            1995
                                                            -----------     -----------
        <S>                                                 <C>             <C>
        Accounts receivable...............................  $20,211,545     $14,260,307
        Allowance for doubtful accounts...................     (488,390)       (387,147)
        Allowance for sales returns.......................     (625,842)       (683,179)
                                                            -----------     -----------
                                                            $19,097,313     $13,189,981
                                                            ===========     ===========
</TABLE>
 
     The allowances for doubtful accounts and sales returns include management's
estimate of the amounts expected to be lost on specific accounts and for losses
on other as yet unidentified accounts included in accounts receivable. In
estimating the potential losses and returns on specific accounts, management
relies on a combination of in-house prepared analysis and review of available
public documents. In estimating the allowance component for unidentified losses
and returns within the portfolio, management relies on historical experience.
The amounts the Company will ultimately realize could differ materially in the
near term from the amounts assumed in arriving at the allowance for doubtful
accounts and sales returns reported in the financial statements.
 
  f. Inventory
 
     Inventory is stated at the lower of cost or market. Cost is determined
using an average cost method, which approximates first-in, first-out.
 
     Inventory consists of the following at December 31, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                               1996            1995
                                                            -----------     -----------
        <S>                                                 <C>             <C>
        Inventory.........................................  $18,370,790     $14,450,707
        Allowance for obsolescence........................     (627,337)       (342,458)
                                                            -----------     -----------
                                                            $17,743,453     $14,108,249
                                                            ===========     ===========
</TABLE>
 
                                       F-7
<PAGE>   34
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The allowance for obsolescence is based on management's estimate of the
amount considered obsolete based upon specific reviews of inventory items. In
estimating the allowance, management relies on its knowledge of the industry
(including technological and design changes) as well as its current inventory
levels. The amounts the Company will ultimately realize could differ materially
in the near term from amounts assumed in arriving at the allowance for
obsolescence reported in the financial statements at December 31, 1996.
 
  g. Property and Equipment
 
     Property and Equipment is recorded at depreciated cost and consists of the
following at December 31, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                               1996           1995
                                                             ---------     -----------
        <S>                                                  <C>           <C>
        Machinery and Equipment............................  $ 836,502     $   886,188
        Furniture and Fixtures.............................    272,946         498,965
        Leasehold Improvements.............................    175,316          50,847
        Automobile.........................................         --           3,100
        Capital Leases.....................................    118,717         118,717
                                                             ---------     -----------
                                                             1,403,481       1,557,817
        Accumulated depreciation and amortization..........   (832,181)     (1,002,101)
                                                             ---------     -----------
                                                             $ 571,300     $   555,716
                                                             =========     ===========
</TABLE>
 
     Maintenance, repairs and minor renewals are charged to expense as incurred.
Additions, major renewals and betterments are capitalized. When assets are
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and any resulting gain or loss is included in operations.
 
     Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
 
<TABLE>
        <S>                                                             <C>
        Machinery and Equipment.......................................  3-5 years
        Furniture and Fixtures........................................  3-7 years
        Leasehold Improvements........................................  Term of lease
        Automobile....................................................  5 years
</TABLE>
 
  h. Income Taxes
 
     The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Tax credits are treated as reductions of the
federal income tax provision in the periods in which the credits are realized.
 
  i. Revenue Recognition
 
     Sales and related costs are recorded by the Company upon shipment of
products. The Company records an allowance for estimated returns of products,
using a historical percentage of sales.
 
  j. Net Income (Loss) Per Common Share
 
     In 1996, the net loss per common share is computed based on the average
number of common shares outstanding. In 1995 and 1994, the net income per common
share is computed based on the average number of shares of common and common
equivalent shares (stock options) outstanding, after giving effect to the
assumed exercise of dilutive stock options. The income per share amounts are
computed assuming the
 
                                       F-8
<PAGE>   35
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
conversion of the preferred stock into common stock. Such conversion actually
occurred concurrent with the initial public offering -- see Note 8. Dual
presentation of primary and fully dilutive earnings per share has not been made
on the consolidated statements of operations because the differences are
immaterial.
 
     In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128 "Earnings Per Share." This statement will require that primary
earnings per share (EPS) be replaced by basic EPS. The primary difference
between the two methods is that common stock equivalents are not included in the
basic EPS calculation thereby reducing the denominator in the calculation. A
diluted EPS disclosure will also be required which, for the Company, will be
comparable to its current EPS disclosure. The Company will be required to adopt
this pronouncement for the fiscal year ended December 31, 1997.
 
  k. Long-lived Assets
 
     The Company does not own significant assets which are considered long lived
assets. Accordingly, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of" did not have any impact upon adoption on January 1, 1996.
 
  l. Stock-based Compensation
 
     In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation", which encourages, but does not require, a fair value based method
of accounting for stock-based compensation plans. On January 1, 1996, as
permitted under SFAS No. 123, the Company elected to comply with the statement's
pro forma disclosure requirements and continue to account for its stock-based
compensation plans in accordance with APBO No. 25, "Accounting for Stock Issued
to Employees." The adoption of this statement did not have a material effect on
the Company's net income (loss) or financial position (see Note 6).
 
2.  NOTE PAYABLE UNDER REVOLVING LINE OF CREDIT
 
     On June 1, 1995, the Company amended its existing credit agreement (the
Agreement) with a syndicate consisting of four major financial institutions, one
of which acts as Agent or lead bank. Under the amended credit facility, the
Company can borrow up to a total of $40,000,000 (borrowing capacity was
$50,000,000 in 1994), subject to certain limitations. Borrowings are limited to
the lesser of $40,000,000, or 85 percent of eligible accounts receivable, as
defined, and the lesser of $20,000,000 or the amount of eligible inventory, less
the aggregate amount of reserves, if any, established by the Agent, as defined
in the Agreement. In addition, any amounts outstanding on open letters of credit
reduce the available funds under the Agreement. The Company has borrowing
options available under the line of credit, a variable interest rate or prime
rate option, and a fixed rate or Eurodollar rate option. Borrowings under the
prime rate option bear interest at the Agent's prime rate (eight and one quarter
percent at December 31, 1996) plus one and one quarter percent. Borrowings under
the Eurodollar rate option bear interest at a fixed Eurodollar interest rate
(five and five eighths percent at December 31, 1996) plus two and three quarters
percent. By giving adequate notice to the Agent, the Company is permitted to
make up to two conversions to the Eurodollar loan advances, each of which is
limited to a minimum of $5,000,000 aggregate balance with integral multiples of
$1,000,000 in excess thereof. The line of credit expires on August 5, 1997.
 
     As of December 31, 1996 and 1995, the Company was out of compliance on
certain of its debt covenants. Waivers have been obtained related to these areas
of non-compliance. Concurrent with the latest waiver, certain covenants were
modified for all periods until maturity. Also, the Eurodollar rate option has
been eliminated and the amount of available borrowings as a percentage of
eligible assets will decrease .25% per week until maturity.
 
     The Company purchases certain inventory from overseas vendors on a letter
of credit basis. There were no open letters of credit at December 31, 1996. At
December 31, 1995, there were $302,400 in open letters of credit.
 
                                       F-9
<PAGE>   36
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  SUBORDINATED DEBT
 
     The subordinated debt represents unpaid dividends, bonuses and promissory
notes to certain officers and management employees. In connection with the
initial public offering, the Company converted all preferred shares into common
shares and issued separate subordinated notes in the aggregate amount of
$780,798, reflecting the Company's long-term obligation to pay accumulated
unpaid dividends on its Series A Preferred stock to its four preferred
stockholders. Each subordinated note is a general unsecured obligation maturing
in four years and bears interest at ten percent per annum. However, no payment
will be made in the event such payment would result in the violation of a
covenant on the Company's note payable to financial institution (see Note 2).
 
     Immediately prior to the initial public offering, the Company terminated
its former phantom stock option plan. Each participant in the plan received a
promissory note in consideration for the cancellation of their shares. The
amounts are fully vested upon completion of one year of service following the
effective date of the offering (May 21, 1996). The total of all promissory notes
issued was $206,800 and bear interest at the rate of eight percent per year. The
pro-rata amounts earned through December 31, 1996 are included in the
accompanying balance sheet.
 
4.  COMMITMENTS AND CONTINGENCIES
 
  a. Operating Leases and Capital Lease Obligations
 
     The Company is committed under noncancelable operating and capital lease
obligations for its facilities and equipment. The equipment related to the
capital leases has an original cost of approximately $119,000 and accumulated
depreciation of approximately $82,600 at December 31, 1996. Rent expense was
$377,746, $332,157 and $334,692 and at December 31, 1996, 1995 and 1994,
respectively. Minimum annual payments under noncancelable operating and capital
leases are as follows as of December 31, 1996:
 
<TABLE>
<CAPTION>
                            YEAR ENDING:                       CAPITAL      OPERATING
        -----------------------------------------------------  --------     ----------
        <S>                                                    <C>          <C>
        1997.................................................  $ 29,656     $  520,639
        1998.................................................    28,588        442,916
        1999.................................................    15,804        429,863
        2000.................................................        --         95,952
                                                               --------     ----------
                                                                 74,048     $1,489,370
                                                                            ==========
        Amount representing interest.........................    (7,829)
                                                               --------
                                                                 66,219
        Current portion......................................   (24,842)
                                                               --------
                                                               $ 41,377
                                                               ========
</TABLE>
 
  b. Warranty
 
     The Company offers warranties on its products which range from three to
twelve months. The Company has not experienced significant warranty charges and
has established an allowance for these costs based on its historical experience.
 
  c. Contingencies
 
     Since its initial public offering in May 1996, the Company's stock price
has declined from the offering price. In addition, the Company has restated its
1995 operating results originally disclosed in the Form S-1, filed pursuant to
the offering (see Note 9).
 
                                      F-10
<PAGE>   37
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On April 2, 1997, a class-action suit was filed against the Company related
to the above. Although there is some exposure from the above matters, management
feels that litigation on this basis is difficult to support, particularly in
light of the nature of the applicable disclosure, the Company's overall
condition and numerous other factors. Management intends to vigorously contest
such claims.
 
     The Company has other contingent liabilities arising in the ordinary course
of business. In the opinion of management, the ultimate disposition of such
matters will not materially affect the Company's results of operations or
financial position.
 
5.  INCOME TAXES
 
     The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the asset-and-liability method of accounting for income taxes.
 
     The Company has recorded a provision for Alternative Minimum Tax and state
income taxes of zero, $45,993 and $70,960 for the years ending December 31,
1996, 1995 and 1994, respectively. The Company has not recorded a federal income
tax provision for regular tax purposes for 1996, 1995 and 1994, as the Company
believes that sufficient net operating loss carryforwards exist to offset any
income in those years. As a result of these factors, the reconciliation from the
federal statutory rate has been omitted as it is not meaningful. The Company has
determined that at December 31, 1996, it had net operating loss carryforwards of
approximately $11,500,000, for federal income tax purposes. These net operating
loss carryforwards expire at various dates through the year 2011. The Company
has provided a reserve against the carryforward since the realizability has not
been determined to be more likely than not.
 
     The components of the Company's deferred tax asset at December 31, 1996 and
1995 were:
 
<TABLE>
<CAPTION>
                                                               1996            1995
                                                            -----------     -----------
        <S>                                                 <C>             <C>
        Inventory reserves................................  $   697,449     $   420,582
        Allowance for returns and doubtful accounts.......      482,462         463,451
        NOL carryforwards.................................    3,914,973       1,693,717
        Depreciation......................................      199,413         140,562
        Miscellaneous.....................................       61,031          69,697
        Other.............................................       44,672         161,991
                                                            -----------     -----------
                                                              5,400,000       2,950,000
        Valuation allowance...............................   (5,400,000)     (2,950,000)
                                                            -----------     -----------
        Net deferred tax asset............................  $        --     $        --
                                                            ===========     ===========
</TABLE>
 
     The provision for income taxes is comprised of the following:
 
<TABLE>
<CAPTION>
                                                          1996       1995        1994
                                                          -----     -------     -------
        <S>                                               <C>       <C>         <C>
        Current provision:
          Federal.......................................  $  --     $45,993     $41,222
          State.........................................     --          --      29,738
                                                          -----     -------     -------
                  Total current provision...............  $  --     $45,993     $70,960
                                                          =====     =======     =======
</TABLE>
 
                                      F-11
<PAGE>   38
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The components of changes to the Company's deferred income tax provision,
which arise from tax credits and timing differences between financial and tax
reporting, are presented below:
 
<TABLE>
<CAPTION>
                                                        1996           1995          1994
                                                     -----------     ---------     ---------
    <S>                                              <C>             <C>           <C>
    Inventory Reserves.............................  $   276,868     $   4,947     $  34,117
    Allowance for returns and doubtful accounts....       19,011        54,978       101,851
    NOL carryforward...............................    2,221,255      (389,262)     (329,232)
    Depreciation...................................       58,851        42,492        29,368
    Miscellaneous..................................       (8,666)       49,622        (4,750)
    Other..........................................     (117,319)       37,223       (31,354)
    Valuation allowance............................   (2,450,000)      200,000       200,000
                                                     -----------     ---------     ---------
                                                     $        --     $      --     $      --
                                                     ===========     =========     =========
</TABLE>
 
6.  STOCK OPTIONS
 
     In February 1996, the Company adopted an Incentive Stock Option Plan, which
became effective as of May 21, 1996 (the "1996 Plan"), which provides for the
issuance of incentive stock options to acquire up to 200,000 shares of the
Company's Common Stock. These options are available for grant under the 1996
Plan to the officers, directors and certain other employees of the Company. The
1996 Plan is administered by the Compensation Committee of the Board of
Directors, none of whom is eligible to participate in the plan. The purchase
price per share shall be set by the Board of Directors and shall not be less
than 100% of the fair market value of the stock on the date of grant. However,
if a grant is made to a person then owning more than 10% of the voting power of
all the Company's stock, the exercise price must be at least equal to 110% of
the fair market value of the Common Stock on the date of grant.
 
     The Company also adopted a Non-Statutory Stock Option Plan ( the
"Non-Statutory Plan") pursuant to which certain key executives and directors and
certain other employees are from time to time to be offered to purchase shares.
The Non-Statutory Plan is also managed by the Compensation Committee or the
Board of Directors (in the absence of the Compensation Committee). Under this
Plan, there are 325,000 shares reserved for issuance and the exercise price must
be at least equal to 85% of the fair market value of the Common Stock on the
date of the grant. Grants, if any, of options to members of the compensation
committee will be approved by the disinterested members of the Board of
Directors.
 
     Options granted under this plan are vested (and become immediately
exercisable when vested) pursuant to the following schedule: 1) upon or after
the first anniversary of the option, optinee shall have the right to purchase up
to 25% of the aggregate number of shares subject to the option; 2) upon and
after the second anniversary, up to 50% of the aggregate number of shares
subject to the option and 3) upon and after the third anniversary, up to 100% of
the aggregate number of shares subject to the option.
 
     Upon completion of the initial public offering, two directors of the
Company hold options for 326,223 and 39,336 shares of Common Stock under
separate agreements that are not part of the 1996 Plan or the Non-Statutory
Plan. These options that were granted in 1993 represent the adjusted options
available to these individuals resulting from the options held prior to the
Recapitalization. These options are exercisable at any time at a price of $1.91
per share. "Cashless" exercise is available pursuant to which shares may be
acquired by reducing the number of shares acquired by applying the excess value
(market value less exercise price) of the appropriate number of shares subject
to the options to satisfy the exercise price obligation.
 
     The Company accounts for these plans under APB Opinion No. 25, the effect
of which is immaterial to the financial statements. Had compensation cost for
these plans been determined consistent with SFAS
 
                                      F-12
<PAGE>   39
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
No. 123, for options granted since January 1, 1995, the Company's net loss and
loss per share would have been increased to the following pro forma amounts:
 
<TABLE>
        <S>                                                               <C>
        Net Loss:
          As Reported...................................................  $(5,980,184)
          Pro Forma.....................................................  $(6,635,552)
        Loss Per Share:
          As Reported...................................................  $     (2.04)
          Pro Forma.....................................................  $     (2.26)
</TABLE>
 
     Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
 
     The Incentive Plan options vest after one year and the Non-Qualified Plan
options vest over three years. Options issued under both plans expire after five
years.
 
     A summary of the status of the Company's two stock option plans at December
31, 1996 and changes during the year then ended is presented in the table and
narrative below:
 
<TABLE>
<CAPTION>
                                                                       1996
                                                            --------------------------
                                                                      WEIGHTED AVERAGE
                                                            SHARES     EXERCISE PRICE
                                                            -------   ----------------
        <S>                                                 <C>       <C>
        Outstanding at beginning of year..................       --            --
        Granted...........................................  397,700        $ 5.51
        Exercised.........................................       --            --
        Forfeited.........................................   10,100        $ 5.01
        Expired...........................................       --            --
                                                            -------         -----
        Outstanding at end of year........................  387,600        $ 5.52
                                                            =======         =====
        Exercisable at end of year........................       --            --
        Weighted average fair value of options granted....       --        $ 4.09
</TABLE>
 
<TABLE>
<CAPTION>
                                         WEIGHTED-
                                          AVERAGE     WEIGHTED-
                          OUTSTANDING    REMAINING     AVERAGE    EXERCISABLE    WEIGHTED-
            RANGE OF         AS OF      CONTRACTUAL   EXERCISE       AS OF      AVERAGE FAIR
        EXERCISE PRICES    12/31/96        LIFE         PRICE       12/31/96       VALUE
        ----------------  -----------   -----------   ---------   ------------  ------------
        <S>               <C>           <C>           <C>         <C>           <C>
        $4.68 - $4.75(1)     92,100         4.3         $4.68          --          $ 4.14
        $5.50 - $5.57(2)    117,500         4.3         $5.50          --          $ 4.02
        $5.58 - $5.60(1)     25,000         4.4         $5.58          --          $ 4.97
        $5.64 - $5.75(1)      3,000         4.4         $5.64          --          $ 5.25
        $6.05 - $6.35(3)    150,000         4.3         $6.05          --          $ 3.94
</TABLE>
 
---------------
(1) Issued at a discount to fair market value
 
(2) Issued at fair market value
 
(3) Issued at a premium to fair market value
 
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free interest rate of 6.39%, expected
dividend yield of 0.00%, expected lives of 5.0 years, and expected volatility of
89.43%.
 
                                      F-13
<PAGE>   40
 
                CRAIG CONSUMER ELECTRONICS, INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7.  DEFINED CONTRIBUTION PLAN
 
     Effective January 1, 1993, the Company established a defined contribution
plan (the Plan) under Section 401(k) of the Internal Revenue Code in which all
eligible employees can elect to participate. The employees can elect to have
certain percentages of their pay withheld for contribution to the Plan on a
tax-free basis. The Company will match the first 10 percent of employee
contributions.
 
8.  CONVERSION OF PREFERRED AND COMMON STOCK
 
     In connection with the initial public offering, preferred shares were
automatically reclassified into 1,733,330 shares of common stock. In addition, a
3.81-to-one reverse stock split of the Common Stock was completed. All share and
per share amounts reflect the stock split.
 
9.  PRIOR PERIOD ADJUSTMENTS
 
     Subsequent to the issuance of the 1995 financial statements, the Company
discovered certain errors and irregularities in its year end inventory and
accrued liability balances. Accordingly, the 1995 financial statements have been
restated to correct the errors, the effect of which decreased reporting amounts
as follows:
 
<TABLE>
<CAPTION>
                                                              ORIGINAL      AS RESTATED
                                                             ----------     -----------
        <S>                                                  <C>            <C>
        Pre-tax income.....................................  $  952,137      $  74,499
        Net income.........................................     791,227         28,506
        Earnings per share.................................        0.33           0.01
        Retained earnings, December 31, 1995...............   1,554,927        792,206
</TABLE>
 
                                      F-14
<PAGE>   41
 
                                  SCHEDULE II
 
                           CRAIG CONSUMER ELECTRONICS
 
                        VALUATION AND QUALIFYING ACCOUNT
          FOR THE FISCAL YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                BALANCE AT      CHARGED TO                      BALANCE
                                               BEGINNING OF     COSTS AND                       END OF
                                               FISCAL YEAR       EXPENSES      DEDUCTIONS     FISCAL YEAR
                                               ------------     ----------     ----------     -----------
<S>                                            <C>              <C>            <C>            <C>
Allowance for Uncollectible Accounts:
  Fiscal year ended December 31, 1996........    $387,147        $161,542      $  (60,299)     $ 488,390
  Fiscal year ended December 31, 1995........     203,760         209,850         (26,463)       387,147
  Fiscal year ended December 31, 1994........      84,889         256,842        (137,971)       203,760
</TABLE>
 
                                       S-1
<PAGE>   42
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
 
     None.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth certain information with respect to the
executive officers and directors of the Company:
 
<TABLE>
<CAPTION>
              NAME                 AGE                           POSITION
---------------------------------  ---     ----------------------------------------------------
<S>                                <C>     <C>
Richard I. Berger(1).............  53      President, Chief Executive Officer and Chairman of
                                           the Board
Donna Richardson.................  41      Treasurer, Secretary, and Chief Financial Officer
Anthony Mirando..................  50      Senior Vice President
Bonnie Metz......................  47      Vice President-Managing Director, Hong Kong
Richard A. Miller(2).............  54      Director
Peter Behrendt(1)................  69      Director
Bernard Taran(1)(2)..............  58      Director
James Koblensky(2)...............  62      Director
</TABLE>
 
---------------
(1) Member of the Compensation Committee.
 
(2) Member of the Audit Committee.
 
     Richard I. Berger is one of four individuals who provided the initial
capital to acquire the assets of what is now the Company from Bercor, Inc.
("Bercor") out of Bercor's Chapter 11 bankruptcy reorganization. Mr. Berger has
served as the Chief Executive Officer of the Company and as its Chairman of the
Board of Directors since its formation in 1989 and has served as its President
since 1991. Mr. Berger was employed by Corwin Hall as a salesperson and was also
employed by Newcraft Corporation, an affiliate of Corwin Hall, for a combined
total of 12 years. These companies were engaged in the distribution of Panasonic
Consumer Electronics. Mr. Berger ultimately became the president of Newcraft and
a vice president of Telecor (a New York Stock Exchange traded company which was
the parent company of Newcraft).
 
     On April 1, 1979, Mr. Berger formed Bercor. Bercor was engaged in the
distribution of various products, including consumer electronics and household
appliances. Bercor became a public company in 1985, and primarily due to
competitive pressures and problems associated with the distribution of certain
non-proprietary product lines, Bercor filed a petition on June 23, 1988 and was
subsequently reorganized under Chapter 11 of the United States Bankruptcy Code.
Mr. Berger, together with Messrs. Rollnick, Johannsmeier, and Miller, formed a
group to acquire the consumer electronics assets, including the "Craig" brand
name, from Bercor on June 20, 1989.
 
     The United States Securities and Exchange Commission undertook an
investigation and commenced a proceeding in 1988 to consider possible violations
of federal securities laws by Bercor and certain of its personnel (including Mr.
Berger), specifically alleging that the Company improperly claimed tax
carryforward benefits in a manner inconsistent with generally accepted
accounting principles and that the Company improperly reserved for inventory
obsolescence. Mr. Berger was alleged to have aided those violations. Mr. Berger
neither admitted nor denied these violations, but entered into a consent decree
in order to forego the time and expense of litigation, on the advice of counsel.
Bercor entered into a similar consent decree, which did not result in any
administrative finding or other determination of liability of Bercor. Mr.
Berger, as an incident to the consent decree, was enjoined from future
violations of provisions of the Securities Exchange Act of 1934. No private
civil cause of action was commenced in connection with these alleged violations.
 
     Donna Richardson is the Company's Treasurer, Secretary, and Chief Financial
Officer and has served as the chief accounting officer of the Company since
1989. Prior to employment by the Company in 1989, Ms. Richardson held several
management and accounting positions with Wang Laboratories Inc., a computer
 
                                       24
<PAGE>   43
 
products company, and eventually served as the Western Federal Systems District
Controller for several Western states with that company.
 
     Anthony J. Mirando has served as the Company's Senior Vice President
responsible for marketing and sales in North and South America since the
Company's organization in 1989. Prior to 1989, Mr. Mirando was employed by one
of Bercor's predecessors and has also served as the National Sales and Marketing
Manager of the Car Audio Division of JVC, a manufacturer of consumer electronics
products.
 
     Bonnie Metz is the Vice President-Managing Director, Hong Kong of the
Company, a position she has held since 1995. Prior to joining the Company in
1989, Ms. Metz was employed by Bercor prior to its bankruptcy. Ms. Metz served
as the Company's Director of Operations from 1989 to 1993 and as Director of
International Trade from 1994 to 1995.
 
     Richard A. Miller has been a director of the Company since its formation in
1989. Mr. Miller is an attorney and Certified Public Accountant employed in his
own private law practice for over 15 years. Mr. Miller also spent several years
in the Los Angeles office of what is now KPMG/Peat Marwick and has also been
employed by the Internal Revenue Service. Mr. Miller was also a director of
Bercor.
 
     Peter M. Behrendt has served as a director of the Company since 1989. Mr.
Behrendt is currently, and since 1988 has been, self-employed as a management
consultant and has served as a consultant to the Company. Mr. Behrendt has also,
at different times since 1988, served as a consultant to Radix Group
International, a customs broker and freight forwarder, Thomas America, an
importer and specialty electronics products dealer, and Innovative Equipment
Co., an importer of printing equipment.
 
     Bernard L. Taran has served as a director of the Company since May 1996.
Mr. Taran had been a contractor to and part-time employee of the Company from
January 1995 until May 1996. Mr. Taran performs insurance reviews and risk
management, valuations, evaluation of executive incentives, and general business
management. Prior to joining the Board of Directors, Mr. Taran performed such
services for the Company as a part-time employee. Since that time, these
services have been performed by Mr. Taran as a consultant. From 1991 to 1995,
Mr. Taran acted as an independent investment, business, financial, and marketing
consultant for several clients, including the Company and Sunset Paper Products,
Inc., a manufacturer of paper baking products. From 1980 to 1991, Mr. Taran was
employed by C. M. Meiers Company, Inc., a property and casualty insurance
agency, as a Vice President responsible for marketing, sales and servicing of
commercial accounts.
 
     James F. Koblensky has served as a director of the Company since May 1996.
Since 1994, Mr. Koblensky has been self-employed as a consultant, operating his
consulting business as N. K. Management Company. In addition to performing
consulting services for the Company, Mr. Koblensky has performed consulting
services for American Greetings Consumer Groups, among others. From 1992 to
1993, Mr. Koblensky was employed by Thrifty Drug Stores as a Vice President and
General Merchandise Manager. From 1988 to 1992, Mr. Koblensky served Pay 'N'
Save Drug Stores as its Senior Vice President in charge of merchandising,
marketing and advertising.
 
     The Board of Directors consists of five directors. Each director holds
office until the next annual meeting of stockholders or until his successor is
elected and qualified. Officers serve at the discretion of the Board of
Directors.
 
     The Company's Audit Committee which consists of Messrs. Miller, Koblensky,
and Taran, reviews the professional services provided by the Company's
independent auditors, the independence of such auditors from management of the
Company, the annual financial statements of the Company, and the Company's
system of internal accounting controls. The Audit Committee also reviews such
other matters with respect to the accounting, auditing, and financial reporting
practices and procedures of the Company as it may find appropriate or as may be
brought to its attention.
 
     The Board of Directors met six times during 1996.
 
                                       25
<PAGE>   44
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The following table sets forth certain information regarding the
compensation paid by the Company to its Chief Executive Officer and to the other
three most highly compensated executive officers (collectively, the "Named
Executive Officers") who received salary and bonuses in excess of $100,000
during 1996 for all services rendered in all capacities to the Company.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                        LONG-TERM COMPENSATION
                                                                                    ------------------------------
                                               ANNUAL COMPENSATION(1)                           LTIP     ALL OTHER
                                     ------------------------------------------     OPTIONS/  PAYMENTS    COMPEN-
    NAME AND PRINCIPAL POSITION      YEAR    SALARY        BONUS         OTHER      SARS(#)     ($)       SATION
-----------------------------------  ----   --------      --------      -------     -------   --------   ---------
<S>                                  <C>    <C>           <C>           <C>         <C>       <C>        <C>
Richard Berger.....................  1996   $340,746(2)   $ -0-         $40,000(4)  150,000      -0-        -0-
  President, Chief Executive         1995    311,512       318,000(3)    30,000(4)     -0-       -0-        -0-
    Officer, and Chairman of         1994    295,000(5)    360,000(5)    16,525        -0-       -0-        -0-
    the Board          
 
Bonnie Metz........................  1996    126,600        -0-          78,000(6)  34,000       -0-        -0-
  Vice President -- Managing         1995    109,500        -0-          68,500(6)     -0-       -0-        -0-
    Director, Hong Kong              1994    109,500         7,200       56,600(6)     -0-       -0-        -0-         
                            
 
Anthony Mirando....................  1996    156,600        -0-           6,600     34,000       -0-        -0-
  Senior Vice President              1995    132,000        -0-           6,600        -0-       -0-        -0-
                                     1994    132,000         9,900        6,600        -0-       -0-        -0-
 
Donna Richardson...................  1996    115,000        -0-           -0-       34,000       -0-        -0-
  Secretary, Treasurer, and          1995    100,000        -0-           -0-          -0-       -0-        -0-
  Chief Financial Officer            1994    100,000         6,480        -0-          -0-       -0-        -0-
</TABLE>
 
---------------
(1) Except where indicated, other than salary, bonus, and other compensation
    described herein, the Company did not pay the Named Executive Officers any
    compensation, including perquisites, in excess of 10% of such Named
    Executive Officer's salary.
 
   
(2) Represents $114,842 paid to Executive Marketing, Inc., an affiliate of Mr.
    Berger ("EMI") which contracted to provide Mr. Berger's services to the
    Company from January 1, 1996 through May 20, 1996, and $225,904 paid by the
    Company to Mr. Berger for the period beginning May 21, 1996 through December
    31, 1996. Does not include the 1996 bonus for 1994 earnings previously
    withheld but paid during 1996 by delivery of a subordinated note. See
    "Certain Relationships and Related Transactions."
    
 
(3) Pursuant to a prior agreement with an affiliate of Mr. Berger for the
    provision of Mr. Berger's services, Mr. Berger was entitled to a bonus equal
    to 25 percent of the Company's pre-tax profit. For 1995, this bonus equaled
    $318,000, however, due to the restatement of the Company's financial
    statements, this amount will be repaid during 1997 through the offset of
    notes payable by the Company to Mr. Berger or through another negotiated
    mechanism. Such agreement terminated on May 21, 1996.
 
(4) Consists of the value of bookkeeping, tax and financial planning services,
    as well as a car allowance provided to Mr. Berger which had an estimated
    aggregate value of $30,000 during 1995 and $40,000 during 1996.
 
(5) Other than $26,000, these amounts were paid to EMI. The 1994 bonus was paid
    in 1994 but relates to 1993.
 
(6) Consists of a car allowance and personal housing allowance for Ms. Metz'
    residence in Hong Kong.
 
EMPLOYMENT AGREEMENTS
 
     Richard Berger has entered into an employment agreement with the Company
for a term of three years, automatically and continuously renewed for three-year
terms. Under the terms of the employment agreement, Mr. Berger is entitled to
salary of $375,000 per year plus annual cost-of-living adjustments, and is
entitled to a bonus of 10% of the amount by which net pre-tax, pre-bonus income
exceeds $2 million, up to a maximum of 50% of his base salary. Additionally, Mr.
Berger is entitled to receive various other perquisites including a Company
vehicle and reimbursement for expenses incurred on behalf of the Company, and
the payment of
 
                                       26
<PAGE>   45
 
premiums on a 10 year, $1,000,000 term life insurance policy. Additionally, Mr.
Berger is entitled to receive the key-man life insurance policy (a whole life
policy) the Company maintains on him, to receive the Company vehicle he is using
at that time, and is entitled to a two-year maximum stipend of $60,000 per year
for an office and secretary, if he is dismissed by the Company for any reason
other than his dismissal for cause. Except in the event of termination for
cause, the compensation payable to Mr. Berger under the agreement shall also be
payable to Mr. Berger for the remaining three year term of the agreement.
 
     Bonnie Metz, Anthony Mirando, and Donna Richardson have entered into one
year employment agreements with the Company which are automatically renewable
for one year terms if not terminated prior to the expiration of the initial term
or any renewal tern. These agreements provide for annual compensation of
$126,600 for Ms. Metz, $156,600 for Mr. Mirando, and $115,000 for Ms.
Richardson, with increases to be provided at the discretion of the Compensation
Committee or Board of Directors (in the absence of a Compensation Committee).
Ms. Metz also receives a housing allowance, as long as she serves in the Hong
Kong office, which allowance was $78,000 (U.S.) for 1996. Each such person is
entitled to payment of compensation through the remaining term if such person is
terminated for other than cause.
 
INCENTIVE STOCK OPTION PLAN
 
     In February 1996, the Company adopted an Incentive Stock Option Plan (the
"1996 Plan"), which provides for the issuance of incentive stock options to
acquire up to 200,000 shares of the Company's Common Stock. These options are
available for grant under the 1996 Plan to the officers, directors, and certain
other employees of the Company. The 1996 Plan is administered by the
Compensation Committee of the Board of Directors, none of whom is eligible to
participate in the Plan.
 
     Pursuant to the 1996 Plan, the Compensation Committee or the Board of
Directors (in the absence of a Compensation Committee) may grant and issue
options to purchase Common Stock. The purchase price per share shall be set by
the Board of Directors and shall not be less than 100% of the fair market value
of the stock on the date of grant. However, if an option is granted to a person
then owning more than 10% of the voting power of all of the Company's Stock, the
exercise price must be at least equal to 110% of the fair market value of the
Common Stock on the date of grant, and the term of such option will expire no
later than five years after the date of grant. Each option granted pursuant to
the 1996 Plan shall be vested and exercisable one year after the effective date
of the grant of such option.
 
     Options under the 1996 Plan have been granted to three individuals at an
exercise price of $5.50 per share, as reflected by the following table:
 
<TABLE>
<CAPTION>
                                                                           SHARES UNDERLYING
                          NAME/POSITION OF OPTIONEE                             OPTIONS
    ---------------------------------------------------------------------  -----------------
    <S>                                                                    <C>
    Bonnie Metz, Vice President -- Managing Director, Hong Kong..........        34,000
    Anthony Mirando, Senior Vice President...............................        34,000
    Donna Richardson, Treasurer, Chief Financial Officer, and
      Secretary..........................................................        34,000
</TABLE>
 
NON-STATUTORY STOCK OPTION PLAN
 
     The Company has also adopted a Non-Statutory Stock Option Plan (the
"Non-Statutory Plan") pursuant to which certain key executives and directors are
from time to time to be offered options to purchase shares. The Non-Statutory
Plan is also managed by the Compensation Committee or the Board of Directors (in
the absence of a Compensation Committee). Under the Non-Statutory Plan, there
are 325,000 shares reserved for issuance and the exercise price must be at least
equal to 85% of the fair market value of the Common Stock on the date of grant.
Grants of options under the Non-Statutory Plan, if any, to members of the
Compensation Committee will be approved by the disinterested members of the
Board of Directors.
 
     Options granted under the Non-Statutory Plan are vested (and become
immediately exercisable when vested) pursuant to the following schedule: 1) upon
and after the first anniversary of the option, optionee shall have the right to
purchase up to 25% of the aggregate number of shares subject to the option; 2)
upon and
 
                                       27
<PAGE>   46
 
after the second anniversary, up to 50% of the aggregate number of shares
subject to the option; and 3) upon and after the third anniversary, up to 100%
of the aggregate number of shares subject to the option.
 
     Options under the Non-Statutory Plan have been granted to approximately 60
persons, at an exercise price of $4.675 per share, as reflected by the following
table:
 
<TABLE>
<CAPTION>
                                                                           SHARES UNDERLYING
                          NAME/POSITION OF OPTIONEE                             OPTIONS
    ---------------------------------------------------------------------- -----------------
    <S>                                                                    <C>
    Richard Berger, President, Chief Executive Officer and Chairman of the
      Board...............................................................      150,000
    Peter Behrendt, Director..............................................       10,000
    James Koblensky, Director.............................................       10,000
    Richard Miller, Director..............................................       10,000
    Bernard Taran, Director...............................................       10,000
    Other Non-Executive Employees (55 persons)............................      110,000
</TABLE>
 
     Under either the 1996 Plan or the Non-Statutory Plan, options granted are
exercisable during the optionee's lifetime only by the recipient and are
non-transferable, except by will under the laws of descent and distribution.
Unexercised options terminate on the date an individual ceases to be an employee
of the Company, or, if exercise rights are vested, for a period of up to three
months following termination if it is voluntary or occurs due to retirement with
the consent of the Board of Directors. Should an optionee become disabled or die
during his or her employment, the option may be exercised by the personal
representative of the optionee for a period of up to 12 months from the date of
his disability or during the stated option period in the event of his death,
provided that the option is otherwise exercisable. The option will in any event
expire on its stated expiration date. Options that expire or become
unexercisable for any reason shall, unless the plan has been terminated, be
available for future grants. The 1996 Plan will terminate in 2006, unless
terminated earlier. The Board of Directors may terminate or amend either plan
without stockholder approval, except (i) amending the 1996 Plan if the amendment
would cause the 1996 Plan to fail to satisfy the Incentive Stock Option
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), and
(ii) as to either plan, if the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, require stockholder approval to amend. No
amendment may materially adversely affect a previously granted option without
the consent of the optionee.
 
     Pursuant to the agreements under which options are issued, in the event
that an optionee voluntarily terminates employment with the Company and
thereafter competes, either directly or indirectly, with the Company, the Board
of Directors, in its sole discretion, has the right to cause the Company to
repurchase from the optionee shares of the Common Stock which the optionee has
acquired upon exercise of options. The repurchase price would be equal to the
price at which the options were exercised by the optionee. This repurchase right
extends for a period of five years from the date the options were exercised.
 
OTHER STOCK OPTIONS
 
     As of December 31, 1996, Messrs. Berger and Miller held options for 326,223
and 39,336 shares of Common Stock, respectively, under separate agreements which
are not part of the 1996 Plan or Non-Statutory Plan. These options represent the
adjusted options available to Messrs. Berger and Miller resulting from the
options held prior to the Recapitalization that were granted in 1993. These
options are exercisable at any time at a price of $1.91 per share. "Cashless"
exercise is available pursuant to which shares may be acquired by reducing the
number of shares acquired by applying the excess value (market value less
exercise price) of the appropriate number of shares subject to the options to
satisfy the exercise price obligation.
 
                                       28
<PAGE>   47
 
OPTION GRANTS AND EXERCISES
 
     The following table sets forth certain information with respect to the
unexercised options to purchase Common Stock (including phantom stock shares and
related appreciation rights) held by the Named Executive Officers as of December
31, 1996.
 
                         FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                 NUMBER OF SECURITIES              VALUE OF UNEXERCISED
                                                UNDERLYING UNEXERCISED                 IN-THE-MONEY
                                                     OPTIONS/SARS                      OPTIONS/SARS
                                                     AT FY-END(#)                      AT FY-END($)
                                             -----------------------------     -----------------------------
                   NAME                      EXERCISABLE     UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
-------------------------------------------  -----------     -------------     -----------     -------------
<S>                                          <C>             <C>               <C>             <C>
Richard I. Berger..........................    326,223          150,000         $ 355,583(1)       $ -0-
Peter Behrendt.............................        -0-           10,000               -0-            -0-
James Koblensky............................        -0-           10,000               -0-            -0-
Bernard Taran..............................        -0-           10,000               -0-            -0-
Richard A. Miller..........................     39,336           10,000            42,876(2)         -0-
Anthony Mirando............................        -0-           34,000               -0-            -0-
Bonnie Metz................................        -0-           34,000               -0-            -0-
Donna Richardson...........................        -0-           34,000               -0-            -0-
</TABLE>
 
---------------
(1) Based on difference between exercise price of $1.91 per share and closing
    price of $3.00 per share on December 31, 1996.
 
401(K) BENEFIT PLAN
 
     The Company maintains a deferred compensation plan for its employees under
the Code (the "401(k) Plan"), entitled the Berel Industries, Inc. Savings and
Investment Plan. The 401(k) Plan was adopted by the Company on January 1, 1993.
The 401(k) Plan covers all of the employees of the Company, including officers,
and the purpose of the 401(k) Plan is to provide retirement, disability, death,
and certain other incidental benefits to participating employees and their
beneficiaries. Employees who have completed one year of service and reached age
21 are eligible to participate in the 401(k) Plan. Under the 401(k) Plan,
eligible employees may elect to defer up to 15 percent of their compensation and
have the Company contribute this deferred amount to the 401(k) Plan on their
behalf, subject to certain maximum dollar limitations. Employees are fully
vested in any salary reduction amounts which are contributed to the 401(k) Plan
on their behalf. The Company may make a matching contribution up to 10 percent
of the amount contributed by the employee up to a maximum of five percent of the
contributing employee's annual earnings. These discretionary contributions are
subject to the profitability of the company and are subject to certain
limitations under the Code.
 
     Each participant or any beneficiary may elect to invest his or her
voluntary contributions and the matching contributions in one or more investment
funds. Participants are fully vested at all times in a salary reduction
contribution as well as the Company contributions. During 1994, 1995 and 1996,
employee contributions totaled $80,746, $106,738 and $71,920. Matching
contributions by the Company during the same three-year period were $4,690,
$5,976 and $5,045. A participant or his beneficiary may receive his benefits in
the form of an annuity or in the form of a lump sum payment.
 
                                       29
<PAGE>   48
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of December 31, 1996
by (i) each person known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each director of the Company, (iii) each Named Executive
Officer, and (iv) all directors and executive officers as a group.
 
<TABLE>
<CAPTION>
                                                                          SHARES BENEFICIALLY
                                                                                OWNED(2)
                                                                        ------------------------
                         NAME AND ADDRESS(1)                              NUMBER      PERCENT(3)
----------------------------------------------------------------------  ----------    ----------
<S>                                                                     <C>           <C>
Richard Berger(4).....................................................   1,100,080       29.3
Karl Johannsmeier(5)..................................................     677,226       19.4
William Rollnick......................................................     368,047       10.7
Richard Miller(6).....................................................     204,647        5.9
Peter Behrendt........................................................          --         --
Bernard Taran.........................................................          --         --
James Koblensky.......................................................          --         --
Bonnie Metz...........................................................          --         --
Anthony Mirando.......................................................          --         --
Donna Richardson......................................................          --         --
                                                                         ---------       ----
All Current Officers and Directors as a Group (eight persons).........   1,304,727       34.3
                                                                         =========       ====
</TABLE>
 
---------------
(1) The address of each listed stockholder is c/o the Company, 13845 Artesia
    Boulevard, Cerritos, California 90703.
 
(2) Beneficial ownership is determined in accordance with the rules of the
    Securities and Exchange commission and generally includes the right to
    exercise voting or investment power with respect to securities. Shares of
    Common Stock subject to options that are currently exercisable or
    exercisable within 60 days of the date hereof, are deemed outstanding for
    computing the percentage of any other person. Except as indicated by
    footnote and subject to community property laws where applicable, the
    persons named in the table have sole voting and investment power with
    respect to all shares of Common Stock shown as beneficially owned by them.
 
(3) Applicable percentage of ownership is based on 3,434,441 shares of Common
    Stock outstanding as of February 28, 1997.
 
(4) Consists of 697,220 shares owned by Berger Holdings, a company controlled by
    Mr. Berger, 76,637 owned by EMI Employment Pension Plan, of which Mr. Berger
    is trustee, and 326,223 shares of Common Stock which may be acquired by Mr.
    Berger upon exercise of stock options which are presently exercisable or
    will become exercisable within 60 days of the date hereof.
 
(5) Consists of 477,226 shares owned by Karl H. Johannsmeier, 100,000 shares by
    Trust of Klaus D. Johannsmeier, of which Karl H. Johannsmeier is the
    trustee, and 100,000 shares of Trust of Hans J. Johannsmeier, of which Karl
    H. Johannsmeier is the trustee.
 
(6) Consists of 69,109 shares owned by RAM Investment Group, a partnership
    controlled by Mr. Miller, 96,202 shares owned by Richard Alan Miller
    Employee Pension Plan, of which Mr. Miller is trustee, and 39,336 shares of
    Common Stock which may be acquired by Mr. Miller upon exercise of stock
    options which are presently exercisable or will become exercisable within 60
    days of the date hereof.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Effective upon the consummation of the Company's initial public offering in
1996, the Company established a Compensation Committee. The Compensation
Committee consists of Messrs. Berger, Taran, and Behrendt, and reviews executive
salaries and administers any bonus, incentive compensation, and stock option
plans of the Company, including the 1996 Plan. In addition, the Compensation
Committee consults
 
                                       30
<PAGE>   49
 
with management of the Company regarding pension and other benefit plans, and
compensation policies and practices of the Company.
 
     Richard Berger has historically provided his services pursuant to an
arrangement with Executive Marketing, Inc., an entity controlled by Mr. Berger.
In this regard, the cash compensation for Mr. Berger's services up to and
including May 21, 1996, has been paid to Executive Marketing, Inc.
 
     During 1995, Mr. Berger made a personal loan to the Company's distribution
agent in Canada, Carr-Tech Distributors. Carr-Tech had certain products for
which it was entitled to invoice the Company during 1995. Carr-Tech reduced the
amount of the invoice by $150,000 and the Company, in turn, is obligated to
discharge the obligation of Carr-Tech to Mr. Berger, repaying in full the
obligation of Carr-Tech and having no net effect on the Company. This obligation
has been assigned by Mr. Berger to Mr. Miller. See below.
 
     Berger Holdings, an affiliated company of Mr. Berger, loaned $265,000 to
the Company on March 28, 1994. This loan was paid in full on January 3, 1995. On
January 11, 1995, Berger Holdings made a subsequent loan to the Company in the
amount of $245,000. Interest on the loan accrues at the same rate of interest
that the Company is charged by its principal lender, BTCC. Interest accrued
through December 31, 1995 on the loan totalled $18,192. The loan was repaid in
full during April 1996.
 
     Mr. Berger has been issued a subordinated note in the amount of $201,163
for his accrued bonus owing for the year ended 1994. This note is a general
unsecured obligation of the Company, maturing on May 21, 2000. The note bears
interest at the rate of 10% per year. Semi-annual interest payments will
commenced November 1, 1996, and semi-annual fully amortized principal payments
will commence May 1, 1997. This note is subordinate to the BTCC Loan, but equal
in priority to the subordinated dividend notes.
 
     On May 21, 1996, each of Richard Berger, Richard Miller, Karl Johannsmeier
and William Rollnick (or their respective affiliates) were issued promissory
notes or hold other evidence of the obligations in lieu of accumulated but
unpaid dividends on the Company's Series A Preferred Stock. During November of
1996, Mr. Berger made an unsecured, interest-free loan to the Company for
$300,000 (the "November 1996 Loan"). This loan is payable upon demand.
 
     During January of 1997, through a series of transactions among Mr. Berger,
his own pension plan and Mr. Miller, Mr. Miller acquired the obligations of the
Company to Mr. Berger associated with the November 1996 Loan, the $150,000
obligation of the Company to Mr. Berger arising out of the 1995 Carr-Tech
transactions, and $116,000 of the obligations of the Company owing to Mr. Berger
for accrued and unpaid dividends on the formerly issued Series A Preferred
Stock. This series of transactions had no impact on the Company, the obligations
that otherwise would be owing to Mr. Berger having been effectively assigned to
Mr. Miller.
 
     Richard Miller, a director of the Company, has provided legal services as
counsel to the Company from time to time. During 1995 and 1996, Mr. Miller was
compensated for legal services in amounts totaling $12,750 and $8,250,
respectively. Additionally, Mr. Miller was paid $5,875 and $15,437 for directors
fees and interest on subordinated notes, respectively, during 1996. The Company
does not anticipate that Mr. Miller's legal services to the Company will be
substantial in the future.
 
     Peter Behrendt received a monthly fee of $1,000, for a total of $12,000,
during 1995 in exchange for consulting services. During 1996, Mr. Behrendt was
paid directors fees of $5,875.
 
     James Koblensky, a Director and President of N. K. Management, has provided
management consulting services through N. K. Management Company. During 1995, N.
K. Management Company was paid a monthly fee of $1,000, for a total of $12,000
for the year, and during the first four months of 1996, N. K. Management Company
was paid a total of $2,000 for the year. In addition, during 1996, Mr. Koblensky
was paid directors fees ($4,375), expense reimbursement ($307) and a salary and
medical premiums for part-time services ($8,093). Mr. Koblensky has been paid
for consulting services on an hourly basis.
 
     Bernard Taran, a Director, has provided certain services to the Company
from time to time as a part-time employee. Since May 1996, Mr. Taran has
provided consulting services on an hourly basis. During 1995, Mr. Taran was paid
approximately $12,000 and was provided with health insurance as a participant in
the
 
                                       31
<PAGE>   50
 
Company's group insurance plan. Mr. Taran provides analyses of the Company's
insurance needs and coverage. During 1996, Mr. Taran was paid directors fees
($4,375), salary and medical insurance premiums ($8,841) and expense
reimbursements ($4,270).
 
     Immediately prior to the Company's initial public offering, the Company
terminated its former phantom stock plan. Bonnie Metz, Anthony Mirando, Donna
Richardson, and Peter Behrendt were participants in that plan. In accordance
with such termination, each such person received a promissory note in
consideration for the cancellation of their phantom shares. The termination of
the phantom stock plan resulted in promissory notes being issued as follows:
 
<TABLE>
<CAPTION>
                                                                          NOTE AMOUNT
                                                                          -----------
        <S>                                                               <C>
        Anthony Mirando.................................................    $94,000
        Donna Richardson................................................    $30,550
        Bonnie Metz.....................................................    $35,250
        Peter Behrendt..................................................    $47,000
</TABLE>
 
     Each note is a general unsecured obligation of the Company, maturing in
five years. The notes bear interest at the rate of eight percent per year.
Semi-annual interest payments commenced November 1, 1996 and fully-amortized,
semi-annual principal repayments shall commence May 1, 1997.
 
     The Company believes that the terms of all transactions between the Company
and its stockholders, or any of their affiliates described above, are no less
favorable to the company than terms that could have been obtained from third
parties. After the consummation of the Company's initial public offering, all
transactions between the Company and its officers, directors, principal
stockholders, or their affiliates are subject to approval by the disinterested
members of the Board of Directors. See "Management."
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
     (a) FINANCIAL STATEMENTS.
 
     The following is a list of all financial statements filed as a part of this
Report:
 
          1. Consolidated Balance Sheets -- December 31, 1996 and 1995 (as
             restated)
 
          2. Consolidated Statements of Operations for the years ended December
             31, 1996, 1995 (as restated) and 1994
 
          3. Consolidated Statements of Shareholders' Equity for the years ended
             December 31, 1996, 1995 (as restated) and 1994
 
          4. Consolidated Statements of Cash Flows for the years ended December
             31, 1996, 1995 (as restated) and 1994
 
          5. Notes to Consolidated Financial Statements -- December 31, 1996,
             1995 and 1994
 
     (b) FINANCIAL STATEMENT SCHEDULES.
 
     The following is a list of a financial statement schedule required to be
filed as a part of this Report:
 
          II. Valuation and Qualifying Accounts
 
     All schedules other than the Schedule listed above are omitted as the
information is not required, not material or otherwise furnished.
 
                                       32
<PAGE>   51
 
     (c) EXHIBITS.
 
   
<TABLE>
<CAPTION>
EXHIBIT                                                                           METHOD OF
NUMBER                               DESCRIPTION                                    FILING
------   -------------------------------------------------------------------    --------------
<C>      <S>                                                                    <C>
   3-A   Restated Certificate of Incorporation of Berel Industries, Inc. ...          **
   3-B   Bylaws of Berel Industries, Inc. ..................................          **
   3-C   Amendment of Articles of Incorporation of Craig Consumer
           Electronics, Inc. ...............................................          **
   4-A   Specimen of Common Stock Certificate...............................          **
  10-A   Loan Agreement with BTCC...........................................          **
  10-B   Cerritos Lease.....................................................          **
  10-C   Hong Kong Lease....................................................          **
  10-D   Chinese Joint Venture Agreement....................................         ***
  10-E   Revised Employment Agreement of Richard Berger.....................          **
  10-F   Form of Indemnity Agreement for Directors..........................          **
  10-G   Revised Form of Proposed Subordinated Note.........................          **
  10-H   Revised Incentive Stock Option Plan................................          **
  10-I   Revised Non-Qualified Stock Option Plan............................          **
  10-J   Revised Berger Option Agreement....................................          **
  10-K   Revised Miller Option Agreement....................................          **
  10-L   Employment Agreement of Donna Richardson...........................          **
  10-M   Employment Agreement of Bonnie Metz................................          **
  10-N   Employment Agreement of Anthony Mirando............................          **
  10-O   Lease Agreement with Datuk Lai Kon Fah PGDK........................         ***
  10-P   Engagement Agreement with Billion Lane International Limited.......         ***
  27     Financial Data Schedule............................................          *
</TABLE>
    
 
---------------
  * Filed herewith.
 
 ** This exhibit was filed as an exhibit to the Company's Registration Statement
    on Form S-1 (File No. 333-01868) and is incorporated herein.
 
   
*** Previously filed.
    
 
     (d) REPORTS ON FORM 8-K.
 
     No reports on Form 8-K were filed during the quarterly period ended
December 31, 1996.
 
                                       33
<PAGE>   52
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, this 16th day of April, 1997.
    
 
                                          CRAIG CONSUMER ELECTRONICS, INC.
 
                                          By:      /s/ RICHARD I. BERGER
                                            ------------------------------------
                                                     Richard I. Berger
                                               Its President, Chief Executive
                                                         Officer and
                                                   Chairman of the Board
 
   
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 to the report on Form 10-K has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
    
 
   
<TABLE>
<CAPTION>
                SIGNATURE                                  TITLE                       DATE
------------------------------------------   ----------------------------------   ---------------
<C>                                          <S>                                  <C>
 
          /s/ RICHARD I. BERGER              President, Chief Executive Officer    April 16, 1997
------------------------------------------     and Chairman of the Board
            Richard I. Berger                  (Principal Executive Officer)
 
           /s/ DONNA RICHARDSON              Treasurer, Secretary and Chief        April 16, 1997
------------------------------------------     Financial Officer (Principal
             Donna Richardson                  Accounting Officer)
</TABLE>
    
 
                                       34