<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended DECEMBER 27, 1998
-----------------
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: 0-14729
-------
POLK AUDIO, INC.
----------------------------------------------------------
(Exact name of the registrant as specified in its charter)
MARYLAND 52-0954180
------------------------------- -------------------
(State or other jurisdiction of (I.R.S.Employer
Incorporation or organization) Identification No.)
5601 METRO DRIVE, BALTIMORE, MARYLAND 21215
------------------------------------- -----
(Address and principal executive offices) (Zip code)
(410) 358-3600
--------------
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
Number of shares of common stock of the registrant outstanding as of
February 9, 1999: 1,849,035 SHARES.
Page 1
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
POLK AUDIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 27, March 29,
Assets 1998 1998
------ (Unaudited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and short-term investments $ 3,195,525 363,948
Trade accounts receivable, net of allowance
for doubtful accounts of $232,714 at
December 27 and $188,768 at March 29 6,150,375 13,514,314
Inventories:
Finished goods 3,905,483 3,577,283
Work-in-process 1,080,606 951,445
Raw materials and supplies 4,077,741 4,849,388
----------- -----------
Total inventories 9,063,830 9,378,116
----------- -----------
Income taxes recoverable 188,331 ---
Deferred income taxes 925,000 825,000
Prepaid expenses and other current assets 645,857 515,204
----------- -----------
Total current assets 20,168,918 24,596,582
Property and equipment, at cost less accumulated
depreciation and amortization 4,714,106 5,011,989
Other assets 191,456 856,797
Notes receivable-officers 259,767 259,767
Deferred income taxes 1,010,000 1,050,000
----------- -----------
Total assets $ 26,344,247 31,775,135
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable, trade $ 2,840,358 5,178,899
Bank overdraft --- 496,240
Income taxes payable --- 840,194
Accrued expenses and other current liabilities 2,712,933 2,744,343
Current portion of long-term debt --- 400,000
Current portion of accrued product warranty 547,603 404,556
----------- -----------
Total current liabilities 6,100,894 10,064,232
Long-term debt, net of current portion --- 3,615,045
Accrued product warranty, less current portion 446,007 350,000
Other 13,874 18,423
----------- -----------
Total liabilities 6,560,775 14,047,700
----------- -----------
Stockholders' equity:
Common stock, par value $.01 per share. Authorized
20,000,000 shares; issued 1,849,035 shares 18,490 18,490
Additional paid-in-capital 1,751,218 1,751,218
Accumulated other comprehensive income (4,195) 7,421
Note receivable-stock (942,250) (942,250)
Retained earnings 18,960,209 16,892,556
----------- -----------
Total stockholders' equity 19,783,472 17,727,435
----------- -----------
Total liabilities and stockholders' equity $ 26,344,247 31,775,135
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
<PAGE> 3
POLK AUDIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Nine months ended
-------------------------- --------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $18,153,680 12,952,611 54,674,775 32,979,964
Cost of goods sold 11,109,547 7,809,892 33,247,972 20,266,856
----------- ----------- ----------- -----------
Gross profit 7,044,133 5,142,719 21,426,803 12,713,108
Selling, research, general
and administrative
expenses 5,847,482 4,570,908 17,410,238 13,219,511
----------- ----------- ----------- -----------
Operating income (loss) 1,196,651 571,811 4,016,565 (506,403)
----------- ----------- ----------- -----------
Other income(expense):
Interest income 17,437 184 47,650 16,507
Interest expense (4,250) (86,070) (68,291) (187,591)
Royalty income 211,056 145,000 424,740 315,903
Provision for loss on
Investment (400,000) --- (600,000) ---
Other, net (11,883) (6,393) (38,011) (6,393)
----------- ----------- ----------- -----------
Other income (expense) (187,640) 52,721 (233,912) 138,426
----------- ----------- ----------- -----------
Earnings (loss) before
income taxes 1,009,011 624,532 3,782,653 (367,977)
Income taxes 578,000 253,000 1,715,000 (153,000)
----------- ----------- ----------- -----------
Net earnings(loss) 431,011 371,532 2,067,653 (214,977)
Retained earnings at
beginning of period 18,529,198 15,199,879 16,892,556 15,786,388
----------- ----------- ----------- -----------
Retained earnings at
end of period $18,960,209 15,571,411 18,960,209 15,571,411
=========== =========== =========== ===========
Earnings(loss) per
Share - basic $0.23 0.20 1.12 (0.12)
====== ====== ====== ======
Earnings (loss) per
Share - diluted $0.23 0.20 1.09 (0.12)
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE> 4
POLK AUDIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
---------------------------
Dec. 27, Dec. 28,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $2,067,653 (214,977)
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,702,523 1,657,165
Gain on sale of fixed assets (6,425) (1,500)
Deferred income taxes (60,000) (211,000)
Provision for loss on investment 600,000 ---
Increase in accrued product warranty 239,054 36,000
Decrease in other liabilities (4,549) ---
Increase (decrease) from changes in working
capital:
Accounts receivable 7,363,939 1,514,913
Inventories 314,286 (2,220,905)
Income taxes recoverable or payable (1,028,525) (96,421)
Prepaid expenses and other current assets (130,653) (361,993)
Accounts payable, trade (2,338,541) 1,737,843
Accrued expenses and other current
liabilities (31,410) (571,756)
---------- ----------
Net cash provided by operating activities 8,687,352 1,267,369
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (1,404,640) (2,456,741)
(Increase) decrease in deposits and
other assets 65,341 (599,692)
Proceeds from sale of property and equipment 6,425 1,500
---------- ----------
Net cash used in investing activities (1,332,874) (3,054,933)
---------- ----------
Cash flows from financing activities:
Decrease in bank overdraft (496,240) (44,126)
Net proceeds from (payments on) revolving
line of credit (3,315,045) 2,111,287
Payments on term note payable (700,000) (300,000)
Proceeds from exercise of stock options --- 135,000
---------- ----------
Net cash used in financing activities (4,511,285) 1,902,161
---------- ----------
Effect of exchange rate changes on cash (11,616) 78,205
Net increase (decrease) in cash and cash
Equivalents 2,831,577 192,208
Cash and cash equivalents, beginning of period 363,948 422,043
---------- ----------
Cash and cash equivalents, end of period $3,195,525 614,845
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE> 5
POLK AUDIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Consolidated financial statements
The consolidated financial statements included herein do not include all
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. For
further information, such as the significant accounting policies followed by the
Company, refer to the Notes to Financial Statements set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended March 29, 1998.
In the opinion of management, the consolidated financial statements
include all necessary adjustments (consisting of normal recurring accruals) for
a fair presentation of the financial position, results of operations and cash
flows for the interim periods presented.
The results of operations and cash flows for the periods ended December
27, 1998 and December 28, 1997 are not necessarily indicative of the results to
be expected for the full fiscal year.
(2) New accounting pronouncements
Effective March 30, 1998 the Company adopted statement of Financial
Accounting standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
an annual financial statement that is displayed with the same prominence as
other financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period of transactions
and other events and circumstances from non-owner sources.
Comprehensive income will thus represent the sum of net income and other
comprehensive income. The accumulated balance of other comprehensive income is
required to be displayed separately from retained earnings and additional
paid-in-capital in the statement of financial position. The adoption of SFAS No.
130 resulted in the Company reporting unrealized gains and losses of foreign
exchange rate transactions in other comprehensive income.
Page 5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A reconciliation of comprehensive income is as follows:
<TABLE>
<CAPTION>
Quarter ended Nine months ended
-------------------------- --------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 431,011 371,532 2,067,653 (214,977)
Changes in accumulated
other comprehensive income (2,100) 28,194 (11,616) 78,205
---------- ---------- ---------- ----------
Total comprehensive income $ 428,911 399,726 2,056,037 (136,772)
========== ========== ========== ==========
</TABLE>
(3) Earnings per share
Effective December 28, 1997, the Company adopted the Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128). This
standard replaces the presentation of earnings per share (EPS) with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The table below illustrates the reconciliation of the
numerators and denominators of the basic and diluted EPS computations.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
-------------------------- --------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 431,011 371,532 2,067,653 (214,977)
========== ========== ========== ==========
Weighted average number
of shares - basic 1,849,035 1,843,435 1,849,035 1,834,156
Effect of dilutive stock
options 50,166 14,458 45,679 ---
---------- ---------- ---------- ----------
Weighted average number of
Shares - diluted 1,899,201 1,857,893 1,894,714 1,834,156
========== ========== ========== ==========
</TABLE>
Page 6
<PAGE> 7
PART I. FINANCIAL INFORMATION (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
that term in the Private Securities Litigation Reform Act of 1995 (the Act).
Statements contained herein that are not historical facts are forward-looking
statements made pursuant to the safe harbor provisions of the Act.
Forward-looking statements may include, but are not limited to, projections of
revenue, income, or loss and capital expenditures, statements regarding future
operations, financing needs, and plans relating to products of the Company,
assessments of materiality, and predictions of future events, as well as
assumptions relating to the foregoing. Forward-looking statements are inherently
subject to risks and uncertainties, and the Company's actual results could
differ materially from those set forth in or underlying the forward-looking
statements contained in this Report as a result of various factors including,
without limitation, consumer acceptance of new technology and new products,
competition, pricing, borrowing costs, foreign manufacturing, sourcing, and
sales, and other risk factors.
RESULTS OF OPERATIONS
For the third quarter of fiscal 1999, net earnings were $431,011 or $0.23
per diluted share, compared with $371,532 or $0.20 per share, for the third
quarter of fiscal 1998. For the nine months, net earnings were $2,067,653 or
$1.09 per diluted share in fiscal 1999, compared with a net loss of $(214,977)
or $(0.12) per share in fiscal 1998. The following table presents the components
of net earnings (loss) as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
------------------------ ------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1998 1997 1998 1997
(Unaudited) (Unaudited)
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold (61.2) (60.3) (60.8) (61.4)
------ ------ ------ ------
Gross profit 38.8 39.7 39.2 38.6
Selling, research, general
& administrative expenses (32.2) (35.3) (31.9) (40.1)
------ ------ ------ ------
Operating income (loss) 6.6 4.4 7.3 (1.5)
Other income (expense), net (1.0) 0.4 (0.4) 0.4
------ ------ ------ ------
Earnings (loss) before
income taxes (benefit) 5.6 4.8 6.9 (1.1)
Income taxes(expense) benefit (3.2) (1.9) (3.1) 0.5
------ ------ ------ ------
Net earnings (loss) 2.4% 2.9 3.8 (0.6)
====== ====== ====== ======
</TABLE>
Page 7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
NET SALES AND GROSS PROFIT MARGIN
Net sales increased 40.2% to $18,153,680 for the third quarter of fiscal
1999 as compared to the third quarter of fiscal 1998, and increased 65.8% to
$54,674,775 for the first nine months of fiscal 1999 as compared to the first
nine months of fiscal 1998. The increase in net sales resulted from higher
domestic sales resulting from shipments to Circuit City Stores(R), Inc. which
commenced in February, 1998, coupled with higher sales resulting from new RT
Bookshelf and CS Center-channel products introduced during the September 1998
quarter, partially offset by lower export sales as compared to the prior year.
Cost of goods sold increased to 61.2% for the third quarter of fiscal
1999 from 60.3% for the third quarter of fiscal 1998 and decreased to 60.8% for
the first nine months of fiscal 1999 from 61.4% for the first nine months of
fiscal 1998. The decrease in cost of goods sold, as a percentage of net sales,
resulted from adverse changes in product and customer sales mix coupled with
higher other direct material costs partially offset by increased production
volumes and the beneficial effect of increased absorption of manufacturing fixed
overhead, as compared to the prior year.
SELLING, RESEARCH, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, research, general and administrative (SRG&A) expenses increased
27.9% to $5,847,482 for the third quarter of fiscal 1999 as compared to the
third quarter of fiscal 1998 and increased 31.7% to $17,410,238 for the first
nine months of fiscal 1999 as compared to the first nine months of fiscal 1998.
As a percentage of net sales, SRG&A expenses decreased to 32.2% for the third
quarter of fiscal 1999 from 35.3% for the third quarter of fiscal 1998 and
decreased to 31.9% for the first nine months of fiscal 1999 from 40.1% for the
first nine months of fiscal 1998. The dollar increase in SRG&A expenses
primarily resulted from increased variable selling and shipping costs related to
higher sales volume coupled with increases in fixed promotion and marketing
costs, increased research and development expenditures and increased general and
administrative expenses, as compared to the prior year.
OTHER INCOME (EXPENSE) AND INCOME TAXES
Other income (expense) was $(187,640) for the third quarter of fiscal
1999 as compared with $52,721 for the third quarter of fiscal 1998. Other income
(expense) was $(233,912) for the first nine months of fiscal 1999 as compared
with $138,426 for the first nine months of fiscal 1998. During the third quarter
of fiscal 1999, the Company recorded an additional provision for loss on its
investments in common and preferred stock of
Page 8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Genesis Technologies, Inc.(TM) (the "Genesis Investments") in the amount of
$400,000. An allowance was also recorded during the second quarter of fiscal
1999 in the amount of $200,000 bringing the total reserve against the Genesis
Investments to $600,000 or 100% of the book value of the Genesis Investments as
of December 27, 1998. Management of the Company is continuing to evaluate the
future prospects of Genesis, the recoverability of the Genesis Investments and
the Company's alternative courses of action.
Income taxes, as a percentage of earnings before income taxes, were 57.3%
for the third quarter of fiscal 1999 compared to 40.5% for the third quarter of
fiscal 1998, and were 45.3% for the first nine months of fiscal 1999 compared to
41.6% for the first nine months of fiscal 1998, reflecting reserves taken to
reflect the likelihood that long-term capital losses resulting from the
write-down of the Genesis Investments will not be deductible.
SEASONALITY
The home audio market is somewhat seasonal, with the majority of the
Company's sales and earnings occurring historically in the quarters ending
December and March. The Company is still evaluating the impact of its sales to
Circuit City Stores, Inc. and its impact on the Company's long-term sales and
earnings trends.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through cash
generated by operations, term loan borrowings, revolving credit line borrowings
and normal trade credit extended by its suppliers. Net cash provided by
operating activities during the first nine months of fiscal 1999 was $8,687,352.
As of December 27, 1998, the Company's working capital was $14,068,024 and its
current ratio was 3.3 to 1. In addition, the Company presently has an unsecured
revolving credit agreement with a commercial bank providing for maximum
borrowings of $7,000,000, all of which was available at December 27, 1998. The
Company also had an unsecured five-year term loan agreement with the same bank
for $2,000,000, of which $0 was outstanding at December 27, 1998. The Company
believes working capital and temporary borrowings from its credit agreements
will be sufficient to meet its current operating needs and anticipated capital
expenditures for the remainder of fiscal 1999.
Page 9
<PAGE> 10
YEAR 2000 ACTION PLAN
The Company has adopted a Year 2000 Action Plan (the "Plan") which
identifies the process by which the Company will address Year 2000 related
issues. It also establishes a committee represented by all departments of the
Company assigned the responsibility to complete Year 2000 preparations with a
targeted date of no later than September 30, 1999. The Plan strives to identify
Year 2000 issues, assesses its impact on Company operations, identifies the
cost, and outlines the implementation and testing plan to have critical software
and hardware platforms Year 2000 compliant. As of the date of this filing the
Company believes it has identified all critical systems and is continuing to
assess their compliance. The Company continues to be in the testing phase of the
project for those systems believed to be Year 2000 compliant.
Costs associated with the Year 2000 project primarily include costs
incurred to upgrade internal software and hardware platforms not currently Year
2000 compliant. The Company estimates that these costs will be incurred in the
normal course of business as software and hardware is ordinarily upgraded to
keep pace with technological advances. Actual costs could range to $200,000 over
a period of twelve months, most of which will be capitalized.
The Company's ability to operate its Mexico manufacturing facilities, its
San Diego distribution facility and its Baltimore facility as well as
electronically transmit and receive data between these facilities, subsequent to
the turn of the century, is entirely dependent upon its local power companies
and local and long distance phone companies, in part located in international
territories. As of the date of this filing the Company has received reasonable
representations from the depended upon utility companies that they expect to
provide uninterrupted service into the year 2000.
The Company relies heavily on materials and components for incorporation
into its products that are currently being provided by a number of suppliers,
both international and domestic. An interruption in supply from one or a
combination of these suppliers could adversely affect the Company's ability to
supply product to its customers. As of the date of this filing, the Company has
received reasonable representations from approximately 50% of these suppliers
that they expect to provide uninterrupted service into the year 2000. Second
requests have since been sent to those vendors that have not yet responded.
The failure to correct a material Year 2000 problem could result in an
interruption of normal business operations which could have a material and
adverse affect of the Company's results of operations and financial condition,
however, the Plan is expected to significantly reduce the Company's level of
uncertainty regarding the Year 2000 problem.
Page 10
<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K are set forth below.
<TABLE>
<CAPTION>
Exhibit No. Reference
----------- ---------
<S> <C>
27.0 Financial Data Schedule Page 13
</TABLE>
(b) Reports on Form 8-K:
On November 23, 1998, the Company announced the disposition of its Eosone
and Genesis Technologies, Inc. interests.
Page 11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLK AUDIO, INC.
----------------
(Registrant)
February 9, 1999 /s/ George M. Klopfer
-----------------------
George M. Klopfer
Chief Executive Officer
/s/ Gary B. Davis
-----------------------
Gary B. Davis
Treasurer, Chief Financial Officer
and Chief Accounting Officer
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-END> DEC-27-1998
<CASH> 3,195,525
<SECURITIES> 0
<RECEIVABLES> 6,383,089
<ALLOWANCES> 232,714
<INVENTORY> 9,063,830
<CURRENT-ASSETS> 20,168,918
<PP&E> 13,529,416
<DEPRECIATION> 8,815,310
<TOTAL-ASSETS> 26,344,247
<CURRENT-LIABILITIES> 6,100,894
<BONDS> 0
0
0
<COMMON> 18,490
<OTHER-SE> 19,764,982
<TOTAL-LIABILITY-AND-EQUITY> 26,344,247
<SALES> 54,674,775
<TOTAL-REVENUES> 54,674,775
<CGS> 33,247,972
<TOTAL-COSTS> 17,410,238
<OTHER-EXPENSES> 165,621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,291
<INCOME-PRETAX> 3,782,653
<INCOME-TAX> 1,715,000
<INCOME-CONTINUING> 2,067,653
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,067,653
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.09
</TABLE>
