SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report under section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1996
[ ] 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 0-16154
AUDIO KING CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1565405
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3501 South Highway 100
Minneapolis, Minnesota 55416
(Address of principal executive office)
(612) 920-0505
(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. Yes x No ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the last practicable date.
Class Outstanding at November 1, 1996
Common Stock, $.001 par value 2,775,980
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AUDIO KING CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
September 30, 1996 June 30, 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 32,500 $ 6,600
Accounts receivable, net of allowance
of $172,700 and $161,100 2,436,300 3,340,100
Inventories 9,163,400 8,727,400
Prepaid income taxes and other 408,000 341,900
------------ ---------
Total current assets 12,040,200 12,416,000
------------ ---------
PROPERTY AND EQUIPMENT, at cost:
Building 960,800 960,800
Furniture, fixtures, and equipment 3,707,800 3,690,000
Leasehold improvements 5,494,200 5,494,200
Accumulated depreciation and amortization (3,370,000) (3,094,200)
------------ ---------
Net property and equipment 6,792,800 7,050,800
------------ ---------
OTHER ASSETS, principally goodwill 1,403,300 1,413,100
------------ ---------
TOTAL ASSETS $ 20,236,300 $ 20,879,900
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,042,900 $ 4,074,300
Current portion of long-term obligations 536,700 536,500
Accrued liabilities 1,256,300 1,355,800
----------- -----------
Total current liabilities 6,835,900 5,966,600
LONG-TERM OBLIGATIONS, less current portion 6,367,300 7,749,800
OTHER LIABILITIES,
primarily deferred lease incentives 617,400 584,800
----------- -----------
TOTAL LIABILITIES 13,820,600 14,301,200
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, 6,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.001 par, 20,000,000 shares authorized;
2,775,980 and 2,774,980 issued and outstanding 2,800 2,800
Additional paid-in capital 4,560,100 4,559,200
Retained earnings 1,852,800 2,016,700
----------- -----------
Total shareholders' equity 6,415,700 6,578,700
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,236,300 $20,879,900
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NET SALES $ 16,160,700 $ 15,335,700
COST OF MERCHANDISE SOLD 10,355,300 9,646,700
----------- -----------
Gross profit 5,805,400 5,689,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,928,800 5,578,800
----------- -----------
Operating income (loss) (123,400) 110,200
INTEREST EXPENSE, net 159,500 102,300
----------- -----------
Income (loss) before income taxes (282,900) 7,900
INCOME TAX PROVISION (BENEFIT) (119,000) 3,300
----------- -----------
NET INCOME (LOSS) $ (163,900) $ 4,600
=========== ===========
NET INCOME (LOSS) PER SHARE $ (0.06) $ 0.00
=========== ===========
Weighted average shares of common and
common stock equivalent shares outstanding 2,775,313 2,864,948
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES: 1996 1995
<S> <C> <C>
Net income (loss) $ (163,900) $ 4,600
Adjustments required to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 286,100 220,000
Changes in operating assets and liabilities:
Accounts receivable 903,800 (571,000)
Inventories (436,000) (391,800)
Prepaid income taxes and other (66,100)
Accounts payable 968,600 2,387,700
Accrued liabilities (100,200) 449,000
Net cash provided by operating activities 1,392,300 1,770,500
INVESTING ACTIVITIES:
Purchases of property and equipment (17,800) (777,600)
FINANCING ACTIVITIES:
Change in deferred lease incentives 32,600 20,200
Net repayments under line-of-credit agreement (1,375,000) (1,175,000)
Net borrowings (repayments)
under capital lease obligations (6,200) 156,600
Sale of common stock and exercise of stock options 900 16,100
Net cash used for financing activities (1,348,600) (982,100)
NET INCREASE IN CASH 25,900 10,800
CASH, beginning of period 6,600 28,600
CASH, end of period $ 32,500 $ 39,400
Additional supplementary cash flow information is as follows:
Interest paid $ 159,500 $ 102,000
Income taxes paid, net of refunds received -- 110,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Nature of Business
The condensed consolidated financial statements have been prepared by Audio
King Corporation, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. The information furnished in the
condensed consolidated financial s tatements includes normal recurring
adjustments and reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of such financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested
that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements for the year ended
June 30, 1996 and the related notes thereto included in the Company's
latest Annual Report on Form 10-K.
Operating results for the interim periods may not be necessarily indicative
of the operating results to be expected for the full fiscal year, since the
Company's business is seasonal with higher net sales occurring in the
fourth calendar quarter.
(2) Accounting Pronouncement
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," requires impairment losses on long-lived assets
to be recognized when an asset's book value exceeds its expected future
cash flows (undiscounted). The Company adopted SFAS 121 on July 1, 1996.
The adoption did not have a material impact on the financial position or
results of operations of the Company.
(3) Reclassifications
Certain amounts in the financial statements for fiscal year 1996 have been
reclassified to conform with the financial statement presentation for
fiscal year 1997. These reclassifications have no effect on net income or
shareholders' equity as previously reported.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net sales for the three-month period ended September 30, 1996 were approximately
$16,160,700, an increase of 5.3% from net sales of approximately $15,335,700 for
the same period in the prior year. Comparable store sales increased 3% for the
first quarter ended September 30, 1996 over the same period last year.
Management believes the sales increase was a result of promoting the Company's
specialist retail strategy which utilizes increased advertising, larger stores
with wider product assortment, extended consumer credit offers, and better
trained salespeople to produce increased sales.
Seasonality is a factor in the Company's results of operations on a quarterly
basis. Net sales for the Company's first and fourth quarters historically have
represented the weakest sales quarters of the year. The Company's second quarter
which ends December 31 is typically the strongest quarter, due to the high
demand associated with the holiday season.
Gross profit for the three-month period ended September 30, 1996, increased 2.0%
to approximately $5,805,400 from approximately $5,689,000 for the corresponding
period of the prior year. Gross profit, as a percent of net sales, was 35.9% for
the three-month period ended September 30, 1996 compared to 37.1% for the
corresponding period of the prior year. The decrease in gross margin percentage
was due to a growth in sales of video products as a percent of total sales,
which typically carry a lower gross margin, and to the increased competitive
nature of the consumer electronics industry.
Selling, general, and administrative expenses for the three-month period ended
September 30, 1996 increased as a percent of net sales to 36.7% from 36.4% for
the comparable three-month period of the preceding year. Selling, general, and
administrative expenses for the three-month period ended September 30, 1996
increased approximately 6.3%, or $350,000, over the comparable prior period due
primarily to increases in employee salaries and benefits, promotional expense
and occupancy and depreciation costs.
Interest expense for the three-month period ended September 30, 1996 was
approximately $159,500 compared to approximately $102,300 in the first quarter
of fiscal year 1996.
The Company's effective income tax rate was estimated at 42% for the purpose of
recording the income tax effects for the three months ended September 30, 1996
and 1995.
Financial Condition
During the three-month period ended September 30, 1996, cash of approximately
$1,392,300 was provided by operations compared to approximately $1,770,500
provided by operations in the comparable period the prior year. Capital
expenditures for the three month period were approximately $17,800 principally
for the purchase of computers and other equipment.
Working capital at September 30, 1996 was $5,204,300 as compared to $6,449,400
at June 30, 1996. The current ratio was 1.8 to 1 as of September 30, 1996 and
2.1 to 1 as of June 30, 1996. The decrease in working capital was attributable
primarily to an increase in inventory levels and accounts payable.
Inventories increased to $9,163,400 at September 30, 1996 from $8,727,400 at
June 30, 1996 in order to support overall increased sales and display
requirements. Concurrently, accounts payable increased as a result of purchasing
additional inventory, as well as an increase in advertising.
7
<PAGE>
The Company maintains a credit agreement which provides for two credit
facilities. The first facility is a working capital line of credit which
provides for up to $6,500,000 in borrowings and bears interest at the bank's
reference rate or at the adjusted certificate of deposit rate plus 2%, at the
Company's option. Outstanding advances on the working capital line of credit as
of September 30, 1996 were $2,850,000. The second credit facility is a term loan
of $3,000,000 and bears interest at the bank's reference rate plus 0.25% or at
the adjusted certificate of deposit rate plus 2.25%, at the Company's option.
Borrowings under the bank agreement are collateralized by inventories, accounts
receivable, and fixed assets. Terms of the agreement require that the Company
meet certain financial and other covenants. The Company was in compliance with,
or had obtained a waiver of, all of its line of credit agreement covenants as of
September 30, 1996.
The Company believes that cash generated from operations and borrowings
available under its bank line of credit will be sufficient to fund its working
capital and capital expenditure requirements for at least the next 12 months.
8
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit No. Description
27 Financial Data Schedule
(filed with electronic version only)
(b) Reports on Form 8-K - The Company filed no reports on Form 8-K during
the quarter ended September 30, 1996.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
AUDIO KING CORPORATION
November 11, 1996 By: /s/ H. G. Thorne
H. G. Thorne
President and Chief Executive
Officer (principal executive
officer)
November 11, 1996 By: /s/ R. E. Thiner
R. E. Thiner
Sr. Vice President of Finance
(principal financial and
accounting officer)
10
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<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
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0
0
<COMMON> 3
<OTHER-SE> 6,413
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