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 March 31, 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 May 10, 1996
Common Stock, $.001 par value 2,748,476
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AUDIO KING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,239 $ 28,629
Vendor and other accounts receivable,
net of allowance of $192,243 and $105,472 3,554,213 2,953,338
Inventories 10,089,186 8,398,227
Prepaid income taxes and other 773,803 422,525
------------ ----------
Total current assets 14,431,441 11,802,719
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures, and equipment 3,550,283 2,948,868
Leasehold improvements 5,739,735 3,515,677
Building and equipment under capital leases 1,267,897 1,195,486
Accumulated depreciation and amortization (3,279,020) (2,335,410)
----------- -----------
Net property and equipment 7,278,895 5,324,621
--------- ---------
OTHER ASSETS, principally goodwill 1,247,970 1,270,271
--------- ---------
$ 22,958,306 $ 18,397,611
======= ========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' INVESTMENT
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Vendor and other accounts payable $ 4,442,908 $ 3,999,408
Checks issued not yet presented for payment 329,461 172,338
Current portion of long-term obligations 32,756 102,223
Accrued liabilities 1,426,041 894,213
Income taxes payable 22,690 22,690
Deferred revenue related to extended service
program 24,804 24,804
------- ------
Total current liabilities 6,278,660 5,215,676
---------- ---------
LONG-TERM OBLIGATIONS, less current portions 9,016,736 6,201,105
LONG-TERM LIABILITIES,
primarily deferred lease incentives 417,592 270,111
----------- -----------
SHAREHOLDERS' INVESTMENT:
Preferred stock, 6,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.001 par, 20,000,000 shares authorized;
2,721,729 and 2,713,329 issued and outstanding 2,721 2,713
Additional paid-in capital 4,452,651 4,440,720
Retained earnings 2,789,946 2,267,286
----------- ---------
Total shareholders' investment 7,245,318 6,710,719
----------- -----------
$ 22,958,306 $ 18,397,611
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 16,220,457 $ 13,400,014 $ 51,216,819 $ 43,246,155
COST OF MERCHANDISE SOLD 10,115,331 8,241,354 31,900,676 27,410,288
---------- ---------- ---------- ----------
Gross Profit 6,105,126 5,158,660 19,316,143 15,835,867
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,398,624 4,912,055 18,598,919 14,421,854
OTHER INCOME 575,000 - 575,000 -
--------- --------- ---------- ----------
Operating Income 281,502 246,605 1,292,224 1,414,013
INTEREST EXPENSE, net 152,229 69,657 391,564 195,885
--------- --------- ---------- ----------
Income before income taxes 129,273 176,948 900,660 1,218,128
INCOME TAX PROVISION 54,000 74,318 378,000 511,318
-------- --------- ---------- ---------
NET INCOME $ 75,273 $ 102,630 $ 522,660 $ 706,810
======== ========= ======== ========
EARNINGS PER SHARE:
NET INCOME PER SHARE $ .03 $ .04 $ .19 $ .25
======== ========= ======== ========
Weighted average shares
of common stock outstanding
for three and nine months
ended March 31, 1996
and 1995 2,802,539 2,846,782 2,778,145 2,829,723
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES: 1996 1995
---- ----
<S> <C> <C>
Net income $ 522,660 $ 706,810
Adjustments required to reconcile net income
to net cash used for operating activities:
Depreciation and amortization 985,723 596,063
Changes in other operating items:
Vendor and other accounts receivable (600,875) (501,185)
Inventories (1,690,959) (1,551,858)
Prepaid income taxes and other assets (351,286) 144,447
Checks issued not yet presented for payment 87,656 341,260
Vendor and other accounts payable 443,500 878,095
Income taxes payable - 12,318
Accrued liabilities 531,828 55,664
Deferred revenue related to extended service
program - (74,804)
Other liabilities,
primarily deferred lease incentives 140,472 29,626
------- ------
Net cash provided by used for operating activities (453,941) (70,374)
--------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,910,692) (1,392,679)
Retirements of property and equipment - 31,457
Deposits on construction work in progress - (127,345)
------------ ------------
Net cash used for investing activities (2,910,692) (1,488,567)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings (repayments)
under line-of-credit agreement 2,750,000 875,000
Net borrowings (repayments)
under capital lease obligations 65,631 (70,164)
Sale of common stock 11,952 64,271
------ ------
Net cash used for financing activities 2,827,583 869,107
--------- -------
NET INCREASE (DECREASE) IN CASH (14,390) 16,976
CASH, beginning of period 28,629 17,224
------ ------
CASH, end of period $ 14,239 $ 34,200
====== ======
Additional supplementary cash flow information
is as follows:
Interest paid $ 392,000 $ 196,000
Income taxes paid, net of refunds received 550,000 499,000
======= =======
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
5
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARIES
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 statements 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, 1995 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) Other Income
Other income recorded for the three-month period ended March 31, 1996
of $575,000 resulted from a revised agreement related to cellular
telephone sales commissions. The previous agreement provided for a
commission for cellular phone activation to be paid at the time of the
sale and an additional commission to be paid monthly for three years
based on phone usage. The revised agreement provides for all revenues
to be received at time of the sale. The revised agreement also provided
for a lump-sum payment for the phone usage commissions for the cellular
phones that were sold over the past three years. The revised agreement
is not expected to have a negative material impact on future earnings.
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 March 31, 1996 were approximately
$16,220,000, an increase of 21% from net sales of approximately $13,400,000 for
the same period in the prior year. Net sales for the nine-month period ended
March 31, 1996 were approximately $51,217,000, an increase of 18.4% from net
sales of approximately $43,246,000 for the same period in the prior year.
Management believes the sales increase was a result of its promoting specialist
retail strategy, which utilizes increased advertising, product assortment and
larger stores to increase store traffic, as well as extended consumer credit
offers and trained salespeople to produce increased sales. Management also
believes that the increase was largely due to an increased volume of goods sold
rather than increased prices.
Net sales for the three months ended March 31 historically have represented the
second strongest sales quarter of the year. The strongest quarter is the second
quarter which ends December 31, due to the high demand associated with the
holiday season. The weakest demand sales quarter has historically been the first
quarter which ends September 30. Seasonality is a factor in the Company's
results of operations.
Gross profit for the three-month period ended March 31, 1996 increased 18.3% to
approximately $6,105,000 from approximately $5,159,000 for the corresponding
period of the prior year. Gross profit, as a percent of net sales, was 37.6% for
the three-month period ended March 31, 1996 compared to 38.5% for the
corresponding period of the prior year. The decrease in gross margin percentage
was due to a higher percentage of total sales in video which typically carry a
lower gross margin. For the nine-month period ended March 31, 1996, gross profit
increased 22% to approximately $19,316,000 from approximately $15,836,000 for
the corresponding period of the prior year. As a percent of net sales for the
nine-month period ended March 31, 1996, gross profit was 37.7% compared to 36.6%
for the corresponding period of the prior year. The increase in gross margin
percentage was due to growth as a percent of total sales in accessories and home
audio components which typically carry a higher gross margin.
Selling, general, and administrative expenses increased as a percent of net
sales to 39.4% for the quarter ended March 31, 1996 from 36.7% for the
comparable three-month period of the preceding year. The increase in selling,
general, and administrative expenses is a result of certain costs relating to
revenue, such as rent and certain salaries, increasing faster than and
disproportionately to, sales. Selling, general, and administrative expenses for
the three-month period ended March 31, 1996 increased approximately $1,487,000,
or 30.3%, over the comparable prior period. The increases for the three-month
period are due primarily to increased sales commissions, benefits, salaries and
contract labor of approximately $658,000, increased consumer financing and
promotional expense of approximately $320,000 and increased occupancy, insurance
and depreciation costs of approximately $334,000.
For the nine months ended March 31, 1996, selling, general, and administrative
expenses increased as a percent of net sales to 36.3% from 33.3% for the
comparable nine-month period of the preceding year. As in the three-month period
ended March 31, 1996, the increase in selling, general, and administrative
expenses in the nine-month period ended March 31, 1996 is a result of certain
costs relating to revenue, such as rent and certain salaries, increasing faster
than, and disproportionately to, sales. Selling, general, and administrative
expenses for the nine-month period ended March 31, 1996 increased approximately
$4,177,000 or 29%, over the comparable prior period. The increases for the
nine-month period are due primarily to increased sales commissions, benefits,
salaries and contract labor of approximately $1,941,000, increased consumer
financing and promotional expense of approximately $751,000 and increased
occupancy, insurance and depreciation costs of approximately $1,023,000,
including a one-time charge of $216,000 for the write off of leasehold
improvements related to the Edina store relocation and the Roseville store
expansion.
7
<PAGE>
Interest expense for the three-month period ended March 31, 1996 was
approximately $152,000 compared to approximately $70,000 for the corresponding
period in 1995. Interest expense for the nine-month period ended March 31, 1996
was approximately $392,000 compared to approximately $196,000 for the
corresponding period in 1995. The higher interest expense was a result of higher
borrowing levels.
The Company recorded other income for the three-month period ended March 31,
1996 of $575,000 as a result of a revised agreement related to cellular
telephone sales commissions. The previous agreement provided for a commission
for cellular phone activation to be paid at the time of the sale and an
additional commission to be paid monthly for three years based on phone usage.
The revised agreement provides for all revenues to be received at time of the
sale. The revised agreement also provided for a lump-sum payment for the phone
usage commissions for the cellular phones that were sold over the past three
years. The revised agreement is not expected to have a negative material impact
on future earnings.
The Company earned net income per share of $.03 for the three-month period ended
March 31, 1996 as compared to net income per share of $.04 for the corresponding
period in 1995.
Financial Condition
During the nine-month period ended March 31, 1996, cash of approximately
$454,000 was used for operations compared to approximately $70,000 used for
operating activities in the comparable period the prior year. The cash was used
primarily for increased inventories necessary for overall sales increases and
the display requirements of the relocated Edina store and expanded Roseville
store. Capital expenditures for the nine months ended March 31, 1996 totaled
approximately $2,911,000, principally for the purchase of leasehold
improvements, furniture and fixtures, and other equipment. The Company has no
additional capital expenditures planned for the remainder of fiscal 1996.
Working capital at March 31, 1996 was $8,153,000 as compared to $6,587,000 at
June 30, 1995. The current ratio was 2.3 to 1 as of March 31, 1996 and as of
June 30, 1995. The increase in working capital was primarily attributable to
increased inventories related to the store expansions. Inventories increased to
$10,089,000 at March 31, 1996 from $8,398,000 at June 30, 1995 in order to
support overall increased sales and the display requirements of the relocated
Edina store and the remodeled Roseville store.
The Company maintains a working capital line of credit which provides for up to
$11,000,000 from October 1 of any one year through February 15 of the succeeding
year, at which time available funds are reduced to $8,000,000. The credit
facility bears interest at the bank's reference rate or at the adjusted
certificate of deposit rate plus 2%, at the Company's option.
The borrowings under the line of credit are collateralized by inventories,
accounts receivable, and fixed assets. The Company was in compliance with or had
obtained a waiver of the terms of the credit agreement as of March 31, 1996. The
waiver of terms was granted through March 31, 1996. Negotiations are in progress
for an amended agreement that will extend the credit agreement to December 31,
1997.
The Company expects that cash generated from operations and increased borrowings
under its bank line of credit will be sufficient to fund its anticipated working
capital requirements and expected capital expenditures.
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 March 31, 1996.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the undersigned on behalf of the registrant and in the
capacities and on the date indicated.
Dated: May 10, 1996 AUDIO KING CORPORATION
By: /s/ H.G. Thorne
H.G. Thorne
President, Chief
Executive Officer,
and Chief Financial Officer
(Principal executive
officer and principal
financial and accounting
officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 14,239
<SECURITIES> 0
<RECEIVABLES> 3,746,456
<ALLOWANCES> 192,243
<INVENTORY> 10,089,186
<CURRENT-ASSETS> 14,431,441
<PP&E> 10,557,915
<DEPRECIATION> 3,279,020
<TOTAL-ASSETS> 22,958,306
<CURRENT-LIABILITIES> 6,278,660
<BONDS> 0
0
0
<COMMON> 2,721
<OTHER-SE> 7,242,597
<TOTAL-LIABILITY-AND-EQUITY> 22,958,306
<SALES> 51,216,819
<TOTAL-REVENUES> 51,216,819
<CGS> 31,900,676
<TOTAL-COSTS> 18,598,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 125,801
<INTEREST-EXPENSE> 391,564
<INCOME-PRETAX> 900,660
<INCOME-TAX> 378,000
<INCOME-CONTINUING> 522,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 522,660
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
