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, 1997
[ ] 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 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)
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
------------ ------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 7,100 $ 6,600
Accounts receivable, net of allowance
of $97,700 and $161,100 2,057,300 3,340,100
Inventories 9,641,400 8,727,400
Prepaid income taxes and other 403,300 341,900
------------ ------------
Total current assets 12,109,100 12,416,000
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Building 960,800 960,800
Furniture, fixtures, and equipment 3,315,300 3,690,000
Leasehold improvements 5,135,200 5,494,200
Accumulated depreciation and amortization (3,109,700) (3,094,200)
------------ ------------
Net property and equipment 6,301,600 7,050,800
------------ ------------
OTHER ASSETS, principally goodwill 1,374,200 1,413,100
------------ ------------
TOTAL ASSETS $ 19,784,900 $ 20,879,900
============ ============
</TABLE>
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>
March 31, 1997 June 30, 1996
----------- -----------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 3,898,200 $ 4,074,300
Current portion of long-term obligations 537,800 536,500
Accrued liabilities 1,679,100 1,355,800
----------- -----------
Total current liabilities 6,115,100 5,966,600
LONG-TERM OBLIGATIONS, less current portion 6,470,400 7,749,800
OTHER LIABILITIES,
primarily deferred lease incentives 683,900 584,800
----------- -----------
TOTAL LIABILITIES 13,269,400 14,301,200
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, 6,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.001 par, 6,000,000 shares authorized;
2,798,613 and 2,774,980 issued and outstanding 2,800 2,800
Additional paid-in capital 4,581,700 4,559,200
Retained earnings 1,931,000 2,016,700
----------- -----------
Total shareholders' equity 6,515,500 6,578,700
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $19,784,900 $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 March 31, Nine Months Ended March 31,
1997 1996 1997 1996 .
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 14,950,300 $ 16,220,400 $ 50,298,300 $ 51,216,800
COST OF MERCHANDISE SOLD 9,166,900 10,115,300 31,781,700 31,900,700
------------ ------------ ------------ ------------
Gross Profit 5,783,400 6,105,100 18,516,600 19,316,100
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,190,400 6,398,600 18,265,400 18,598,900
OTHER INCOME 0 575,000 0 575,000
------------ ------------ ------------ ------------
Operating Income (Loss) (407,000) 281,500 251,200 1,292,200
INTEREST EXPENSE, net 144,400 152,200 468,900 391,500
------------ ------------ ------------ ------------
Income (Loss) before income taxes (551,400) 129,300 (217,700) 900,700
INCOME TAX PROVISION (BENEFIT) (272,000) 54,000 (132,000) 378,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (279,400) $ 75,300 $ (85,700) $ 522,700
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE $ (0.10) $ 0.03 $ (0.03) $ 0.19
============ ============ ============ ============
Weighted average shares of common
stock and common stock
equivalents outstanding 2,811,950 2,802,539 2,827,382 2,778,145
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AUDIO KING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES: 1997 1996
----------- -----------
<S> <C> <C>
Net income (loss) $ (85,700) $ 522,700
Adjustments required to reconcile net
income (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization 846,100 985,700
Changes in operating assets and liabilities:
Accounts receivable 1,282,800 (600,900)
Inventories (914,000) (1,691,000)
Prepaid income taxes and other (61,400) (351,300)
Accounts payable (176,100) 531,200
Accrued liabilities 323,300 531,800
----------- -----------
Net cash (used for) provided by operating activities 1,215,000 (71,800)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (58,000) (2,910,700)
----------- -----------
FINANCING ACTIVITIES:
Change in deferred lease incentives 99,100 140,500
Net borrowings (repayments) under bank credit agreements (1,250,000) 2,750,000
Net borrowings (repayments) under capital lease obligations (28,100) 65,600
Sale of common stock and exercise of stock options 22,500 12,000
----------- -----------
Net cash (used for) provided by financing activities (1,156,500) 2,968,100
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 500 (14,400)
Cash and Cash Equivalents, beginning of period 6,600 28,600
----------- -----------
Cash and Cash Equivalents, end of period $ 7,100 $ 14,200
=========== ===========
Additional supplementary cash flow information is as follows:
Interest paid $ 472,900 $ 392,000
Income taxes paid, net of refunds received (294,200) 550,000
=========== ===========
</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) Pending Merger
On March 4, 1997, the Company announced the signing of a definitive
merger agreement pursuant to which Ultimate Electronics, Inc. (NASDAQ:
ULTE) will acquire all the shares of the Company for stock and cash. The
merger is subject to various conditions including approval by the
Company's shareholders, registration of the Ultimate Electronics shares
to be issued, final approval by Ultimate Electronics' bank and
satisfaction of obligations under the Hart-Scott-Rodino Antitrust
Improvements Act. The merger is expected to be completed by mid June.
(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.
(4) Accounting Pronouncement
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128) which requires the disclosure of basic earnings per share and
diluted earnings per share. The Company expects to adopt SFAS 128 in
fiscal 1998 and anticipates it will not have a material impact on the
financial position or the results of operations.
<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, 1997, were approximately
$14,950,300, a decrease of 7.8% from net sales of approximately $16,220,400 for
the same period in the prior year. Net sales for the nine-month period ended
March 31, 1997, were approximately $50,298,300, a decrease of 1.8% from net
sales of approximately $51,216,800 for the same period in the prior year.
Comparable store sales decreased 9% for the third quarter ended March 31, 1997,
and decreased 4% for the nine-month period ended March 31, 1997, from the same
periods last year. Management believes the decrease in comparable store sales
was due to the competitive nature of the consumer electronics industry.
Seasonality is a factor in the Company's results of operations on a quarterly
basis. The Company's second quarter which ends 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 March 31, 1997, decreased 5.3% to
approximately $5,783,400 from approximately $6,105,100 for the corresponding
period of the prior year. Gross profit, as a percent of net sales, was 38.7% for
the three-month period ended March 31, 1997, compared to 37.6% for the
corresponding period of the prior year. For the nine-month period ended March
31, 1997, gross profit decreased 4.1% to approximately $18,516,600 from
approximately $19,316,100 for the same period in the prior year. Gross profit as
a percent of net sales for the nine-month period ended March 31, 1997, was 36.8%
compared to 37.7% for the same period in the prior year. The fluctuation in
gross margin percentage was due primarily to varying levels of promotion pricing
in the respective periods coupled with deflation of prices in the consumer
electronics industry.
Selling, general, and administrative expenses for the three-month period ended
March 31, 1997 increased as a percent of net sales to 41.4% from 39.4% for the
comparable three-month period of the preceding year. This increase was primarily
a result of a $175,000 settlement in a dispute with a former landlord over
renovation expenses at a retail location vacated by the Company in 1995 and to
professional and other expenses totaling approximately $130,000 in connection
with the pending merger of the Company with Ultimate Electronics, Inc.
Notwithstanding the increase as a percentage of sales, selling, general, and
administrative expenses for the three-month period ended March 31, 1997,
decreased approximately 3.3%, or $208,200, over the comparable prior period due
primarily to a decrease in finance charges related to consumer financing and
payroll expense.
For the nine-month period ended March 31, 1996, selling, general, and
administrative expenses as a percent of net sales remained constant at 36.3%
compared to the same period in the prior year. Selling, general, and
administrative expenses for the nine-month period ended March 31, 1997 decreased
approximately $333,500 over the comparable period in the prior year due
primarily to a decrease in finance charges related to consumer financing and
payroll expense.
In the third quarter ended March 31, 1996, the Company recorded other income of
$575,000 as a result of revising an agreement related to cellular telephone
sales commission to provide for receiving commissions at the time of the sale.
The previous contract provided for receiving commissions over a period of time.
<PAGE>
Interest expense for the three month period ended March 31, 1997, was
approximately $144,400 compared to approximately $152,200 in the comparable
period in the prior year. For the nine-month period ended March 31, 1997,
interest expense was approximately $468,900 compared to approximately $391,500
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 six months ended December 31, 1996. In
calculating the income tax benefit for the three month period ended March 31,
1997, the Company's effective tax rate was 49% as a result of recording a
$40,000 benefit of a net operating loss carryback in the state of Iowa not
previously recorded. The Company's blended effective tax rate for the nine
months ended March 31, 1997, was 60% compared to 42% for the same period in the
prior year.
Financial Condition
During the nine-month period ended March 31, 1997, cash of approximately
$1,215,000 was provided by operations compared to cash of approximately $71,800
used by operations in the comparable period the prior year. Capital expenditures
for the nine-month period were approximately $67,500 compared to $2,910,700 in
the comparable period the prior year which included remodeling costs of two
retail stores. Cash used for financing activities during the nine-month period
ended March 31, 1997, was approximately $1,156,500 primarily as a result of bank
debt repayments. During the comparable period in the prior year cash provided by
financing activities was approximately $2,968,100 primarily as a result of bank
borrowings to finance the cost of remodeling retail stores.
Working capital at March 31, 1997, was approximately $5,994,000 as compared to
approximately $6,449,400 at June 30, 1996. The current ratio was 2.0 to 1 as of
March 31, 1997, and 2.1 to 1 as of June 30, 1996.
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 ($4,500,000 from March 1 through June 30) 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 March 31, 1997, were
$3,350,000. The second credit facility is a term loan of $2,625,000 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. At March 31, 1997, the Company was
not in compliance with an earnings covenant and a cash flow coverage ratio
covenant. The bank has granted waivers of these covenants.
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 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, 1997.
<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
May 9, 1997 By: /s/ H. G. Thorne
H. G. Thorne
President and Chief Executive
Officer (principal executive officer)
May 9, 1997 By: /s/ R. E. Thiner
R. E. Thiner
Sr. Vice President of Finance
(principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 2,155
<ALLOWANCES> 98
<INVENTORY> 9,641
<CURRENT-ASSETS> 12,109
<PP&E> 9,411
<DEPRECIATION> 3,110
<TOTAL-ASSETS> 19,785
<CURRENT-LIABILITIES> 6,115
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 6,513
<TOTAL-LIABILITY-AND-EQUITY> 19,785
<SALES> 50,298
<TOTAL-REVENUES> 50,298
<CGS> 31,782
<TOTAL-COSTS> 18,265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 469
<INCOME-PRETAX> (218)
<INCOME-TAX> (132)
<INCOME-CONTINUING> (86)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
