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 December 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 February 1, 1997
Common Stock, $.001 par value 2,798,613
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AUDIO KING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
December 31, 1996 June 30, 1996
--------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,400 $ 6,600
Accounts receivable, net of allowance
of $218,000 and $161,100 3,790,100 3,340,100
Inventories 10,040,800 8,727,400
Prepaid income taxes and other 627,000 341,900
--------------- -------------
Total current assets 14,469,300 12,416,000
--------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Building 960,800 960,800
Furniture, fixtures, and equipment 3,741,000 3,690,000
Leasehold improvements 5,495,800 5,494,200
Accumulated depreciation and
amortization (3,638,700) (3,094,200)
--------------- -------------
Net property and equipment 6,558,900 7,050,800
--------------- -------------
OTHER ASSETS, principally goodwill 1,393,500 1,413,100
--------------- -------------
TOTAL ASSETS $ 22,421,700 $ 20,879,900
=============== =============
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
--------------- -------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 6,256,400 $ 4,074,300
Current portion of long-term obligations 535,500 536,500
Accrued liabilities 2,298,100 1,355,800
--------------- -------------
Total current liabilities 9,090,000 5,966,600
LONG-TERM OBLIGATIONS, less current portion 5,908,400 7,749,800
OTHER LIABILITIES,
primarily deferred lease incentives 650,100 584,800
--------------- -------------
TOTAL LIABILITIES 15,648,500 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 2,210,300 2,016,700
--------------- -------------
Total shareholders' equity 6,773,200 6,578,700
--------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $22,421,700 $20,879,900
=============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 19,187,300 $ 19,660,700 $ 35,348,000 $ 34,996,400
COST OF MERCHANDISE SOLD 12,259,500 12,138,700 22,614,800 21,785,400
----------- ----------- ----------- -----------
Gross Profit 6,927,800 7,522,000 12,733,200 13,211,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,146,300 6,621,500 12,075,100 12,200,300
----------- ----------- ----------- -----------
Operating Income 781,500 900,500 658,100 1,010,700
INTEREST EXPENSE, net 165,000 137,000 324,500 239,300
----------- ----------- ----------- -----------
Income before income taxes 616,500 763,500 333,600 771,400
INCOME TAX PROVISION 259,000 320,700 140,000 324,000
----------- ----------- ----------- -----------
NET INCOME $ 357,500 $ 442,800 $ 193,600 $ 447,400
=========== =========== =========== ===========
NET INCOME PER SHARE $ .13 $ .16 $ .07 $ .16
=========== =========== =========== ===========
Weighted average shares of common
stock and common stock
equivalents outstanding 2,836,067 2,779,678 2,813,411 2,770,649
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES: 1996 1995
---- ----
<S> <C> <C>
Net income $ 193,600 $ 447,400
Adjustments required to reconcile net income to net
cash (used for) provided by operating activities:
Depreciation and amortization 564,100 654,100
Changes in operating assets and liabilities:
Accounts receivable (450,000) (2,583,300)
Inventories (1,313,400) (2,203,000)
Prepaid income taxes and other (285,100) (130,000)
Accounts payable 2,182,100 2,037,600
Accrued liabilities 942,300 767,800
---------- ---------
Net cash (used for) provided by operating activities 1,833,600 (1,009,400)
---------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (52,600) (1,818,800)
---------- ---------
FINANCING ACTIVITIES:
Change in deferred lease incentives 65,300 176,500
Net borrowings (repayments) under bank credit agreements (1,825,000) 2,575,000
Net borrowings (repayments) under capital lease obligations (17,400) 56,300
Sale of common stock and exercise of stock options 900 12,000
---------- ---------
Net cash (used for) provided by financing activities (1,776,200) 2,819,800
---------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 4,800 (8,400)
Cash and Cash Equivalents, beginning of period 6,600 28,600
---------- ---------
Cash and Cash Equivalents, end of period $ 11,400 $ 20,200
========== =========
Additional supplementary cash flow information is as follows:
Interest paid $ 327,900 $ 239,000
Income taxes paid, net of refunds received -- 120,000
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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, 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
Company's second 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.
<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 December 31, 1996 were approximately
$19,187,300, a decrease of 2.4% from net sales of approximately $19,660,700 for
the same period in the prior year. Net sales for the six-month period ended
December 31, 1996 were approximately $35,348,000, an increase of 1.0% from net
sales of approximately $34,996,400 for the same period in the prior year.
Comparable store sales decreased 4% for the second quarter ended December 31,
1996 and decreased 1% for the six-month period ended December 31, 1996 over the
same periods last year. Management believes the decrease in comparable store
sales was due to the competitive nature of the consumer electronics industry and
the overall consumer spending levels during the past holiday season.
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 ended December 31 is typically the strongest quarter, due to the higher
demand associated with the holiday season.
Gross profit for the three-month period ended December 31, 1996, decreased 7.9%
to approximately $6,927,800 from approximately $7,522,000 for the corresponding
period of the prior year. Gross profit, as a percent of net sales, was 36.1% for
the three-month period ended December 31, 1996 compared to 38.3% for the
corresponding period of the prior year. For the six-month period ended December
31, 1996, gross profit decreased 3.6% to approximately $12,733,200 from
approximately $13,211,000 for the same period in the prior year. Gross profit as
a percent of net sales for the six-month period ended December 31, 1996, was
36.0% compared to 37.7% for the same period in the prior year. The decrease in
gross margin percentage was due primarily to higher levels of promotion pricing
coupled with continued deflation of prices in the consumer electronics industry.
Selling, general, and administrative expenses for the three-month period ended
December 31, 1996 decreased as a percent of net sales to 32.0% from 33.7% for
the comparable three-month period of the preceding year. Selling, general, and
administrative expenses for the three-month period ended December 31, 1996
decreased approximately 7.1%, or $475,000, over the comparable prior period due
primarily to decreases in advertising, depreciation, and salaries and benefits.
For the six-month period ended December 31, 1996, selling, general, and
administrative expenses as a percent of net sales decreased to 34.2% from 34.9%
in the same period in the prior year. Selling, general, and administrative
expenses for the six-month period ended December 31, 1996 decreased
approximately 1.0% or $125,000 over the comparable period in the prior year. The
decreases in selling, general, and administrative expenses are due primarily to
higher depreciation expense in the prior year due to writing off leasehold
improvements related to the Edina remodeling and a decrease in advertising
expense in the current period.
Interest expense for the three-month period ended December 31, 1996 was
approximately $165,000 compared to approximately $137,000 in the comparable
period in the prior year. For the six-month period ended December 31, 1996
interest expense was approximately $324,500 compared to approximately $239,300
for the same period in the prior year.
The Company's effective income tax rate was estimated at 42% for the purpose of
recording the income tax effects for the three and six months ended December 31,
1996 and 1995.
<PAGE>
Financial Condition
During the six-month period ended December 31, 1996, cash of approximately
$1,831,400 was provided by operations compared to approximately $1,009,400 used
by operations in the comparable period the prior year. Capital expenditures for
the six month period were approximately $52,600 principally for the purchase of
computers and other equipment.
Working capital at December 31, 1996 was approximately $5,379,300 as compared to
approximately $6,449,400 at June 30, 1996. The current ratio was 1.6 to 1 as of
December 31, 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 $10,040,800 at December 31, 1996, a
more typical level at the close of the calendar year, from $8,727,400 at June
30, 1996. Inventory at December 31, 1995, was $10,601,000.
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 December 31, 1996 were $2,650,000. The second credit facility is a term loan
of $2,750,000 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
the line of credit agreement covenants as of December 31, 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.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
(a) The Company held its Annual Meeting on November 13, 1996.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees as listed on the
proxy statement, and all of such nominees were elected.
(c) By a vote of 2,527,760 shares in favor, with 23,500 shares against and
1,950 shares abstaining, the shareholders set the number of directors
to be elected at five (5).
(d) The following persons were elected to serve as directors of the
Company until the next Annual Meeting of shareholders by the votes
indicated:
Nominee Number of Votes For Number of Votes Withheld
Randel S. Carlock 2,522,510 30,700
Henry G. Thorne 2,522,510 30,700
Sherman A. Swenson 2,524,610 28,600
Barry R. Rubin 2,524,710 28,500
Gary S. Kohler 2,524,710 28,500
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 December 31, 1996.
<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
February 10, 1997 By: /s/ H. G. Thorne
H. G. Thorne
President and Chief Executive
Officer (principal executive
officer)
February 10, 1997 By: /s/ R. E. Thiner
R. E. Thiner
Sr. Vice President of Finance
(principal financial and
accounting officer)
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 4,008
<ALLOWANCES> 218
<INVENTORY> 10,041
<CURRENT-ASSETS> 14,469
<PP&E> 10,198
<DEPRECIATION> 3,639
<TOTAL-ASSETS> 22,422
<CURRENT-LIABILITIES> 9,090
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 4,560
<TOTAL-LIABILITY-AND-EQUITY> 22,422
<SALES> 35,348
<TOTAL-REVENUES> 35,348
<CGS> 22,615
<TOTAL-COSTS> 34,690
<OTHER-EXPENSES> 0
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<INCOME-TAX> 140
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</TABLE>
