SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended June 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ X ]
As of September 20, 1996, the aggregate market value of the registrant's Common
Stock, $.001 par value, held by nonaffiliates of the registrant was $6,047,903.
As of September 20, 1996, there were 2,775,980 shares of the registrant's Common
Stock, $.001 par value, issued and outstanding.
Portions of the Company's definitive Proxy Statement for its upcoming annual
meeting are incorporated by reference into Items 10, 11, 12, and 13 of Part III
in accordance with Rule 12b-23.
1
PART I
ITEM 1. BUSINESS
Audio King Corporation is a holding company which owns all of the outstanding
Common Stock of Audio King, Inc. (references herein to "Audio King" or the
"Company" refer collectively to both Audio King Corporation and Audio King, Inc.
unless specifically stated otherwise). Audio King operates consumer electronics
specialty stores which seek to attract discriminating consumers of home, car and
video electronics by offering such consumers a broad selection of competitively
priced name-brand products in comfortable store environments staffed with
professional sales consultants. Audio King also offers personalized services,
such as custom design and installation of home and automobile electronics
systems and repair services. Audio King intends to grow by expanding its present
store facilities and merchandise assortments and opening a limited number of new
stores.
Audio King currently operates eleven specialty stores: six in Minneapolis-St.
Paul, Minnesota, and one store in each of Rochester and St. Cloud, Minnesota,
Sioux Falls, South Dakota and Des Moines and Cedar Rapids, Iowa. In each of its
stores, Audio King employs trained sales consultants and emphasizes a high level
of customer service before and after the sale. Audio King's stores provide
sophisticated displays and separate demonstration rooms in modern, comfortable
settings for home, car and video electronics. The Audio Video Environments
division of Audio King also operates a design showroom in Edina, Minnesota,
which offers custom design and installation of home entertainment systems. In
addition, Audio King currently operates Fast Trak Electronics Repair Service
Center, a merchandise clearance center which sells merchandise received on
trade-in and floor samples and an insurance replacement division which services
customer insurance claims.
Marketing Strategy
The Company's marketing strategy is designed to attract those customers for whom
product price, quality, selection and service are the primary considerations. As
part of this strategy, management of the Company has developed a "promoting
specialist" strategy for marketing consumer electronics. The tactics to support
this strategy include increasing product assortment, increasing awareness
through increased advertising, continuing to develop new services and customer
strategies. To implement this strategy, many of the Company's existing stores
have been expanded to meet design criteria which the Company calls "the Audio
King large store format."
Innovative aspects of this format include broad demonstration and comparative
capabilities for home audio, car audio and video products. Additionally, this
format also demonstrates to the customer how to integrate both audio and video.
The Company's marketing strategy also seeks to build customer loyalty by
offering a broad range of benefits, including trained sales consultants, product
performance plans, quarterly mailings, product seminars, extensive car or home
installation services and fast, competent repair services.
During fiscal 1996, the Company continued the execution of the "promoting
specialist" strategy it began in fiscal 1992. In order to implement this
strategy, management has expanded certain store locations and has closed others
which were not compatible with the overall objectives of the strategy. In
general, stores which had created excessive coverage of the marketplace have
been closed. Closure of these stores allowed other of the Company's expanded
locations to serve these market areas more effectively. During fiscal 1992, one
store was expanded to the Audio King large store format and three smaller stores
were closed because there was excessive market coverage or no expansion
capability. During fiscal 1993, the Company expanded two locations to the Audio
King large store format. During fiscal 1994, the Company opened a new store in
Des Moines, Iowa and expanded one location. During fiscal 1995, the Company
opened a new store in Cedar Rapids, Iowa. During fiscal 1996, one store was
relocated and one store was expanded, bringing the total number of stores using
the large store format to nine of the Company's eleven stores.
The Company plans to implement the "promoting specialist" strategy in the future
by expanding the remaining two smaller stores and adding more stores and markets
to the chain.
Products and Services
Audio King offers a broad selection of high quality, competitively priced, name
brand, home entertainment electronics products. Its product lines are designed
to appeal to the middle market and more discriminating or affluent buyer. The
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Company's product lines include Adcom, Alpine, Bang & Olufsen, Bose, Boston
Acoustics, Canon, Canton, Denon, KEF, Kenwood, Klipsch, Monster Cable,
Mitsubishi, Panasonic, Pioneer, Polk, RCA, Sony and Yamaha.
The Company's products and services can be grouped into four major categories:
audio components and systems, automobile audio systems, video products, and
customer services and repair. A majority of the audio products sold by Audio
King are offered on a limited distribution basis in its market area; however,
the video products sold by it generally have broader distribution, including
selected department/chain stores and electronic superstores. The Company's
automobile audio products are offered on both a limited and broad distribution
basis.
The audio components and systems product group includes compact disc players,
loudspeakers, stereo receivers, cassette decks, turntables, tuners, equalizers,
sound processors, amplifiers, prepackaged systems, furniture and accessories.
The automobile audio systems product group includes AM/FM cassette decks,
compact disc players, speakers, amplifiers, equalizers, cellular phones, pagers,
burglar alarms and radar detectors.
The video product group includes color televisions, big screen televisions,
video cassette recorders, camcorders, digital satellite systems and accessories.
Customer services and repair includes the installation of automobile audio
systems, installation of home audio and video, sale of extended service
contracts, warranty and nonwarranty repair of consumer electronics products and
other miscellaneous services.
The table below shows the approximate percentage of net sales for each of the
principal product and service groups for the Company during fiscal years 1996,
1995 and 1994.
Year Ended June 30,
1996 1995 1994
----------------------------
Audio components and systems 31% 32% 33%
Automobile audio products 24% 25% 25%
Video products 35% 34% 29%
Customer services and repair 10% 9% 13%
The percentage of net sales for each product and service group is affected by
consumer trends, promotional activities, the development and introduction of new
products, the availability of products and seasonal factors. The increase in
sales of video products is largely the result of increased emphasis on sales of
these products resulting from the promoting specialist strategy and changes in
consumer preferences. The percentages set forth above are not necessarily
indicative of the relative contribution to net income for each product and
service group.
Advertising and Promotion
The Company's advertising program consists primarily of television, newspaper,
direct mail and radio advertisements. It is designed to appeal to value-driven,
discriminating customers and emphasizes the broad selection of high quality,
competitively priced, name brand products and specialized services offered by
the Company. The Company's advertisements are prepared by independent production
companies and advertising agencies working in conjunction with the Company's own
advertising personnel.
Net advertising expenditures and the corresponding percentage of net sales were
approximately $3,100,000 (4.6%) during fiscal 1996, $2,400,000 (4.2%) during
fiscal 1995 and $2,000,000 (4.3%) for fiscal 1994. Certain advertising
expenditures made by the Company are reimbursed through cooperative advertising
allowances and market development funds provided by certain vendors.
Suppliers. Audio King currently purchases products from over fifty vendors and
has authorized dealer or vendor agreements with a majority of its suppliers;
however, such agreements can generally be terminated by either party with as
little as 30 days' notice. During the fiscal year ended June 30, 1996, sales of
Mitsubishi, Sony and Alpine products accounted for approximately 18%, 15% and
6%, respectively, of the Company's net sales. Audio King has had a long-term
business relationship with each of these vendors and believes its current
relationship with each of them is good. The Company believes it may be able to
substitute the products of another vendor in the event the products of one of
these vendors were no longer available to it. Nevertheless, if the Company lost
one of its significant vendors, the Company's business could be adversely
affected.
3
The Company is a member of Progressive Retailers Organization, Inc. ("PRO
Group"), a buying group formed by several independent audio and video specialty
retailers to provide competitive merchandise programs based on volume
purchasing. The PRO Group offers improved discounts, better access to
promotional products and the ability to earn additional rebates and credits.
Management Information System. The Company uses a computerized system to monitor
operations and merchandise inventory through an industry specific management
information, accounting and inventory control system. This system is designed to
track each product, beginning with the placement of the order, receipt in the
warehouse, delivery to the store and eventual sale to the customer. The Company
has integrated its data processing for its service facility onto its mainframe
computer system.
Store Operations. Each store has a sales manager and two department managers.
Store sales managers receive base salaries, sales commissions and performance
bonuses. Sales and service personnel are compensated primarily on a commission
basis, which varies based on their individual productivity and profitability.
The Company has developed training programs and coordinates training by factory
representatives to keep sales and service personnel informed of new technologies
and products.
Sales to customers are made primarily on a cash or credit card basis. Audio King
generally does not extend credit to customers; however, qualifying customers may
pay for their purchases in installments through arrangements with independent
consumer credit companies.
Service and Repair. Audio King provides warranty and nonwarranty repair of
consumer electronics products through its wholly owned subsidiary, Specialty
Home Electronics Repair, Inc. ("SHER"). SHER, which operates under the name Fast
Trak Electronic Repair Service, is an independent service center which provides
repair services on a fee basis for customers and receives reimbursement from
manufacturers for warranty repair. In addition, the Company installs automobile
audio systems at certain stores and provides delivery and installation on
certain of its products, such as large screen televisions.
Trademarks. The Company has registered the "Audio King" and "FastTrak" trade
names in the United States Patent and Trademark Office. In addition, the trade
name "Audio Video Environments" has been registered in Minnesota and South
Dakota.
Competition. The home entertainment market is highly competitive, with product
selection, quality, service and price being the main competitive factors. The
Company's competitors are mass merchandising stores, including electronics
superstores, department/chain stores and other specialty consumer electronics
stores. The mass merchandising stores, electronics superstores and
department/chain stores generally compete on the basis of price and advertising.
In the Minneapolis-St. Paul, Minnesota area, the Company's principal competitors
are Best Buy Company, Circuit City, Montgomery Wards, Sears, Walmart, Kmart,
Dayton's and Target. The Company believes its primary market is the more
discriminating or affluent customer who is more concerned with product quality,
selection and service than price. The Company believes it will be able to
effectively compete with mass merchandising stores, electronics superstores and
department/chain stores by offering higher quality products, more knowledgeable
sales staff and personalized service. The Company believes it will be able to
effectively compete with other specialty consumer electronics stores on the
basis of a broader selection of high quality products, more store locations and
advertising.
Seasonality. The Company's business historically has been subject to seasonal
fluctuations, with the highest sales activity occurring during the fourth
calendar quarter (October, November, December). This quarter contains the
Christmas season.
Employees. At June 30, 1996, the Company employed 364 persons, of which 38 were
salaried, 115 were compensated on an hourly basis and 211 were compensated on a
commission basis. Of its employees, 30 were employed in the Company's corporate
headquarters, 49 in service and repair and 21 in its warehouse and distribution
facility, with the balance employed in the Company's retail locations. The
Company's employees are not covered by any collective bargaining agreements, and
the Company believes its employee relationships are good.
4
Information Regarding Forward-Looking Statements
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company:
a) Competition. The Company encounters intense competition in all
product categories and competes directly with national and other
companies. Some of the companies with which the Company competes have
greater capital and other resources.
b) Dependence on Key Suppliers. The Company is dependent on certain
suppliers for delivery of products that contribute significantly to the
Company's net sales. While the Company believes that alternative
suppliers are available, the loss of a key supplier could have an
adverse affect on the Company's business.
c) Industry Factors. The presence or lack of new products or product
features in the product categories that the Company sells has impact on
the Company's business, as well as the product mix of actual
merchandise sold.
d) Economic and Market Conditions. The Company's business is affected
by changes in general economic conditions such as consumer attitudes
towards the economy in general, consumer credit availability, interest
rates and inflation.
e) Dependence on Key Personnel. The Company's future success will
depend, in part, on its ability to maintain an effective leadership
team and to attract and retain highly qualified personnel.
f) Litigation. Adverse results in significant litigation matters would
affect the Company's earnings.
ITEM 2. PROPERTY
The Company leases its retail locations, which range in size from approximately
3,000 to 28,000 square feet. The majority of these retail locations are located
in regional malls and strip shopping centers.
The retail locations are designed to provide the customer with a personalized
shopping experience. Merchandise is displayed to facilitate comparison among
products and brands. Stores have demonstration rooms separated from the main
retail space which permit customers to audition products before making a buying
decision. The interior is generally modern, using natural materials, glass and
subdued lighting.
Generally, the existing leases for the Company's retail locations provide for
either base rental with an annual percentage increase or a fixed minimum rent
together with a percentage of net sales. In addition, the leases require the
Company to pay a pro rata portion of the real estate taxes and assessments,
utilities, insurance and common area and other maintenance costs. To date, the
Company has not experienced difficulty in securing leases for suitable retail
locations.
The Company leases 45,000 square feet for its headquarters, warehouse and repair
facilities. The lease for this facility provides for monthly payments of $21,396
and expires February 28, 2002.
5
The following table provides certain information concerning the Company's
specialty retail locations, clearance center and design showroom:
Approximate Square Lease
Year Approximate Gross Footage of Retail Expiration
Opened Square Footage Selling Area (1) Date (2)
--------------------------------------------------------------------
Southdale Store (3) 1974 28,000 20,000 2015
7435 France Ave. S
Minneapolis, MN
Rosedale Store (3) 1977 17,000 13,500 2015
1723 W. Co. Rd. B-2
Roseville, MN
Ridgedale Store (3) 1977 15,000 9,000 2008
1808 S. Plymouth
Minnetonka, MN
Burnsville Store (3) 1979 10,000 6,500 1999
14232 Burnhaven Dr.
Burnsville, MN
Brookdale Store 1980 15,000 9,000 2008
5939 John Martin Dr.
Brooklyn Center, MN
Maplewood Store 1989 9,340 6,000 2004
1868 Beam Avenue
Maplewood, MN
Rochester Store 1986 3,150 2,700 1997
103 Apache Mall
Rochester, MN
Sioux Falls Store 1986 3,138 2,388 1999
701 Empire Mall
Sioux Falls, SD
St. Cloud Store 1987 10,000 6,300 2001
2716 Division Street
St. Cloud, MN
Des Moines Store 1994 20,000 12,000 2009
4100 Merle Hay Rd
Des Moines, IA 50310
Cedar Rapids Store 1995 15,400 11,600 2015
4701 1st Avenue Southeast
Cedar Rapids, IA 52402
St. Louis Park 1986 1,850 1,700 1997
Clearance Center
4818 Excelsior Blvd
St. Louis Park, MN
(1) The retail selling area square footage is exclusive of merchandise storage
areas and car installation bays.
(2) Includes renewal options.
(3) The retail location is located in a strip shopping center adjacent to the
regional shopping center with such name.
Lease expense for all retail locations and other facilities paid by Audio King
for the fiscal years ended June 30, 1996, 1995 and 1994 totaled $1,819,000,
$1,395,000 and $1,285,000, respectively.
6
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings other than ordinary routine litigation
incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No meetings of shareholders were held during the fourth quarter of the year
ended June 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Market Information
The Company's Common Stock is traded in the SmallCap Market on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") under
the symbol "AUDK".
The following table sets forth the range of high and low bid quotations for the
Company's Common Stock as reported to the Company by NASDAQ for the periods
indicated.
Period Covered High Bid (1) Low Bid (1)
Fiscal 1996
First Quarter $ 3 7/8 $ 2 7/8
Second Quarter 3 5/8 2 1/2
Third Quarter 2 7/8 2 1/4
Fourth Quarter 2 7/8 2
Fiscal 1995
First Quarter $ 4 1/8 $ 3 1/2
Second Quarter 4 5/8 3 3/4
Third Quarter 4 1/8 3 3/8
Fourth Quarter 3 1/2 2 3/4
(1) Bid quotations are inter-dealer prices without retail mark-ups,
mark-downs, or commissions and may not necessarily represent actual
transactions.
On September 20, 1996, the closing bid and ask prices for the Company's Common
Stock were $1.75 bid and $2.00 per share, respectively.
b. Holders
As of September 20, 1996, there were approximately 180 shareholders of record of
the Company's Common Stock, excluding shareholders whose stock is held either in
nominee name and/or street name brokerage accounts. Based on information which
the Company has obtained from its transfer agent, there are approximately 1279
shareholders of the Company's Common Stock, including shareholders whose stock
is held either in nominee name and/or street name brokerage accounts.
c. Dividends
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for use in its business operations
and, accordingly, does not anticipate paying any cash dividends in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data and is qualified in its
entirety by the financial statements and notes thereto appearing elsewhere in
this Form 10-K. The following data should be read in conjunction with
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
Year Ended June 30
1996 1995 1994 1993 1992
(In thousands except per share, number of stores and per square foot data)
Statement of Operations Data:
Net sales $ 65,567 $ 56,914 $ 45,826 $ 34,314 $ 29,240
Cost of merchandise sold 41,179 36,062 28,970 21,312 18,115
------- ------- ------- ------- -------
Gross profit 24,388 20,852 16,856 13,002 11,125
Selling, general and
administrative expenses 24,680 19,473 15,484 12,155 10,566
------- ------- ------- ------- -------
Operating income (loss) (292) 1,379 1,372 846 559
Interest expense, net 649 317 179 151 183
Other income 575 - - - -
------- ------- ------- ------- -------
Income (loss) before income taxes and
cumulative effect of change in accounting
for income taxes (366) 1,062 1,193 695 376
Provision (benefit) for income taxes (115) 430 511 313 169
------- ------- ------- ------- -------
Net income (loss) before cumulative effect of
change in accounting for income taxes (251) 632 682 382 207
Cumulative effect on prior years of change in
accounting for income taxes(5) - - (45) - -
------- ------- ------- ------- -------
Net income (loss) $ (251) $ 632 $ 637 $ 382 $ 207
========== ======= ======= ====== ======
Year Ended June 30
1996 1995 1994 1993 1992
(in thousands except per share, number of stores and per square foot data)
Earnings (loss) per share:
Net income (loss) before cumulative effect of
in accounting for income taxes $ (.09) $ .23 $ .25 $ .14 $ .09
Cumulative effect on prior years of change in
accounting for income taxes (3) - - (.02) - -
------- ------- ------- ------- -------
Net income (loss) per share $ (.09) $ .23 $ .23 $ .14 $ .09
Weighted average number of
common shares outstanding 2,735 2,811 2,814 2,717 2,210
========= ====== ====== ====== ======
Store Data:
Number of retail stores
open at end of period 11 11 10 9 9
Weighted average net
retail sales per store $ 5,960 $ 5,629 $ 4,719 $ 3,813 $ 3,249
Weighted average net
retail sales per square
foot of retail space $ 706(5) $ 807(4) $ 793(2) $ 733(1) $ 718
8
Year Ended June 30
1996 1995 1994 1993 1992
(in thousands except per share, number of stores and per square foot data)
Balance Sheet Data at Period End:
Working capital $ 6,450 $ 6,587 $ 4,744 $ 4,043 $ 3,726
Inventories 8,727 8,398 6,864 5,048 4,561
Total assets 20,880 18,398 14,860 10,988 9,860
Long-term obligations, less
current portion 7,750 6,201 3,955 2,673 2,298
Total liabilities 14,301 11,687 8,932 5,703 4,981
Shareholders' investment 6,579 6,711 5,929 5,285 4,879
====== ====== ====== ====== ======
(1) Effective October 1, 1992, the Burnsville store lease was expanded
from 5,000 to 10,000 square feet. The weighted average of selling
square footage is 5,775 square feet for this fiscal year. Effective
March 1, 1993, the Ridgedale store lease was expanded from 3,100 square
feet to 15,000 square feet. The weighted average of selling square
footage is 4,733 square feet for this fiscal year.
(2) Effective November 1, 1993, the Brookdale store lease was expanded
from 5,000 to 15,000 square feet. On April 22, 1994, the Des Moines
store opened, which has 12,000 square feet of selling space.
(3) On July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
resulting in a non-recurring charge to operations of $45,000.
(4) On May 21, 1995, the Cedar Rapids store opened, which has 11,600
square feet of selling space. The weighted average of selling square
footage is 1,276 for this fiscal year.
(5) Effective October 2, 1995, the Southdale store was expanded from
8,800 to 28,000 square feet. The weighted average selling square
footage is 16,575 square feet for this fiscal year. Effective February
1, 1996, the Rosedale store lease was expanded from 8,700 square feet
to 17,000 square feet. The weighted average of selling square footage
is 9,125 square feet for this fiscal year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with Selected Financial Data set forth
under Item 6 hereof and the Company's Consolidated Financial Statements and the
notes thereto included elsewhere herein.
Results of Operations
Management is directed to make long-term investments which will provide the best
long-term return for the Company's stockholders. The growth strategy for the
Company has been our "promoting specialist strategy" which emphasizes
consultative selling coupled with broad selection, competitive prices,
outstanding display and demonstration facilities and aggressive advertising and
promotion. The Company has pursued this strategy since 1992 through investment
in its stores by expanding the demonstration and display space at its existing
stores, adding two new stores in the Iowa marketplace and expanding investment
in advertising and promotion. The following table shows the growth in sales that
has resulted from the Company's shift from small stores to large stores
incorporating the promoting specialist strategy:
Year Sales Small Stores Large Stores New Stores Total Stores
(in Thousands) (under 6,000 square feet) (over 6,000 square feet)
1992 $29,240 5 4 0 9
1993 $34,314 3 6 0 9
1994 $45,826 2 7 1 10
1995 $56,914 2 8 1 11
1996 $65,567 2 9 0 11
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The following table sets forth, for the periods indicated, certain items in the
Company's Statements of Operations as a percentage of net sales.
Year Ended June 30
1996 1995 1994
---- ---- ----
Gross profit 37.2% 36.6% 36.8%
Selling, general, and
administrative expenses 37.6% 34.2% 33.8%
Interest expense, net 1.0% .6% .4%
Provision (benefit) for income taxes (.2)% .7% 1.1%
Change in accounting -- -- .1%
Net income (loss) (.4)% 1.1% 1.4%
====== ====== ======
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Net sales for fiscal 1996 were $65,567,000, an increase of 15% from net sales of
$56,914,000 in the prior year. Management believes the comparable store sales
increase of 6% was a result of its promoting specialist retail strategy, which
utilizes increased advertising, product assortment, larger stores to increase
store traffic and trained salespeople to produce increased sales. The total
sales increase can also be attributed to the relocation of the Southdale store
in October 1995 and the expansion of the Rosedale store completed in February
1996. The sales increase can also be attributed to sales growth in televisions
which are 31" and larger. Although prices have decreased 10% to 15% on mature
products such as audio components, car audio products, video cassette recorders,
and camcorders, the Company's unit sales increases offset the price decreases.
Gross profit increased to $24,388,000 for fiscal 1996 compared to $20,852,000
for fiscal 1995 and increased as a percent of sales to 37.2% in fiscal 1996 from
36.6% in fiscal 1995. Sales of services and furniture and accessory sales, which
carry a higher gross margin, grew as a percent of total sales and were the
primary reason for the increased percentages.
Selling, general and administrative expense, as a percentage of net sales,
increased to approximately 37.6% for fiscal 1996 from 34.2% for fiscal 1995. The
approximate $5,227,000 increase in such expenses for fiscal 1996 is attributable
largely to an increase in sales commissions, salaries and benefits of
approximately $2,300,000; occupancy costs, insurance and depreciation of
approximately $1,142,000; increased advertising of approximately $697,000;
increased fees paid to finance companies related to customer financing
arrangements of approximately $247,000; and restructuring costs related to
reduction of personnel of approximately $90,000. The increased expenses were due
in part to the addition of selling square footage in the Edina and Roseville
stores and to unit sales increases which resulted in increased expenses for
warehousing, handling, personnel and home delivery.
Interest expense for 1996 increased as a percentage of net sales to 1% for 1996
from .6% in 1995. The increase of approximately $332,000 was attributable to
increased borrowings for inventory and capital expenses and includes interest of
$105,000 related to the Cedar Rapids store capital lease.
The Company recorded other income 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 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 reported a net loss for 1996 of approximately $251,000 ($.09 per
share) compared to a net income of approximately $632,000 ($.23 per share) in
1995.
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994
Net sales for fiscal 1995 were $56,914,000, an increase of 24.5% from net sales
of $45,826,000 in the prior year. Management believes the comparable store sales
increase of 13% was a result of its promoting specialist retail strategy, which
utilizes increased advertising, product assortment, larger stores to increase
store traffic and trained salespeople to produce increased sales. The total
sales increase can also be attributed to the opening of two stores, one in Des
Moines, Iowa in April 1994 and one in Cedar Rapids, Iowa in May 1995.
10
Gross profit increased to $20,852,000 for fiscal 1995 compared to $16,856,000
for fiscal 1994 and decreased as a percent of sales to 36.6% in fiscal 1995 from
36.8% in fiscal 1994. Video and cellular sales, which carry a lower gross
margin, grew as a percent of total sales and were the primary reason for the
reduced margins.
Selling, general and administrative expense, as a percentage of net sales,
increased to approximately 34.2% for fiscal 1995 from 33.9% for fiscal 1994. The
approximate $3,988,000 increase in such expenses for fiscal 1995 is attributable
largely to an increase in sales commissions, salaries and benefits of
approximately $2,026,000; occupancy costs, insurance and depreciation of
approximately $516,000; increased advertising of approximately $406,000; and
increased fees paid to finance companies related to customer financing
arrangements of approximately $205,000.
Interest expense for 1995 increased approximately $138,000 and increased as a
percentage of net sales to .6% for 1995 from .4% in 1994.
The Company reported 1995 net income of approximately $632,000 ($.23 per share)
compared to approximately $637,000 ($.23 per share) in 1994.
Liquidity and Capital Resources
For 1996, cash provided by operations totaled approximately $746,000 compared to
cash used for operations of $492,000 during 1995. Capital expenditures during
1996 totaled $2,936,000 compared to $2,271,000 during 1995. These expenditures
were principally for store remodeling or relocation, furniture and fixtures, and
other equipment. The capital expenditures were partially financed through
additional borrowings under the Company's line-of-credit agreement.
At June 30, 1996, the Company maintained 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 borrowings 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.
Outstanding advances on the revolving credit line as of June 30, 1996 and 1995,
were $7,225,000 and $5,225,000, respectively. Total borrowings outstanding under
the agreement are limited based on eligible accounts receivable and inventories.
The amount available for borrowing as of June 30, 1996 was $5,512,236. Under
this agreement, the Company has agreed, among other matters, to maintain minimum
tangible net worth and earnings and equity ratios, all as defined by the
agreement. The Company was in compliance with or subsequently obtained waivers
or amendments for all terms of the credit agreement as of June 30, 1996. The
agreement will expire on December 31, 1996.
On September 12, 1996, the Company amended this credit agreement to provide for
two credit facilities through September 30, 1998. The first facility is a
working capital line of credit which provides for up to $6,500,000 in available
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. The second credit
facility is a term loan of $3,000,000 and bears interest at the bank reference
rate plus .25% or the adjusted certificate of deposit rate plus 2.25%, at the
Company's option.
Working capital at June 30, 1996 was $6,450,000 compared to $6,587,000 at June
30, 1995. The current ratio was 2.1 to 1 at June 30, 1996, compared to 2.3 to 1
at June 30, 1995.
Inventories were valued at approximately $8,727,000 and $8,398,000 at June 30,
1996 and 1995, respectively. The increase in inventories was a result of the
display and stocking requirements of new products lines and the relocation of
one store and the expansion of one store.
The Company has capital expenditures of $250,000 planned for fiscal 1997,
primarily for computer equipment and updating store displays and fixtures. The
Company believes that its current working capital and funds available under its
working capital line of credit are adequate to meet operating cash requirements
and believes that its present capital resources, future operations and its
ability to raise additional funds will provide adequate financial resources to
fund its future growth.
11
Statement of Financial Accounting Standards No. 121
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 effective July 1, 1996. The adoption did not have a
material impact on the financial position or results of operations of the
Company.
Impact of Inflation
Audio King believes that inflation has not had a significant effect on its
business because technological advances in the consumer electronics industry
have resulted in lower per unit product costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and notes thereto of Audio King as of June
30, 1996 and 1995 and for the three years in the period ended June 30, 1996 are
included herein on the following pages and are incorporated by reference in Item
14 of this Form 10-K.
Report of Independent Public Accountants
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Operations for the years ended June 30, 1996, 1995
and 1994
Consolidated Statements of Changes in Shareholders' Investment for the years
June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995
and 1994
Notes to Consolidated Financial Statements
12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Audio King Corporation:
We have audited the accompanying consolidated balance sheets of Audio King
Corporation (a Minnesota corporation) and subsidiaries as of June 30, 1996 and
1995, and the related consolidated statements of operations, changes in
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Audio King Corporation and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
As discussed in Note 2, the Company changed its method of accounting for income
taxes effective July 1, 1993.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 26, 1996
13
CONSOLIDATED BALANCE SHEETS
At June 30
Amounts in thousands except share data
1996 1995
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 7 $ 29
Vendor and other accounts receivable, net of
allowances of $161 and $141 3,340 2,953
Inventories 8,727 8,398
Prepaid income taxes and other 342 423
-------- --------
Total current assets 12,416 11,803
-------- --------
Property And Equipment:
Furniture, fixtures and equipment 3,452 2,949
Leasehold improvements 5,494 3,516
Building and equipment under capital leases 1,199 1,195
Accumulated depreciation and amortization (3,094) (2,335)
-------- --------
Total property and equipment, net 7,051 5,325
Other Assets, principally goodwill 1,413 1,270
-------- --------
$ 20,880 $ 18,398
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term obligations 536 102
Vendor and other accounts payable $ 3,859 $ 3,999
Checks issued not yet presented for payment 215 172
Accrued liabilities 1,356 942
-------- --------
Total current liabilities 5,966 5,216
Long-Term Obligations, less current portion 7,750 6,201
Long-Term Liabilities,
primarily deferred lease incentives (Note 5) 585 270
-------- --------
Commitments And Contingencies (Notes 5 And 6)
Shareholders' Investment:
Preferred stock, 6,000,000 shares authorized; no shares
issued and outstanding -- --
Common stock, $.001 par, 20,000,000 shares authorized;
2,774,980 and 2,713,329 shares issued and outstanding 3 3
Additional paid-in capital 4,559 4,441
Retained earnings 2,017 2,267
-------- --------
Total shareholders' investment 6,579 6,711
-------- --------
$ 20,880 $ 18,398
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
14
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30
(Amounts in thousands except per share data)
1996 1995 1994
---- ---- ----
Net Sales $ 65,567 $ 56,914 $ 45,826
Cost Of Merchandise Sold 41,180 36,062 28,970
-------- -------- --------
Gross Profit 24,387 20,852 16,856
Selling, General And Administrative Expenses 24,679 19,472 15,484
-------- -------- --------
Operating Income (Loss) (292) 1,380 1,372
Interest Expense, Net 649 317 179
Other Income, (Note 2) 575 -- --
-------- -------- --------
Income (Loss) Before Income Taxes And Cumulative
Effect Of Change In Accounting For Income Taxes (366) 1,063 1,193
Income Tax Provision (Benefit) (115) 430 511
-------- -------- --------
Net Income (Loss) Before Cumulative Effect Of
Change In Accounting For Income Taxes (251) 633 682
Cumulative Effect Of Change In
Accounting For Income Taxes (Note 2) -- -- 45
-------- -------- --------
Net Income (Loss) $ (251) $ 633 $ 637
======== ======== ========
Earnings Per Share - Primary And Fully Diluted:
Net Income (Loss) Before Cumulative Effect Of Change In
Accounting For Income Taxes $ (.09) $ .23 $ .25
Cumulative Effect Of Change In Accounting For Income
Taxes -- -- (.02)
-------- -------- --------
Total $ (.09) $ .23 $ .23
======== ======== ========
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
For the years ended June 30
(Amounts in thousands)
Additional Total
Common Stock Paid-In Retained Shareholders'
Shares Amount Capital Earnings Investment
BALANCE, June 30, 1993 2,624 $ 3 $ 4,285 $ 997 $ 5,285
Stock Options and
Warrants Exercised 18 -- 7 -- 7
Net income -- -- -- 638 637
------- ------- ------- ------ ------
BALANCE, June 30, 1994 2,642 $ 3 $ 4,292 $ 1,635 $ 5,929
Sale of Common Stock 42 -- 122 -- 122
Stock Options and
Warrants Exercised 29 -- 27 -- 27
Net income -- -- -- 633 633
------- ------- ------- ------ ------
BALANCE, June 30,1995 2,713 $ 3 $ 4,441 $ 2,268 $ 6,711
Sale of Common Stock 44 -- 99 -- 99
Stock Options Exercised 18 -- 19 -- 20
Net income -- -- -- (251) (251)
------- ------- ------- ------ -------
BALANCE, June 30, 1996 2,775 $ 3 $ 4,559 $ 2,017 $ 6,579
======= ======= ======= ====== =======
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30
Amounts in thousands
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (251) $ 633 $ 637
Adjustments required to reconcile net income to net
cash provided by (used for) operating activities -
Depreciation and amortization 1,249 693 487
Deferred income taxes (235) (83) (43)
Cumulative effect of change in accounting for income
taxes (Note 2) -- -- 45
Changes in other operating items (Note 6) (16) (1,734) (682)
------- ------- -------
Net cash provided by (used for) operating activities 747 (492) 445
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,936) (2,271) (1,725)
Sale of property and equipment -- 1,380 --
------- ------- -------
Net cash used for investing activities (2,936) (891) (1,725)
------- ------- -------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving agreement 2,000 1,325 (150)
Borrowings under term loan facility -- -- 1,500
Net borrowings (repayments) under capital lease obligations 48 (80) (64)
Sale of common stock and exercise of stock options 119 149 7
------- ------- -------
Net cash provided by financing activities 2,167 1,394 1,293
------- ------- -------
NET INCREASE (DECREASE) IN CASH (22) 11 13
CASH, beginning of year 29 17 4
------- ------- -------
CASH, end of year $ 7 $ 29 $ 17
======= ======= =======
NONCASH ACTIVITIES:
Capital lease obligations entered into
for property and equipment $ 62 $1,041 $ --
======= ======= =======
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Business
Audio King Corporation through it operating subsidiaries is a retail sales and
service organization for audio and video equipment with eleven specialty stores;
six in Minneapolis/Saint Paul, Minnesota, and one store each in Rochester and
St. Cloud, Minnesota, Sioux Falls, South Dakota, and Des Moines and Cedar
Rapids, Iowa. Additionally, the Company operates a design showroom and clearance
center in the Minneapolis area.
(2) Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts of Audio King Corporation and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
Inventories: Merchandise and repair parts inventories are stated at the lower of
cost or market as determined by the weighted average cost method which
approximates the first-in, first-out cost method.
Property and Equipment: Property and equipment is stated at cost. Capital leases
are recorded at the lesser of fair value or the discounted present value of the
minimum lease payments. Depreciation and amortization for financial reporting
purposes is provided on the straight-line method over the estimated useful lives
of the respective assets. The principal estimated useful lives are five to ten
years for furniture, fixtures, and equipment and five years for vehicles.
Leasehold improvements are depreciated over the lesser of their useful life or
the life of the lease.
Maintenance and repairs are charged to expense as incurred. Betterments and
renewals that extend the life of an asset are capitalized and depreciated. Cost
of assets sold or retired and the related amounts of accumulated depreciation
and amortization are removed from the related accounts, and any residual values
are charged or credited to income.
Other Assets: Other assets consists principally of goodwill which is being
amortized on a straight-line basis over 40 years. Accumulated amortization
approximated $385,000 and $346,000 at June 30, 1996 and 1995. Goodwill
originated when Audio King Corporation acquired Audio King, Inc. and totaled
$1,182,000 and $1,221,000 at June 30, 1996 and 1995, respectively.
Accrued Liabilities: Accrued liabilities consisted of the following as of June
30:
1996 1995
---- ----
Payroll-related $ 626,000 $ 491,000
Other 730,000 451,000
---------- --------
$ 1,356,000 $ 942,000
========== ========
Revenue Recognition: Revenues from the sale of merchandise inventory are
recognized at the time of sale, net of cancellations or refunds. Repair and
service and installation revenues are recognized net of cancellations and
refunds when the service is performed. The Company grants credit to customers,
substantially all of whom are local residents, businesses and governmental
agencies, third-party consumer finance companies and vendors.
Extended Service Program: The Company contracts with a third party to provide
the services called for under service contracts sold by the Company. The Company
has no future liability under the contracts. The Company records the sales of
service contracts net of cancellations and refunds. Under this arrangement,
gross profit is recognized to the extent of the contract's sale price net of
amounts paid to the third party. The Company recognized approximately
$1,956,000, $1,710,000, and $1,285,000 of gross profit in 1996 and 1995, and
1994, respectively, related to these sales. The Company also provides repair
services under these contracts and is compensated by the third party at rates
customarily charged for these repairs.
Other Income: The Company recorded other income of $575,000 during 1996 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 sale. The revised agreement also provided
for a lump-sum
17
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.
Advertising Expense: Advertising expense, net of cooperative advertising
allowances, is charged to operations as incurred. The net amount of advertising
expense charged to operations totaled approximately $3,100,000, $2,400,000 and
$2,000,000 for the years ended June 30, 1996, 1995, and 1994, respectively.
Income Taxes: The Company accounts for income taxes under the liability method
whereby deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Earnings (Loss) Per Share: Earnings (loss) per share has been computed by
dividing net income (loss) by the number of weighted average shares of common
stock and common stock equivalent shares outstanding during the period except to
the extent deemed anti-dilutive. Common stock equivalents represent the dilutive
effect of the assumed exercise of outstanding stock options and warrants. The
number of weighted average shares of common stock and common stock equivalent
shares on a fully diluted basis used in the computation of earnings per share
for earnings per common and common stock equivalent share was 2,734,000 in 1996,
2,811,000 in 1995, and 2,814,000 in 1994.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Ultimate results could differ from those estimates.
Statement of Financial Accounting Standards No. 121
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 July 1, 1996. The adoption did not have a material
impact on the financial position or results of operations of the Company.
(3) Long-Term Obligations
The Company had the following long-term obligations as of June 30:
1996 1995
---- ----
Bank borrowings $7,225,000 $5,225,000
Capitalized lease obligations for property,
equipment, and vehicles, interest at 5.8%
to 12%, payable at varying amounts through 2015 1,061,000 1,078,000
--------- ---------
8,286,000 6,303,000
Less - current portion (536,000) (102,000)
---------- ---------
Long-term obligations $7,750,000 $6,201,000
========== =========
Scheduled annual maturities of long-term obligations for each of the five fiscal
years following June 30, 1996 are as follows: $536,000 in 1997, $528,000 in
1998, $4,735,000 in 1999, $489,000 in 2000, $510,000 in 2001 and $1,488,000
thereafter.
At June 30, 1996, the Company maintained a working capital line of credit which
provided for up to $11,000,000 from October 1 of any one year through February
15 of the succeeding year, at which time available borrowings were reduced to
$8,000,000. The credit facility bore interest at the bank's reference rate or at
the adjusted certificate of deposit rate plus 2%, at the Company's option (7.6%
at June 30, 1996).
Outstanding advances on the revolving credit line as of June 30, 1996 and 1995,
were $7,225,000 and $5,225,000, respectively. Total borrowings outstanding under
the agreement are limited based on eligible accounts receivable and inventories.
The amount available for borrowing as of June 30, 1996 was $5,512,000. The
Company agreed, among other matters, to maintain minimum tangible net worth and
earnings and equity ratios, all as defined by the agreement. The Company is in
compliance with or has obtained waivers and amendments for all covenants June
30, 1996. On September 12, 1996, the Company amended
18
this credit agreement to provide for two credit facilities through September 30,
1998. The first facility is a working capital line of credit which provides for
up to $6,500,000 in available 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. The second credit facility is a term loan of $3,000,000 and
bears interest at the bank reference rate plus .25% or the adjusted certificate
of deposit rate plus 2.25%, at the Company's option.
(4) Income Taxes
The Company files consolidated federal and state income tax returns. Components
of the provision for income taxes and the effects of timing differences between
the recognition of income and expenses for financial reporting and income tax
reporting purposes for each of the three years in the period ended June 30 are
as follows:
1996 1995 1994
---- ---- ----
Current payable
Federal $ 88,000 $ 395,000 $ 432,000
State 32,000 118,000 122,000
------ ------- -------
120,000 513,000 554,000
Deferred tax benefit (235,000) (83,000) (43,000)
--------- -------- --------
Total provision (benefit) $ (115,000) $ 430,000 $ 511,000
========= ======== ========
The approximate effect of temporary differences between the financial statement
and tax bases of certain assets and liabilities that gave rise to deferred tax
balances at June 30 were as follows:
CURRENT DEFERRED TAX ASSET: 1996 1995
---- ----
Accounts receivable allowance $ 66,000 $ 56,000
Inventories - 38,000
Accrued expenses 156,000 83,000
Current portion of deferred revenue related
to extended to service program - 10,000
-------- --------
Net current deferred tax asset $ 222,000 $ 145,000
======== ========
LONG-TERM DEFERRED TAX ASSET (LIABILITY):
Excess tax depreciation $ 34,000 $ (72,000)
Deferred lease incentives 143,000 108,000
-------- --------
Net long-term deferred tax asset
(liability) $ 177,000 $ 36,000
======== ========
A reconciliation of the provision (benefit) for income taxes at the federal
statutory income tax rate to the provision as reported is as follows:
1996 1995 1994
---- ---- ----
Provision computed at the statutory
federal income tax rate $(124,000) $ 372,000 $ 405,700
State income taxes, net of federal effect (29,000) 67,000 78,800
Amortization of goodwill and other intangibles 13,000 12,000 13,300
Other 25,000 (21,000) 13,200
--------- --------- ---------
Provision (benefit) as reported $(115,000) $ 430,000 $ 511,000
========= ========= =========
19
(5) Shareholders' Investment
Stock Option Plan: Under the Company's 1994 stock option plan (the 1994 Plan),
400,000 common shares are reserved for grant as either nonqualified or incentive
stock options to officers, directors, key employees and consultants or advisors.
Grants of incentive stock options can be made until 2004 and grants of
nonqualified stock options can be made until the 1994 Plan is terminated, in
each case as determined by the board of directors or a board-designated
committee. Incentive stock options must be granted with an exercise price of not
less than 100% of the fair market value on the date of grant. Nonqualified
options may be granted at less than the fair market value on the date of grant
if approved by the board of directors or a board-designated committee. If an
incentive stock option is granted to an individual who owns more than 10% of the
voting rights of the Company's common stock, the option price may not be less
than 110% of the fair market value on the date of grant. The term of the options
may not exceed ten years after the date of grant, except in the case of
nonqualified stock options, whereby the terms are established by the board of
directors or a board-designated committee. Outstanding options at June 30, 1995
may be exercised in whole or in installments at various dates through fiscal
year 2004, as determined by the board of directors or a board-designated
committee. The Company also has a 1987 Stock Option Plan (the 1987 Plan) with
terms similar to the 1994 Plan; however, the Board of Directors determined that
no additional options would be granted under the 1987 Plan upon shareholder
approval of the 1994 Plan in November 1994. The following information relates to
the options under both the 1994 Plan and 1987 Plan.
Options Price Per
Outstanding Share
June 30, 1993 256,800 .75 - 4.00
Forfeited or canceled (1,000) .75 - 1.88
Granted 9,000 2.88
Exercised (5,400) .75 - 1.88
------- ----------
June 30, 1994 259,400 .75 - 4.00
Forfeited or canceled (700) .75 - 1.88
Granted 48,701 3.06 - 4.63
Exercised (13,800) .75 - 1.88
------- ----------
June 30, 1995 293,601 .75 - 4.63
Forfeited or canceled -
Granted 36,900 3.16 - 3.68
Exercised (17,400) .75 - 1.88
------- ----------
June 30, 1996 Options Available for Grant 313,101 .75 - 4.63
=======
June 30, 1996 Options Exercisable 302,501
=======
(6) Supplemental Cash Flow Information
Changes in other operating items for the three years ended June 30 consist of
the following:
1996 1995 1994
---- ---- ----
Vendor and other accounts receivable $(387,000) $ (694,000) $ (766,000)
Inventories (329,000) (1,534,000) (1,816,000)
Prepaid income taxes and other 132,000 7,000 (104,000)
Checks issued not yet presented for payment 43,000 (82,000) 88,000
Vendor and other accounts payable (140,000) 605,000 1,559,000
Accrued liabilities 437,000 (66,000) 392,000
Income taxes payable (23,000) (25,000) (96,000)
Deferred lease incentives 320,000 38,000 50,000
Other (69,000) 17,000 11,000
---------- ---------- ------
$ (16,000) $ (1,734,000) $ (682,000)
========== ========= =========
Additional supplemental cash flow information is as follows:
Interest paid $ 649,000 $ 317,000 $ 179,000
Income taxes paid, net of refunds received $ 550,000 $ 552,000 $ 668,000
20
(7) Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the fiscal years ended June 30, 1996 and
1995 are as follows:
1996
------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales $ 15,336,000 $ 19,660,000 $ 16,220,000 $ 14,351,000
Gross profit $ 5,689,000 $ 7,522,000 $ 6,105,000 $ 5,072,000
Net income (loss) $ 5,000 $ 443,000 $ 75,000 $ (773,000)
Net income (loss) per share $ .00 $ .16 $ .03 $ (.28)
1995
------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales $ 12,342,000 $ 17,504,000 $ 13,400,000 $ 13,668,000
Gross profit $ 4,644,000 $ 6,033,000 $ 5,159,000 $ 5,017,000
Net income (loss) $ 105,000 $ 499,000 $ 103,000 $ (74,000)
Net income (loss) per share $ .04 $ .18 $ .04 $ (.03)
The results for the second quarter of 1996 included a one time charge for
leasehold improvement write off of $192,000 related to the relocation of the
Edina store. In the third quarter of 1996, the Company recorded other income of
$575,000 as a result of a revised agreement related to cellular telephone sales
commissions. In the fourth quarter of 1996, the Company recorded an inventory
book to physical adjustment of $283,000.
The results for the fourth quarter of 1995 included an inventory valuation
adjustment of $94,000 and an adjustment to increase the reserve for salaries
related to vacation pay of $26,000.
(8) Commitments and Contingencies
Lease Commitments: The Company leases store space at its retail locations and
office/warehouse space under operating leases which expire at various dates
through 2015. Certain of the leases provide for additional rents based on a
percentage of annual retail sales in excess of stipulated minimums. In addition,
the Company has received lease incentives in connection with certain leases. The
Company is recognizing the benefits related to these lease incentives on a
straight-line basis over the applicable lease terms. At June 30, 1996 and 1995,
the Company has recorded deferred lease incentives of $585,000 and $270,000,
respectively.
The leases generally contain renewal options and require the Company to pay
maintenance, insurance, taxes, and other expenses in addition to minimum annual
rents. Total rental expense, including percentage rents for such operating
leases, was approximately $1,819,000 in 1996, $1,395,000 in 1995, and $1,285,000
in 1994.
21
The following is a schedule, by year, of future minimum lease payments under
leases with an initial noncancelable term in excess of one year as of June 30,
1996:
Capital Operating
Leases Leases
1997 $ 153,000 $ 1,883,000
1998 151,000 1,823,000
1999 130,000 1,696,000
2000 108,000 1,599,000
2001 130,000 1,627,000
Thereafter 2,166,000 14,513,000
--------- ----------
Total payments 2,838,000 $ 23,141,000
==========
Amounts representing interest 1,777,000
---------
1,061,000
Less: Current maturities (36,000)
---------
Long term capital lease obligations $ 1,025,000
=========
Litigation: In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management, upon consultation with legal
counsel, any liability resulting from such proceedings would not have a material
adverse effect on the Company's financial position or results of operations.
Employment Agreements: The Company has entered into executory
employment/non-compete agreements with certain key officers covering employment
through June 30, 1997. These agreements provide for minimum salary levels as
well as incentive bonuses which are payable if specified management goals are
attained. The aggregate commitment for future salaries at June 30, 1997,
excluding bonuses, was approximately $460,000. Under the terms of all
agreements, among other matters, the key officers agreed not to compete with the
Company during the terms of the agreements and for two years thereafter. Total
compensation expense under these agreements was approximately $580,000 in 1996,
$614,000 in 1995, and $544,000 in 1994.
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the sections
entitled "Determination of Number of and Election of Directors" and "Executive
Officers of Audio King Corporation and Audio King, Inc." in the Company's
definitive proxy statement for its November 13, 1996 Annual Meeting of
Shareholders. Copies of the Company's definitive proxy statement will be filed
with the Securities and Exchange Commission pursuant to Rule 14A within 120 days
after the close of the fiscal year for which this report is filed.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the section
entitled "Executive Compensation" in the Company's definitive proxy statement
for its November 13, 1996 Annual Meeting of Shareholders. Copies of the
Company's definitive proxy statement will be filed with the Securities and
Exchange Commission pursuant to Rule 14A within 120 days after the close of the
fiscal year for which this report is filed.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the sections
entitled "Principal Shareholders" and "Security Ownership of Management" in the
Company's definitive proxy statement for its November 13, 1996 Annual Meeting of
Shareholders. Copies of the Company's definitive proxy statement will be filed
with the Securities and Exchange Commission pursuant to Rule 14A within 120 days
after the close of the fiscal year for which this report is filed.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the section
entitled "Certain Relationships and Related Transactions" in the Company's
definitive proxy statement for its November 13, 1996 Annual Meeting of
Shareholders (if any disclosure is required). Copies of the Company's definitive
proxy statement will be filed with the Securities and Exchange Commission
pursuant to Rule 14A within 120 days after the close of the fiscal year for
which this report is filed.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) All Financial Statements
See Financial Statements included in "Item 8. Financial Statements and
Supplementary Data."
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of the year covered by this report.
(c) Exhibits
See Exhibit Index immediately following the signature page of this
report.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: September 27, 1996 AUDIO KING CORPORATION
By: /s/ Henry G. Thorne
Henry G. Thorne
President, Chief Executive Officer
and Treasurer
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.
Power of Attorney
Each person whose signature appears below constitutes and appoints
Henry G. Thorne and Randel S. Carlock as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10- K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Title Date
/s/ Randel S. Carlock Chairman of the Board September 27, 1996
Randel S. Carlock
/s/ Henry G. Thorne President, Chief Executive Officer September 27, 1996
Henry G. Thorne Treasurer and Director (Principal
Executive, Financial, and
Accounting Officer)
/s/ Sherman A. Swenson Director September 27, 1996
Sherman A. Swenson
/s/ Barry R. Rubin Director September 27, 1996
Barry R. Rubin
/s/ Gary S. Kohler Director September 27, 1996
Gary S. Kohler
24
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-K
For the fiscal year ended
June 30, 1996 Commission File No. 0-16154
AUDIO KING CORPORATION
Exhibit
Number Document
3.1 Articles of Incorporation, as amended. (Incorporated by reference to
Exhibit 3.1 to the Registrant's Form 10-K for the fiscal year ended
June 30, 1992.)
3.2 Bylaws, as amended. (Incorporated by Reference to Exhibit 3.2 to the
Registrant's Form 10-K for the fiscal year ended June 30, 1990.)
4.1 Form of Common Stock Certificate. (Incorporated by Reference to Exhibit
4.1 to Form S-18 Registration Statement , No. 33-14349C.)
10.1 Consulting Agreement dated March 13, 1984 between Audio King, Inc. and
Albert C. Kempf. (Incorporated by Reference to Exhibit 10.10 to Form
S-18 Registration Statement, No. 33-14349C.)
10.2 Consulting Agreement and Stock Purchase Agreement, dated February 15,
1985, between Audio King, Inc. and Scott W. Preston. (Incorporated by
Reference to Exhibit 10.11 to Form S-18 Registration Statement, No.
33-14349C.)
10.3 Lease Agreement between Audio King, Inc. and Acky-Audio Limited
Partnership dated July 1, 1993 relating to the Brookdale Store.
(Incorporated by Reference to Exhibit 10.1 to the Registrant's Form
10-Q for the quarter ended September 30, 1993.)
10.4 Burnsville Plaza Shopping Center Lease dated July 10, 1992 between
Audio King, Inc. and Ridgedale Plaza Shopping center Partnership
relating to the Burnsville store. (Incorporated by Reference to Exhibit
10.21 to Registrant's Form 10-K for the fiscal year ended June 30,
1992.)
10.5 Lease Agreement dated June 30, 1989 between Audio King, Inc. and
Commercial Partners/Maplewood relating to the Maplewood Store.
(Incorporated by Reference to Exhibit 10.11 to the Registrant's Form
10-K for the fiscal year ended June 30, 1989.)
10.6 Lease Agreement dated November 13, 1986 between Audio King, Inc. and
MEPC American Properties Incorporated relating to the Rochester Store.
(Incorporated by Reference to Exhibit 10.30 to Form S-18 Registration
Statement No. 33-14349C.)
25
Exhibit
Number Document
10.7 Lease Agreement dated May 6, 1988 between Audio King, Inc. and The
Equitable Life Assurance Society of the United States relating to the
Sioux Falls Store. (Incorporated by Reference to Exhibit 10.31 to the
Registrant's Form 10-K for the fiscal year ended June 30, 1988.)
10.8 Lease Agreement dated December 24, 1985 between Audio King, Inc. and
John M. Hoogesteger relating to the St. Louis Park Clearance Center.
(Incorporated by Reference to Exhibit 10.25 to Form S-18 Registration
Statement No. 33-14349C.)
10.9 Lease Agreement dated September 29, 1987 between Audio King, Inc. and
Urban Associates relating to the St. Cloud Store. (Incorporated by
Reference to Exhibit 10.39 to Form S-18 Registration Statement No.
33-14349C.)
10.10 Lease Amendment Agreement dated November 15, 1991 between Audio King,
Inc. and Urban Associates relating to the St. Cloud store.
(Incorporated by Reference to Exhibit 10.1 to Registrant's Form 10-Q
for the quarter ended December 31, 1991.)
10.11 Lease Agreement dated January 31, 1992 between Audio King, Inc. and C.
Harvey Wilkins relating for the corporate office facility.
(Incorporated by reference to Exhibit 10 to Registrant's Form 10-Q for
the quarter ended March 31, 1992.)
10.12 Lease Agreement, dated September 8, 1992, between Audio King, Inc. and
CSM Investors, Inc. relating to the Ridgedale store. (Incorporated by
reference to Exhibit 10.19 to the Registrant's Form 10-K for the fiscal
year ended June 30, 1993.)
10.13 Modification of Lease dated December 7, 1993 between Audio King, Inc.
and John M. Hoogesteger relating to the St. Louis Park Clearance
Center. (Incorporated by reference to Exhibit 10.18 to the Registrant's
Form 10-K for the fiscal year ended June 30,1994.)
10.14 Second Addendum effective October 1, 1994 to Lease Agreement between
Audio King, Inc. and C. Harvey Wilkins relating to the St. Louis Park
corporate office facility. (Incorporated by reference to Exhibit 10.19
to the Registrant's Form 10-K for the fiscal year ended June 30,1994.)
10.15 1987 Stock Option Plan and form of Stock Option Agreements.
(Incorporated by Reference to Exhibit 10.39 to Form S-18 Registration
Statement No. 33-14349C.) **
10.16 Amendment to the 1987 Stock Option Plan dated November 15, 1990.
(Incorporated by Reference to Exhibit 10.32 to the Registrant's Form
10-K for the fiscal year ended June 30, 1991.) **
10.17 Amendment to 1987 Stock Option Plan adopted June 2, 1992. (Incorporated
by Reference to Exhibit 10.24 to Registrant's Form 10-K for the fiscal
year ended June 30, 1992.) **
26
Exhibit
Number Document
10.18 Amendment to 1987 Stock Option Plan adopted September 9, 1993.
(Incorporated by reference to Exhibit 10.23 to the Registrant's Form
10-K for the fiscal year ended June 30,1994.) **
10.19 Amended and Restated Credit Agreement dated September 18, 1992 among
the Registrant, Audio King, Inc., Specialty Home Electronics Repair,
Inc., and First Bank National Association. (Incorporated by reference
to Exhibit 10.24 to the Registrant's Form 10-K for the fiscal year
ended June 30,1994.)
10.20 Amended and Restated Revolving Credit Promissory Note dated September
18, 1992 of the Registrant, Audio King, Inc., and Specialty Home
Electronics Repair, Inc. and First Bank National Association.
(Incorporated by reference to Exhibit 10.29 to the Registrant's Form
10-K for the fiscal year ended June 30,1994.)
10.21 Security Agreement dated October 10, 1989 of the Registrant, Audio King
Inc., and Specialty Home Electronics Repair, Inc. and First National
Bank Association. (Incorporated by Reference to Exhibit 10.22 to the
Registrant's Form 10-K for the fiscal year ended June 30, 1990.)
10.22 Employment Agreement dated March 1, 1990 between the Registrant and
Randel S. Carlock. (Incorporated by Reference to Exhibit 10.24 to the
Registrant's Form 10-K for the fiscal year ended June 30, 1990.) **
10.23 Amendment to Employment Agreement dated October 26, 1992 between the
Registrant and Randel S. Carlock. (Incorporated by Reference to Exhibit
10 to the Registrant's Form 10-Q for the fiscal quarter ended September
30, 1992.) **
10.24 Employment Agreement dated July 1, 1993 between the Registrant and
Henry G. Thorne. (Incorporated by Reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the quarter ended September 30, 1993.)**
10.25 Employment Agreement dated July 1, 1993 between the Registrant and
Samuel F. Nichols. (Incorporated by Reference to Exhibit 10.3 to the
Registrant's Form 10-Q for the quarter ended September 30, 1993.)**
10.26 Employment Agreement dated July 1, 1993 between the Registrant and M.
Phillip Ward. (Incorporated by Reference to Exhibit 10.4 to the
Registrant's Form 10-Q for the quarter ended September 30, 1993.)**
10.27 Amendment to Amended and Restated Credit Agreement dated November 19,
1993 between the Registrant, Audio King, Inc., and Specialty Home
Electronics Repair, Inc. and First Bank National
Association.(Incorporated by Reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended December 31, 1993.)
27
Exhibit
Number Document
10.28 Amended and Restated Term Promissory Note dated November 19, 1993 of
the Registrant, Audio King, Inc., and Specialty Home Electronics
Repair, Inc. and First Bank National Association. (Incorporated by
Reference to Exhibit 10.1 to the Registrant's form 10-Q for the quarter
ended December 31, 1993.)
10.29 Lease agreement dated February 12, 1994 between Audio King Corporation
and MLH Realty Partnership V relating to the Des Moines store.
(Incorporated by Reference to Exhibit 10.1 to the Registrant's Form
10-Q for the quarter ended March 31, 1994.)
10.30 Second Amendment to Amended and Restated Credit Agreement dated
September 15, 1994 of the Registrant, Audio King, Inc., and Specialty
Home Electronics Repair, Inc. and First Bank National Association.
(Incorporated by reference to Exhibit 10.35 to the Registrant's Form
10-K for the fiscal year ended June 30, 1994.)
10.31 Amended and Restated Revolving Note dated September 15, 1994 of the
Registrant, Audio King, Inc., and Specialty Home Electronics Repair,
Inc. and First National Bank Association. (Incorporated by reference to
Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended
June 30, 1994.)
10.32 Purchase Agreement between Audio King of Iowa, Inc. and Ryan
Highlander, L.C. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended December 31, 1994.)
10.33 1994 Stock Option Plan, as amended, and forms of agreements.
(Incorporated by reference to Exhibit 10.2 to the Registrant's Form
10-Q for the quarter ended December 31, 1994.)**
10.34 Third Amendment to Amended and Restated Credit Agreement dated March
31, 1995 by and between the Registrant, Audio King, Inc. and Specialty
Home Electronics Repair, Inc. and First Bank National Association.
(Incorporated by reference to Exhibit 10.1 to the Registrant's Form
10-Q for the quarter ended March 31, 1995.)
10.35 Amended and Restated Revolving Note dated March 31, 1995 of the
Registrant, Audio King, Inc. and Specialty Home Electronics Repair,
Inc. to First Bank National Association. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended March
31, 1995.)
10.36 Fourth Amendment to Amended and Restated Credit Agreement dated April
14, 1995 by and between the Registrant, Audio King, Inc. and Specialty
Home Electronics Repair, Inc. and First Bank National Association.
(Incorporated by reference to Exhibit 10.3 to the Registrant's Form
10-Q for the quarter ended March 31, 1995.)
10.37 Amended and Restated Revolving Note dated April 14, 1995 of the
Registrant, Audio King, Inc. and Specialty Home Electronics Repair,
Inc. to First Bank National Association. (Incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-Q for the quarter ended March
31, 1995.)
28
Exhibit
Number Document
10.38 Contract of Sale with Seller Leaseback dated June 28, 1995 by and
between the Registrant, Audio King Iowa, Inc. and OLP Iowa, Inc.
(Incorporated by reference to Exhibit 10.41 to the Registrant's Form
10-K for the year ended June 30, 1995.)
10.39 Lease agreement dated June 28, 1995 between the Registrant and OLP
Iowa, Inc. relating to the Cedar Rapids store. (Incorporated by
reference to Exhibit 10.42 to the Registrant's Form 10-K for the year
ended June 30, 1995.)
10.40 Lease agreement dated June 29, 1995 between the Registrant and CLP
Partners relating to Centennial Lakes store in Edina. (Incorporated by
reference to Exhibit 10.43 to the Registrant's Form 10-K for the year
ended June 30, 1995.)
10.41 Lease agreement dated September 5, 1995 between the Registrant and
Flame Development relating to expansion of Rosedale location.
(Incorporated by reference to Exhibit 10.44 to the Registrant's Form
10-K for the year ended June 30, 1995.)
10.42 Second Amendment to Employment Agreement dated October 26, 1992 between
the Registrant and Randel S. Carlock. (Incorporated by reference to
Exhibit 10.45 to the Registrant's Form 10-K for the year ended June 30,
1995.)**
10.43* Second Amendment to Lease Agreement dated November 13, 1986 between the
Registrant and MEPC Apache Properties Inc. relating to the Rochester
store.
10.44* Second Amended and Restated Credit Agreement dated September 12, 1996
among the Registrant, Audio King, Inc., Specialty Home Electronic
Repair, Inc., Audio King of Iowa, Inc., Fast Trak Inc., and First Bank
National Association.
10.45* Amended and Restated Revolving Note in the amount of $6,500,000 dated
September 12, 1996 of the Registrant, Audio King, Inc., Specialty Home
Electronic Repair, Inc., Audio King of Iowa, Inc., Fast Trak Inc., to
First Bank National Association.
10.46* Amended and Restated Term Note in the amount of $3,000,000 dated
September 12, 1996 of the Registrant, Audio King, Inc., Specialty Home
Electronic Repair, Inc., Audio King of Iowa, Inc., Fast Trak Inc., to
First Bank National Association.
10.47* Amended and Restated Security Agreement dated September 12, 1996 among
the Registrant, Audio King, Inc., Specialty Home Electronic Repair,
Inc., Audio King of Iowa, Inc., Fast Trak Inc., and First Bank National
Association.
11.0* Computation of Earnings per Share.
21.1 Subsidiaries of the Registrant. (Incorporated by reference to Exhibit
21.1 to the Registrant's Form 10-K for the year ended June 30, 1995.)
23.1* Consent of Arthur Andersen LLP
24.0* Power of Attorney. (See signature page of this Annual Report on Form
10-K.)
27 Financial Data Schedule (filed with electronic version only)
* Filed herewith.
** Management contract or compensatory plan or arrangement.
29