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
For the fiscal year ended JUNE 30, 1997 or
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[ ] 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 0-15194
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SOUND ADVICE, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 59-1520531
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 TIGERTAIL BOULEVARD, DANIA, FLORIDA 33004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 922-4434
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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Title of class
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COMMON STOCK PURCHASE RIGHTS
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Title of class
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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 (17 CFR 229.405) 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 this Form 10-K [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT ON SEPTEMBER 19, 1997, BASED UPON THE CLOSING
MARKET PRICE OF THE REGISTRANT'S VOTING STOCK ON THE NASDAQ NATIONAL MARKET ON
SEPTEMBER 19, 1997, AS REPORTED IN THE WALL STREET JOURNAL, WAS APPROXIMATELY
$6,690,000.
THE REGISTRANT HAD 3,728,894 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF SEPTEMBER 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC SECTIONS INCORPORATED ARE IDENTIFIED UNDER APPLICABLE ITEMS HEREIN)
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT TO BE FILED IN
CONNECTION WITH ITS 1997 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY
REFERENCE IN PART III OF THIS REPORT.
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TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS........................................................................................1
General................................................................................1
Products...............................................................................2
Marketing Strategy.....................................................................3
Advertising............................................................................4
Operations.............................................................................5
Expansion..............................................................................8
Seasonality............................................................................9
Servicemarks..........................................................................10
Competition...........................................................................10
Employees.............................................................................10
ITEM 2. PROPERTIES.....................................................................................11
ITEM 3. LEGAL PROCEEDINGS..............................................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...............................................................................12
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT...........................................................13
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................................................15
Common Stock Information..............................................................15
Dividend Policy.......................................................................15
Recent Sales of Unregistered Securities...............................................16
ITEM 6. SELECTED FINANCIAL DATA........................................................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................20
Results of Operations.................................................................20
Liquidity and Capital Resources.......................................................23
Impact of Inflation and Foreign
Currency Fluctuations...............................................................25
Recent Accounting Pronouncement.......................................................25
Forward-Looking Statements............................................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................26
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT..............................................................................27
ITEM 11. EXECUTIVE COMPENSATION.........................................................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..........................................................................27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................27
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K........................................................................27
SIGNATURES.......................................................................................................28
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PART I
ITEM 1. BUSINESS.
GENERAL
Sound Advice, Inc. (the "Registrant"), incorporated in Florida on March
12, 1974, is a full service specialty retailer of a broad range of high-quality,
upscale entertainment and consumer electronic products. As of June 30, 1997, the
Registrant operated 21 stores in Florida which sell home and car audio systems,
large screen televisions, video products, cellular telephones and other personal
electronics, such as home telephones, answering machines and hand held audio
systems, car security systems, home entertainment furniture and related
customized services and accessories. In contrast to mass merchandisers and
discounters of consumer electronic products, the Registrant targets customers
seeking informed advice concerning product selection and system integration as
well as a broad selection of products incorporating the latest technology.
The Registrant's marketing strategy is to build customer satisfaction
and loyalty through its customer support program which includes a technically
proficient sales force and custom design, installation and repair services. The
Registrant's showrooms provide comfortable surroundings and contain audition
rooms and demonstration areas in its stores where customers are encouraged to
test and compare the products. In its stores, the Registrant emphasizes a broad
selection of upscale and specialty brand consumer electronic products.
The Registrant's operating strategy is to cluster its stores in larger
markets and maximize selling space per store in order to achieve economies of
scale, as well as provide convenient locations for its customers. The
Registrant's stores are currently clustered in four areas in Florida, including
the Miami/Ft. Lauderdale/West Palm Beach area (the "East Coast Stores"), the
Tampa/St. Petersburg/Clearwater/Sarasota/Fort Myers area (the "West Coast
Stores"), the Orlando area (the "Central Florida Stores") and Jacksonville (the
"Jacksonville Stores"). In fiscal year 1997 the Registrant did not add or close
any stores, but relocated one East Coast Store to a larger facility. As of this
date, the Registrant operates 21 stores, which, except for one smaller store, on
average contain approximately 15,000 to 17,000 gross square feet. It currently
plans during fiscal year 1998 to add one additional West Coast Store and to
relocate the remaining smaller West Coast Store to a larger facility containing
approximately 15,000 gross square feet. The Registrant is also exploring
potential sites for the combination of its central warehouse and distribution
facility in Deerfield Beach and its corporate headquarters in Dania upon the
expiration of those leases in 1998 and 1999, respectively. See "Expansion" in
this ITEM 1.
In fiscal year 1997, the Registrant's net sales were approximately $156
million which was a decrease from its net sales of approximately $169 million in
fiscal year 1996. This was primarily due to the elimination from its product mix
in January 1996 of personal computers, peripherals and multimedia products,
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which had been added in the fall of 1994, and the reduction or elimination
during fiscal years 1996 and 1997 from its product mix of certain nonperforming
low margin products. The products were eliminated or reduced as a result of
reduced margin created in certain products arising from increased competition
and, in the case of the personal computers and related products, their rapid
obsolescence. In addition, this action was part of the Registrant's renewed
specialty retailing focus on value added selling in its core categories of high
end audio, video (including home theater and large screen televisions) and
mobile electronics and on custom design and installation and repair services.
See "Results of Operations - Fiscal 1997 Compared to Fiscal 1996" and "Fiscal
1996 Compared to Fiscal 1995" in ITEM 7.
In April 1996, the Registrant's then existing $16,000,000 senior credit
facility was replaced with a $25,000,000 revolving credit facility from a new
lender. See "Liquidity and Capital Resources" in ITEM 7. Commensurate with the
elimination of personal computers, the Registrant initiated an expense reduction
program in the third quarter of fiscal year 1996. This program included a
reduction in the Registrant's employees, primarily in the areas of on-site
technicians known as "quicktechs" and store cashiers, associated with the
elimination of personal computers and other low margin products and a reduction
in store support personnel by having showroom managers directly supervise store
salespersons and conduct product training at the store level. During fiscal
1997, the Registrant focused its cost reduction efforts primarily in the area of
advertising and general corporate expenses. See "Results of Operations - Fiscal
1997 Compared to Fiscal 1996" and "Results of Operations - Fiscal 1996 Compared
to Fiscal 1995" in ITEM 7 and "Advertising" in this ITEM 1.
PRODUCTS
The Registrant offers its customers an extensive selection of
high-quality, brand-name entertainment and consumer electronic products,
including products incorporating the latest technology and not generally carried
by most of its competitors. In a typical store a customer can choose from more
than 2,100 products from approximately 150 manufacturers.
For the 1997 fiscal year, the Registrant's products and services may be
grouped into home and car audio, television and video, service, installation and
product warranty and miscellaneous products.
The home and car audio product group includes receivers, speakers,
audio compact disc players, cassette decks, turntables, tuners, equalizers,
signal processors, mini and normal sized pre-packaged audio systems, amplifiers,
car AM-FM radios, car antennas, security systems, radar detectors and audio
accessories.
The television and video product group includes stereo televisions,
large screen televisions, standard televisions, video tape players/recorders,
video camcorders, digital video disk (DVD) players, video enhancement devices,
home theater systems, direct broadcast satellite dishes and video accessories.
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The service, installation and product warranty group includes car
stereo installation, custom home installation, repair services, delivery and
extended warranty contracts offered by the Registrant on behalf of a third party
provider for most of its audio, video, car stereo and personal electronics
merchandise.
The miscellaneous product group includes personal and portable stereos,
answering machines, home telephones, hand held audio systems, equipment and
activation fees for cellular telephone service and home entertainment furniture.
In fiscal 1995 and 1996, the Registrant also had a separate personal
computer product group which included personal computers, peripherals and
multi-media products.
The table below shows the approximate percentage of the Registrant's
sales for the fiscal years ended June 30, 1997, 1996 and 1995 attributable to
each of the foregoing product groups. The personal computer product group, which
was added in fiscal year 1995, was discontinued in January 1996.
YEARS ENDED JUNE 30,
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PRODUCT GROUP 1997 1996 1995
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Home and Car Audio . . . . . . 48% 44% 39%
Television and Video . . . . 37 35 33
Service, Installation and
Product Warranty . . . . . . 12 11 10
Miscellaneous Products . . . . 3 5 12
Personal Computer . . . . . . - 5 6
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Total . . . . . . . . . . . . 100% 100% 100%
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The percentage of sales by each product group is affected by
promotional activities, consumer trends, store displays, the development of new
products and elimination or reduction of existing products and, thus, the
current mix may not be indicative of the mix in future years.
MARKETING STRATEGY
The Registrant views itself as being in a service business and
emphasizes to its sales personnel the need to provide personal attention and
assistance to each customer. The Registrant trains its sales personnel to assist
customers in their purchases by demonstrating products and providing information
with respect to features, price, quality and system integration. At each store,
audition rooms and segregated demonstration areas and displays of systems and
products promote sales by enabling sales personnel to demonstrate the use of
systems and products and by permitting customers to compare and test the
performance and features of similar products and systems (particularly higher
quality systems and products incorporating the latest technology and fully-
integrated audio/video systems). Consistent with this approach to marketing, the
Registrant commencing during fiscal year 1996 and continuing in fiscal year 1997
has incorporated audio, video and furniture combinations to demonstrate the
technology of home entertainment systems including home theater in a realistic
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setting. The Registrant also has a full-service personal and mobile electronics
center in most of its stores.
The Registrant has pursued a strategy of building customer satisfaction
and loyalty by having (i) a broad range of top-quality products including
products incorporating the latest technology and not generally sold by most of
its competitors; (ii) technically proficient sales personnel providing extensive
customer service; (iii) customer oriented showrooms where products can be
demonstrated to and tested by customers; and (iv) a support program including
custom design and installation and repair services.
The Registrant builds customer satisfaction by offering a comprehensive
customer support program. This program seeks to assure that each customer has
the product or system best suited for that individual. Any merchandise sold by
the Registrant may be auditioned on the customer's premises and, if a customer
is not satisfied, may be returned within 30 days for a refund or exchanged for
credit toward the purchase of another product or system. Customers are
encouraged to upgrade speakers originally purchased from the Registrant by
trading in such speakers within the first year for credit at the original
purchase price toward the purchase of new speakers. Car audio products (if
installed by the Registrant) carry a one year "defective replacement guaranty"
and, once the Registrant installs car stereo equipment, a customer will not be
charged for reinstallation into another car, for installing component upgrades
or reinstalling after repair service. The Registrant's custom department will
visit a customer's home to design and install audio and video products and
systems. The Registrant believes that the costs of its customer support program
is warranted in light of the additional sales and customer satisfaction created
by such ongoing program.
ADVERTISING
To support its marketing strategy, the Registrant promotes its
merchandise through an advertising program which emphasizes the print media
(consisting of newspaper advertising, catalogs and other customer mailings) and,
to a lesser extent, television and radio advertising. Such advertising program
consists of name recognition advertising emphasizing the Sound Advice name and
its competitive prices, its broad and high-quality name brand product selection,
available financing arrangements, its technically proficient sales force, its
support program, its customer oriented showrooms and its customer service and
repair program. In addition, newspaper and catalog advertisements and customer
mailings are directed towards specific products and their prices and specific
financing plans in connection with specific sales events and promotions. The
Registrant has an extensive customer database which is used for targeting its
mailings of catalogs and other promotional advertisements and materials.
The following table shows the Registrant's net advertising expense as a
percentage of net sales for the fiscal years ended June 30, 1997, 1996 and 1995.
Net advertising expense represents gross advertising expense less market
development funds, cooperative advertising and other promotional amounts
received from vendors for incentive and promotional programs.
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YEARS ENDED JUNE 30,
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1997 1996 1995
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(Dollars in Thousands)
Net advertising expense . . . . . $4,086 $6,476 $4,745
Percentage of net sales . . . . . 2.6% 3.8% 2.5%
During fiscal year 1997, net advertising expense was substantially
decreased as compared to fiscal 1996 primarily as a result of a reduction in
advertising expenditures associated with the cost reduction program initiated
during the latter part of fiscal 1996. A portion of the advertising expense
reduction is directly attributable to the elimination of personal computers from
the product mix. In addition, market development and other promotional amounts
received by the Registrant from vendors which offset advertising costs increased
slightly in fiscal 1997 as compared to the prior fiscal year. The primary reason
for the increase in market development funds is additional vendor funds received
in connection with the store relocation in November 1996.
In fiscal year 1996, net advertising expense substantially increased as
compared to fiscal 1995 primarily as a result of a decrease in market
development funds and other promotional amounts received from vendors and
increased advertising expense incurred primarily during the first half of fiscal
year 1996 in connection with increased competition for customers. The increase
in net advertising expense as a percentage of net sales between fiscal years
1996 and 1995 was the result of the increase in total net advertising expense in
fiscal year 1996 for the reasons discussed above combined with the decrease in
net sales in fiscal year 1996.
The Registrant handles the majority of its advertising through its
in-house advertising staff. The Registrant's use of an in-house staff allows it
to be more flexible in decisions regarding advertising, to make changes to
advertising copy on short notice, to publicize special product promotions and to
take advantage of new products and unexpected market developments on a timely
basis. During 1997, the Registrant utilized the services of marketing
consultants to assist in certain advertising campaigns and image development
programs.
OPERATIONS
SUPPLIERS, PURCHASING AND DISTRIBUTION:
The Registrant has no long-term merchandise purchase contracts or
commitments. The Registrant acquires its products from approximately 150
manufacturers, five of which manufacturers accounted for approximately 54% of
the Company's total product purchases during fiscal year 1997. Such five
manufacturers were Alpine, Mitsubishi, Panasonic, Sony and Yamaha. Management
believes that competitive sources of supply would be available for most of the
Registrant's products in the event that one or more of its sources were no
longer available. However, a loss of a primary source of supply could have an
adverse impact on the Registrant and, to the extent that the unavailable source
was for a product line for which the Registrant was the primary distributor in
its
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markets, the Registrant most likely would only be able to replace these products
with products that were widely available in its markets.
The Registrant's policy is to take advantage of cash or payment
discounts offered by manufacturers. The Registrant has also been able to obtain
substantial levels of manufacturers' rebates based on volume buying levels and
on occasion has been able to negotiate favorable terms on very large volume
purchases. Since March 1986, the Registrant has been a member of Progressive
Retailers Organization, Inc., a buying group comprised of 14 retailers of home
entertainment and consumer electronic products located throughout the country
("Progressive Retailers Organization").
Substantially all inventory purchased by the Registrant is shipped
directly to its central distribution facility located in Deerfield Beach,
Florida. Such facility is currently the central distribution facility for its
stores. Inventory is also shipped to and distributed from the Registrant's
support warehouses located in Tampa and Orlando (Winter Park), Florida, which
service the West Coast Stores and Central Florida Stores, respectively. Each
store receives shipments of inventory from the central distribution and/or
support warehouse facilities, at least three times a week, and sometimes on a
daily basis, thereby increasing availability to customers by enabling each store
to maintain reasonable inventories of all products and promptly to replenish
inventories of fast moving products. The Registrant believes that its
distribution system allows it to support a broad selection of merchandise within
the stores, while minimizing store level inventory requirements. Inventory turn
was approximately 4.1, 4.3, and 4.2 times during the fiscal years ended June 30,
1997, 1996 and 1995, respectively.
The Registrant's management information system tracks current levels of
sales, inventory, purchasing and other key information and provides management
with information which facilitates merchandising, pricing, sales management and
the management of warehouse and store inventories. This system enables
management to review and analyze the performance of each of its stores and sales
personnel on a periodic basis. The central purchasing department of the
Registrant monitors current sales and inventory at the stores on a daily basis.
In addition, the Registrant currently completes a physical inventory
approximately 4 times a year and in between such physical inventories it
periodically conducts a cycle count on selected types of inventory. The
purchasing department also establishes the level of inventory required at each
store and handles the replenishment of store inventory based on the current
delivery or replenishment schedule.
During the first quarter of fiscal 1997, the Registrant upgraded its
computer hardware platform. In addition, the functionality of its management
information system ("MIS system") was upgraded to an enhanced version of the MIS
system from the same vendor designed for the new hardware platform. The cost to
upgrade the hardware, software and certain communications features was
approximately $670,000. This upgrade gives the Registrant the ability to add new
stores and increase its reporting and processing capabilities with only
incremental upgrades of certain components of the MIS system.
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SALES AND STORE OPERATIONS:
Sales to customers are primarily made on a cash and bank credit card
basis. In addition, customers who qualify can obtain longer term financing by
obtaining a Sound Advice credit card, which the Registrant makes available to
its customers, without an annual fee, through a private label credit card
arrangement with an unrelated finance company without recourse to the
Registrant. The Registrant also periodically, as part of its promotional
activities, makes special financing programs available to its customers, some of
which programs utilize a vendor issued credit card. A part of the cost of such
special financing programs is at times borne by the Registrant. In addition,
certain of the Registrant's vendors periodically participate with and support
the Registrant in financing promotions.
Each store has its own management structure consisting of a full time
general showroom manager having overall responsibility at each location and a
full time operations manager under such general showroom manager. Most of the
Registrant's stores also have an individual in charge of the mobile electronics
department. Each general showroom manager's and operations manager's
compensation is dependent in part on the store's gross profit. As of September
11, 1997, approximately 288 sales personnel working at the stores were
compensated on a commission basis. Commission payment plans vary depending upon
the type, price and/or gross margin of the product.
As a continuation of a restructuring commenced during fiscal year 1996
of its sales management group to improve decision-making and communication
throughout its corporate structure, the Registrant now has a company wide sales
executive and two regional sales vice presidents, each overseeing approximately
one-half of the stores, all of whom report to the Chief Executive Officer.
Historically, the Registrant has generally experienced employee stability with
many sales persons moving up to positions of greater responsibility, although
the Registrant does experience some turn-over of employees particularly during
the early term of their employment. See "Employees" in this ITEM 1.
Merchandise sold at a store is generally delivered to the customer at
the store at the time of sale, with the exception of certain large screen
televisions, home entertainment furniture and integrated systems for which the
Registrant offers home delivery and installation service. In addition, the
Registrant offers custom home audio and video installation service. The
Registrant also installs car stereo systems, cellular telephones and car
security systems at all but one of its stores.
SERVICE AND REPAIR:
The Registrant has its repair facility at its corporate headquarters in
South Florida. The Registrant is an authorized manufacturer's service
representative for substantially all of its products and is reimbursed by the
manufacturer for the service or repair it performs on products still covered by
a manufacturer's warranty. Products brought to the stores by customers for
service or repair are shipped to the Registrant's repair facility.
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The Registrant offers, through an unrelated insurance company on a
nonrecourse basis, an extended warranty contract for most of the audio, video
and other merchandise it sells, whereby a customer is provided coverage beyond
the warranty period covered by the manufacturer. The Registrant collects the
retail sales price of the extended warranty contract from the customer and
remits the customer information and the Registrant's cost for the contract to
the insurance company. The warranty obligation is solely the responsibility of
the insurance company, since the contract is between the customer and the
insurance company. As an authorized service center for the insurance company,
the Registrant may also perform the services required under the extended
warranty contracts for which it is separately paid by the insurer. Gross margins
from the sale of extended warranty contracts are higher than gross margins from
the sale of the Registrant's other products. Revenues from the sale of extended
warranty contracts have historically averaged 5% to 6% of sales. See note (1)(i)
of Notes to Consolidated Financial Statements.
In connection with the promotion of the sale of extended warranty
contracts, the Registrant had offered prior to March 1, 1993, and again from
July 1994 through May 1997, the purchasers of such contracts the right to apply
the amount of the sales price for an extended warranty contract, which has
expired and has not been used for any repair or maintenance procedure, toward
the purchase of merchandise, subject to such purchaser providing appropriate
documentation verifying the purchase of such contract. Contracts issued between
July 1, 1994 and May 31, 1997, which are unused must be redeemed within a
certain time period from the date of contract expiration. The Registrant
recorded a liability at the time of sale for the estimated amount of redemptions
under this incentive program. See the Consolidated Financial Statements and
related notes appearing elsewhere in this report (in particular, note (1)(i)
thereto).
EXPANSION
During fiscal year 1997, the Registrant did not add or close any
stores, but did relocate one of its East Coast Stores to a larger 15,000 square
foot facility in November 1996. Accordingly, during the past fiscal year and as
of the date of this report, it operates 21 stores.
During fiscal year 1998, the Registrant currently plans to open an
additional West Coast Store in the Fall of 1997 and to relocate the remaining
smaller West Coast Store in order to increase the size of that showroom to its
current format. The opening of the relocated West Coast Store is currently
targeted for late fiscal 1998. Each of the new facilities will contain
approximately 15,000 gross square feet. In addition, the Registrant is currently
in negotiations for a potential Fall 1997 opening of a mall based concept store.
This concept store would sell a single vendor's high-end electronics primarily
on an inventory consignment basis. The Registrant continues to explore the
opening of new stores in geographic areas within its existing Florida
distribution network and/or advertising radius in order to realize efficiencies
and cost benefits as a result of the Registrant's clustering of stores.
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The Registrant is also exploring potential sites for a new central
warehouse and distribution facility to replace the current facility which has a
lease expiration date of May 1998. If an acceptable site can be found, the
Registrant is planning to combine its central warehouse and distribution
facility, service center and corporate offices into a single facility upon the
expiration of the current corporate headquarters lease in March 1999.
Management estimates that as of this time the cost (other than initial
inventory) of opening an additional store or relocating a store built to suit
for the Registrant by an owner or landlord is approximately $750,000 to
$950,000. Management also currently estimates that, if the Registrant acquires
an existing store location, it will cost between $900,000 and $1,200,000 to
retrofit such property. Management estimates initial inventory cost for a new
store to be approximately $1,000,000.
The extent of any future expansion within or outside Florida is
dependent on the Registrant's operating performance and the availability of
sufficient financing, together with future general economic and business
conditions. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. - Liquidity and Capital Resources".
SEASONALITY
Historically, due to the holiday season, the Registrant has realized
greater sales and profits during its second fiscal quarter. The Registrant's
marketing strategy and, in particular, its year round use of newspaper,
television and radio advertising, catalogs and promotions (including, without
limitation, vendor specific promotional sales in selected months), attempts to
minimize the seasonality of the Registrant's business.
The following table sets forth the Registrant's quarterly net sales in
dollars and as a percentage of annual net sales for the three fiscal years ended
June 30, 1997:
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NET SALES
------------------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
YEAR ENDED (JULY- (OCTOBER- (JANUARY- (APRIL- FOR
JUNE 30, SEPTEMBER) DECEMBER) MARCH) JUNE) YEAR
- ---------- ---------- --------- --------- -------- ------
(Dollars in Thousands)
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1997. . . . . . . . . $40,351 $47,724 $35,431 $32,117 $155,623
. . . . . . . . 25.9% 30.7% 22.8% 20.6% 100%
1996. . . . . . . . . $44,165 $53,260 $39,079 $32,481 $168,985
. . . . . . . . 26.1% 31.5% 23.1% 19.3% 100%
1995. . . . . . . . . $46,721 $60,854 $43,781 $39,148 $190,504
. . . . . . . . 24.5% 31.9% 23.0% 20.6% 100%
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SERVICEMARKS
The Registrant has registered the "Sound Advice" name in Florida. It
has not registered the "Sound Advice" name with the United States Patent and
Trademark Office. The Registrant is not aware of any adverse claims concerning
the Registrant's use of the "Sound Advice" name.
COMPETITION
The brand-name home entertainment and consumer electronics business is,
and can be expected to remain, highly competitive, with price, customer service
and financing plans or programs being the main competitive factors. The
Registrant believes that it competes effectively on the basis of such factors
and its product mix has been selected to include higher-end audio and video
products not generally offered by many of its competitors. During fiscal years
1996 and 1997 the Registrant reduced its offering of certain widely available
low margin products in order to focus on more fully-featured products in those
categories where the Registrant believes there is less competition. The
Registrant's principal competitors include other retailers specializing in
similar products, department stores, discount stores, mass merchandisers,
catalog showrooms and specialty stores. Many of the Registrant's competitors are
national in scope and have greater financial resources than the Registrant.
EMPLOYEES
As of September 11, 1997, the Registrant employed approximately 633
persons, of whom approximately 449 were commissioned persons, including
approximately 72 car stereo and mobile installers, 33 service department
technicians and 56 delivery and custom installers. Substantially all of the
Registrant's employees are full-time. The Registrant's employees are not
unionized and it has never experienced a strike or work stoppage. Management
believes that its employee relations are good.
10
<PAGE>
ITEM 2. PROPERTIES.
The Registrant's 21 stores are located in four geographic areas on the
east and west coasts of Florida, in north central Florida and in Jacksonville,
Florida. Most of the Registrant's stores are between 15,000 and 17,000 gross
square feet. Retail selling area represents the substantial square footage of
each store, with the balance used for merchandise storage and, in all but one
store, car audio and accessory installation. The stores are generally located
either in free standing buildings or in multi-store shopping centers. The stores
are generally close to regional malls or in shopping districts. The following
map displays the locations of the Registrant's 21 stores.
STORE LOCATIONS
A map of Florida indicates the general location of the Registrant's 21 stores in
the four geographic areas.
JACKSONVILLE STORES EAST COAST STORES
Jacksonville (Regency) West Palm Beach
Jacksonville (Orange Park) Boca Raton
Ft. Lauderdale
CENTRAL FLORIDA STORES Plantation
Orlando (East Colonial) Hollywood
Orlando (Sandlake) Aventura
Altamonte Springs Hialeah Gardens
Coral Gables
WEST COAST STORES West Kendall
St. Petersburg South Kendall
Tampa (2)
Clearwater
Sarasota
Fort Myers
11
<PAGE>
All of the Registrant's 21 stores are currently leased, one of which is
accounted for as a capital lease. Leases expire on various dates between 1998
and 2014, without giving effect to renewal options. The average unexpired lease
term of the Registrant's stores including renewal options is approximately 18
years.
Generally, the store leases provide for a base rental with cost of
living adjustments or stipulated annual percentage increases (or a combination
thereof) and do not provide for a percentage of sales in addition to the fixed
rent. In addition, the leases generally require the Registrant to pay all or a
portion of the real estate taxes and assessments, utilities, insurance and/or
common area and interior maintenance and repairs. See notes (9) and (10) of
Notes to Consolidated Financial Statements.
The Registrant's headquarters are located in a 53,850 square foot
facility which contains its executive offices, accounting, data processing,
purchasing and advertising operations, service and repair center. The lease
expires in March 1999 (exclusive of one ten-year renewal option). The
Registrant's 56,320 square foot central warehouse and distribution facility is
located in Deerfield Beach, Florida, approximately 15 miles north of its
corporate headquarters. The lease for such facility expires in May 1998
(exclusive of two five-year renewal options). A sales training center and the
Registrant's custom sales department are located in the Hollywood store
facility.
The Registrant occupies an approximate 12,500 square foot leased
facility in Tampa, Florida area which is used as a warehouse and support
facility for the West Coast Stores. The lease for such facility expires in
January 1998 (exclusive of one 3-year renewal option). The Registrant also
occupies an approximate 10,000 square foot leased facility in Orlando (Winter
Park), Florida which is used as a warehouse and support facility for the Central
Florida Stores. The lease for such facility expires in May 2000.
A portion of the Registrant's former Ft. Lauderdale store is currently
being used for car installations, with the balance of such building having been
leased to a nonaffiliated company for a term of five years (exclusive of one
five-year renewal option).
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is from time to time involved in litigation relating to
claims arising out of its operations in the normal course of business. Such
claims against the Registrant are generally covered by insurance. The Registrant
believes that none of these claims will have a material adverse impact on its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
12
<PAGE>
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) of Form 10-K, the information
regarding executive officers of the Registrant called for by Item 401 of
Regulation S-K is hereby included in Part I of this report.
The following table sets forth the name, age (as of September 15,
1997) and position(s) held by each executive officer of the Registrant:
POSITION(S) WITH
NAME AGE REGISTRANT
- ---- --- ----------------
Peter Beshouri 43 Director, Chairman of the
Board, President and
Chief Executive Officer
Michael Blumberg 49 Director, Senior Vice
President and Secretary
Christopher O'Neil 44 Executive Vice President,
Chief Operating Officer
and Assistant Secretary
Kenneth L. Danielson 47 Chief Financial and
Accounting Officer and
Treasurer
The Registrant's officers are elected annually by the Board of
Directors and hold office at the pleasure of the Board.
PETER BESHOURI, who has been an employee of the Registrant since 1974,
has served as Chairman of the Board and Chief Executive Officer of the
Registrant since August 1982. Prior thereto he was the general sales manager of
the Registrant, as well as having served as a showroom manager and district
manager. He was elected President of the Registrant in May 1985. Mr. Beshouri
currently serves as a director of Progressive Retailers Organization. In August
1995, Mr. Beshouri, together with the Registrant and a former chief financial
officer of the Registrant, voluntarily agreed with the Securities and Exchange
Commission ("SEC"), without admitting or denying any wrongdoing, to the entry of
a cease and desist order by the SEC concerning the Registrant's Form 10-K for
fiscal year 1991 and Forms 10-Q for the quarters ended September 30 and December
31, 1991, which the SEC found in such order had been materially misstated. The
cease and desist order with respect to Mr. Beshouri related to his supervisory
responsibility in connection with the Registrant violating certain provisions of
the securities laws that require public companies to keep accurate books and
records, to maintain appropriate internal accounting controls and to file
accurate annual and quarterly reports. No censure, fine or penalty was imposed
by the SEC on Mr. Beshouri.
MICHAEL BLUMBERG, a founder and a director of the Registrant,
was elected a Vice President in August 1982, Vice President -
Purchasing and Finance in May 1986, Vice President - Purchasing and
Marketing in December 1987, and Senior Vice President in May 1989.
From the Registrant's inception until February 1995, Mr. Blumberg
13
<PAGE>
served as Treasurer of the Registrant and, since October 13, 1989, he has also
been serving as Secretary of the Registrant. His responsibilities include
overall supervision of all purchasing and selecting new product categories and
lines for the Registrant, as well as consulting with certain of the Registrant's
manufacturers in connection with product design.
CHRISTOPHER O'NEIL joined the Registrant in 1979 as a car audio buyer.
He was elected Vice President - Purchasing of the Registrant in May 1986, Vice
President - Car Audio Purchasing in May 1989 and his title was changed to Vice
President/Purchasing in May 1990. Effective February 1992, Mr. O'Neil was
elected Executive Vice President and Chief Operating Officer of the Registrant.
In his current position, his principal responsibilities are the supervision of
service, warehouse, distribution, security and product support functions for the
Registrant's stores. Since December 1990, Mr. O'Neil has also served as an
Assistant Secretary of the Registrant.
KENNETH L. DANIELSON joined the Registrant in September 1993 and
effective October 1993 assumed the responsibilities of and became Chief
Financial Officer of the Registrant. In February 1995, he was also elected
Treasurer. Prior to joining the Registrant, Mr. Danielson was employed by Storer
Communications, Inc. ("Storer"), a large television broadcasting and cable
company based in Miami, Florida, for approximately 15 years. During his
employment with Storer, Mr. Danielson held various positions, including Director
of Accounting, Assistant Treasurer, Vice President, Treasurer and Chief
Financial Officer, with his positions as Vice President, Treasurer and Chief
Financial Officer being held concurrently from November 1988 through August
1993. Prior to Mr. Danielson's employment by Storer, he was employed by Coopers
& Lybrand LLP from 1971 to 1978. Mr. Danielson is a certified public accountant.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
COMMON STOCK INFORMATION
The Registrant's Common Stock, par value $.01 per share ("Common
Stock"), is quoted under the symbol "SUND" on the NASDAQ Stock Market (NASDAQ
National Market).
The following table sets forth, for the fiscal quarters indicated, the
high and low sales prices for the Registrant's Common Stock on the NASDAQ Stock
Market. NASDAQ Stock Market quotations are based on actual transactions and not
bid prices.
PRICES
------
HIGH LOW
---- ---
1996
- ----
First Quarter (7/1/95 to 9/30/95) $ 3-1/2 $ 2-3/8
Second Quarter (10/1/95 to 12/31/95) 2-5/8 1-1/8
Third Quarter (1/1/96 to 3/31/96) 2-1/4 1-3/8
Fourth Quarter (4/1/96 to 6/30/96) 2-7/8 1-1/2
1997
- ----
First Quarter (7/1/96 to 9/30/96) $ 2-1/4 $ 1-1/4
Second Quarter (10/1/96 to 12/31/96) 2 1-3/16
Third Quarter (1/1/97 to 3/31/97) 2-5/8 1-3/8
Fourth Quarter (4/1/97 to 6/30/97) 2-3/8 1-1/4
As of September 19, 1997, there were 196 holders of record of the
Common Stock, and, based upon information previously provided to the Registrant
by depositories and brokers, the Registrant believes it has in excess of 1,000
beneficial owners.
DIVIDEND POLICY
The Registrant has never paid cash dividends on its Common Stock and
does not plan to pay cash dividends in the foreseeable future. The Registrant
has been and continues to be prohibited under its revolving credit facility from
paying cash dividends. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION. - Liquidity and Capital
Resources."
15
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has not issued or sold any unregistered securities
during the fiscal year 1997, except as follows:
(i) Pursuant to the Second Amended and Restated Sound
Advice, Inc. 1986 Stock Option Plan, as amended:
(A) On March 10, 1997, (1) the Registrant granted
incentive stock options to purchase an aggregate of 75,000 shares of Common
Stock to four executive officers of the Registrant at an exercise price of $1.69
per share, which stock options were immediately exercisable through March 9,
2002, and (2) incentive stock options to purchase 31,000 shares of Common Stock
previously granted to two of such executive officers at an exercise price of
$6.29 per share were cancelled and reissued by the Company at an exercise price
of $1.69 per share and are immediately exercisable through March 9, 2002;
(B) The Registrant granted on April 29, 1997, stock
options covering 407,500 shares of Common Stock to certain executive officers
and senior managers of the Registrant at an exercise price of $1.89 per share,
which stock options vest (the "Vesting Terms") to the extent that after the date
of grant the market price (as defined) of a share of Common Stock increases to
$4.00 per share (one-third vest), $5.00 per share (two-thirds vest) and $6.50
per share (all vest), subject to vesting in full in all events on the earlier to
occur of April 29, 2001 or a change in control (as defined), and have a term of
five years expiring on April 28, 2002;
(C) On April 29, 1997, stock options to purchase
35,000 shares of Common Stock previously granted to a director of the Registrant
at exercise prices of $5.96 per share (15,000 shares) and $6.29 per share
(20,000 shares) were cancelled and reissued by the Registrant at an exercise
price of $1.89 per share having the Vesting Terms and a term of five years
expiring on April 28, 2002; and
(D) The Registrant granted as of April 29, 1997, an
additional stock option covering 5,000 shares of Common Stock to the same
director it reissued the stock options covering the 35,000 shares described in
subparagraph (C) above at an exercise price of $1.89 per share having the
Vesting Terms and a term of five years expiring on April 28, 2002.
(ii) A warrant to purchase 5,000 shares of Common Stock was
granted on April 29, 1997, to each of three non-employee directors of the
Registrant at an exercise price of $1.89 per share, which warrants vest on the
Vesting Terms and have a five year term expiring on April 28, 2002.
All of the foregoing stock options and warrants were granted by the
Registrant in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act of 1933, as amended.
(iii) On May 5, 1997, Board of Directors of the Registrant
adopted a Common Stock Purchase Rights Plan and subsequently
16
<PAGE>
declared a dividend distribution of one Common Stock Purchase Right (a "Right")
on each outstanding share of Common Stock to holders of record on May 16, 1997.
Each Right has an initial exercise price of $12.00 for one share of Common
Stock. The Rights will be exercisable only if a person or group acquires 15% or
more of the Common Stock (or 10% of such Common Stock under certain
circumstances) or announces a tender offer, the consummation of which would
result in ownership by a person or group of 15% or more of the Common Stock (or
10% of such Common Stock under certain circumstances). Upon such occurrence,
each Right (other than Rights owned by such person or group) will entitle the
holder to purchase from the Registrant the number of shares of Common Stock
having a market value equal to twice the exercise price of the Right.
If the Registrant is acquired in a merger or other business
combination transaction, or sells more than 50% of its assets or earning power,
after a person or group has acquired 15% of more of the outstanding Common Stock
(or 10% of such Common Stock under certain circumstances), each Right (other
than Rights owned by such person or group) will entitle its holder to purchase,
at the Right's then-current exercise price, a number of the acquiring company's
common shares having a market value of twice such price. Following the
acquisition by a person or group of 15% or more of the Common Stock (or 10% of
such Common Stock under certain circumstances) and prior to an acquisition of
50% or more of the Common Stock, the Board of Directors may exchange the Rights
(other than Rights owned by such person or group) at an exchange ratio of one
share of Common Stock per Right.
Prior to the acquisition by a person or group of beneficial ownership
of 15% or more of the Common Stock (or 10% of such Common Stock under certain
circumstances), the Rights are redeemable for $.001 per Right at the option of
the Board of Directors of the Registrant. The Rights will expire on May 4, 2007.
There are currently 3,728,894 Rights outstanding. See note (6) of Notes to
Consolidated Financial Statements.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data for fiscal years 1997, 1996, 1995, 1994
and 1993 should be read in conjunction with the Consolidated Financial
Statements and related notes and independent auditors report appearing elsewhere
in this report and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Net Sales ................................... $155,623 $168,985 $190,504 $174,761 $158,089
Cost of Goods Sold .......................... 105,605 119,775 134,800 119,373 107,726
-------- -------- -------- -------- --------
Gross Profit ................................ 50,018 49,210 55,704 55,388 50,363
Selling, General, and
Administrative Expense ................... 49,045 52,393 54,502 50,891 49,150
Loss Due to Impairment
of Asset (1) ............................. -- -- 400 -- --
-------- -------- -------- -------- --------
Income (Loss) From
Operations ............................... 973 (3,183) 802 4,497 1,213
Other Income (Expense):
Interest Expense ........................ (1,556) (1,526) (1,425) (503) (584)
Provision for Shareholder
Settlement(2) ......................... -- -- 56 (1,252) --
Other Income (Expense) .................. 101 (4) (66) (7) 1,060
-------- -------- -------- -------- --------
(Loss) Income Before
Income Taxes (Benefit) ................... (482) (4,713) (633) 2,735 1,689
Income Taxes (Benefit) ...................... 389 (486) (152) 1,008 561
-------- -------- -------- -------- --------
Net (Loss) Income ........................... $ (871) $ (4,227) $ (481) $ 1,727(2) $ 1,128
======== ======== ======== ======== ========
Net Loss (Income) Per Common
and Common Equivalent Share .............. $ (.23) $ (1.13) $ (.13) $ .46(2) $ .30
======== ======== ======== ======== ========
Weighted Average Number
of Shares Outstanding .................... 3,729 3,729 3,729 3,743 3,722
======== ======== ======== ======== ========
</TABLE>
- -------------------------
Footnotes on next page.
18
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets ................................. $32,515 $34,645 $39,191 $41,642 $31,574
Current Liabilities ............................ 24,724 26,019 29,107 27,997 19,858
Working Capital ................................ 7,791 8,625 10,084 13,645 11,717
Total Assets ................................... 46,550 49,056 56,702 57,537 46,384
Borrowings Under Revolving
Credit Facility .............................. 11,875 9,100 8,677 9,730 4,810
Current Maturities of Long-Term
Debt (included in Current
Liabilities) ................................. 171 161 2,674 1,238 682
Long-Term Debt (excluding
current maturities) ......................... 575 746 908 3,575 3,273
Shareholders' Equity ........................... 16,298 17,169 21,396 21,933 19,181
STORE DATA:
Number of Stores Open
at End of Period ............................. 21 21 21 20 20
Weighted Average Net
Sales Per Store(3) ........................... $ 7,411 $ 8,047 $ 9,261 $ 8,738 $ 8,038
</TABLE>
- --------------
(1) The Loss Due to Impairment of Asset in the amount of $400,000 in fiscal
year 1995 relates to the return of a new management information system
to, and settlement with, the vendor thereof as a result of the
unsuccessful installation and implementation of such system. See note
(8) of Notes to Consolidated Financial Statements.
(2) The Provision for Shareholder Settlement relates to the global
settlement in fiscal 1994 of the consolidated class action
against the Registrant. In such settlement the Registrant (i)
paid a cash amount totaling approximately $141,000 and (ii)
issued 306,335 warrants to purchase its common stock, which
warrants were valued at $3.00 per warrant, as its portion of
the total maximum settlement amount of approximately
$2,765,000. Excluding the Provision for Shareholder
Settlement, which was equivalent to approximately $788,000 or
$.21 per share after taxes, Net Income would have been
$2,515,000 or $.67 per share for fiscal year 1994. Based on
the actual aggregate amount of claims made, the Registrant
only issued 306,335 warrants to purchase its common stock out
of a maximum number of 325,000 warrants available as part of
the shareholder settlement. Accordingly, the Provision for
Shareholder Settlement was adjusted in fiscal 1995 by a credit
to income of $56,000.
(3) Weighted average net sales per store represents net sales for the
period divided by the number of stores open during the period, weighted
to account for stores open for only a portion of the period.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
The following tables set forth for fiscal years ended June 30, 1997,
1996 and 1995 (i) certain items in the Registrant's statements of operations
expressed as a percentage of net sales and (ii) the percentage change in dollar
amounts of such items as compared to the indicated prior fiscal year.
<TABLE>
<CAPTION>
PERIOD TO PERIOD
ITEMS AS A PERCENTAGE PERCENTAGE INCREASE
OF NET SALES / (DECREASE)
----------------------------------------------- -----------------------------
YEARS ENDED YEARS ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1996 1995 1996-97 1995-96
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Net Sales........................... 100.0% 100.0% 100.0% (7.9)% (11.3)%
Cost of Goods Sold.................. 67.9 70.9 70.8 (11.8) (11.1)
------ ------ -----
Gross Profit........................ 32.1 29.1 29.2 1.6 (11.7)
Selling, General and Admini-
strative Expense.................. 31.5 31.0 28.6 (6.4) (3.9)
Loss Due to Impairment of
Asset.............................. - - 0.2 - **
------ ------- -----
Income (Loss) from
Operations........................ 0.6 (1.9) 0.4 130.6 (497.2)
Other Income (Expense):
Interest Expense.................. (1.0) (0.9) (0.7) 2.0 7.1
Other Expense, Net................ .1 * * 2,937.1 (62.5)
------ ------- -----
(Loss) Income Before Income
Taxes (Benefit)................... (0.3) (2.8) (0.3) (89.8) 645.0
====== ======= =====
Net Loss ........................... (0.6)% (2.5)% (0.3)% (79.4)% 779.1%
====== ======= =====
</TABLE>
- ----------------
* Negligible
** Not meaningful
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for the fiscal year ended June 30, 1997, were approximately
$155,623,000, a decrease of approximately $13,362,000 or 7.9% over the prior
fiscal year. The decrease in net sales overall is primarily attributable to the
Registrant's decision to eliminate personal computers and other non-performing
low margin products from the product mix along with reduced sales of cellular
telephones, personal electronics and VCRs. Comparable store net sales decreased
8.6% in fiscal year 1997 compared to fiscal year 1996. The comparable store net
sales were adjusted to exclude the store relocated to a larger showroom in
November 1996. The Registrant's operations, in common with other retailers in
general, are subject to seasonal influences. Historically, the Registrant has
realized more of its net sales and operating income in the second quarter ending
in December.
Gross profit increased by approximately $808,000 or 1.6% in the fiscal
year ended June 30, 1997 compared to the prior fiscal year. The gross profit
percentage was 32.1% in the fiscal year ended June 30, 1997. Exclusive of the
provision for loss on
20
<PAGE>
personal computers and accessories, the gross profit percentage for the fiscal
year ended June 30, 1996 was 30.0%. The increase in gross profit and gross
profit percentage is directly related to the Registrant's renewed focus on value
added selling in the core categories of high end audio, video and mobile
electronics and the elimination of computers and other non-performing low margin
products from the product mix. The gross profit for the prior fiscal year was
impacted by a $1,500,000 provision for loss on personal computers and related
accessories recorded in the second quarter of fiscal 1996 in connection with
such product category's elimination from the Company's product mix.
Selling, general and administrative expense ("SG&A") for the fiscal
year ended June 30, 1997, was approximately $49,045,000, a decrease of
approximately $3,349,000 or 6.4% over the prior fiscal year. The overall
decrease is primarily attributable to cost reduction programs initiated by the
Registrant primarily in the areas of advertising and personnel expense and the
elimination of personal computers from the product mix in fiscal 1996. Since a
sizeable amount of these reductions were associated with the elimination of
expenses associated with sales of personal computers, it is anticipated that
future expense reductions in this area will not be as significant. However, the
Registrant continues to monitor and control expenses in its effort to reduce the
overall level of SG&A. The Registrant's efforts are now being directed at the
improvement of operational processes to attempt to generate reduced costs. In
addition, costs which are relatively fixed in nature are being reviewed and
analyzed for potential reduction or elimination. SG&A as a percentage of net
sales increased slightly to 31.5% from 31.0% in the prior fiscal year. The
percentage increase is directly attributable to the reduction in net sales from
the previous fiscal year.
Interest expense for the fiscal year ended June 30, 1997, was
$1,556,000, an increase of $30,000 from the prior fiscal year. The increase was
primarily reflective of increased borrowings under the Registrant's revolving
credit facility during fiscal 1997.
In fiscal 1997 the Registrant recorded a net income tax provision in
the amount of $389,000 on the pre-tax operating loss. This provision is due to
the increase of the valuation allowance on the deferred tax assets, net of
income taxes recoverable as a result of the carryback of the fiscal 1997 net
operating loss.
Net loss for the fiscal year ended June 30, 1997 was approximately
$871,000 or $.23 per share compared to net loss of approximately $4,227,000 or
$1.13 per share for the prior fiscal year. The significant reduction in net loss
for fiscal year 1997 was primarily due to improved gross profit margins on the
Registrant's product mix, the Registrant's continuing efforts to reduce SG&A and
the impact in fiscal year 1996 of the $1.5 million provision for loss on
personal computers and related accessories.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the fiscal year ended June 30, 1996, were
approximately $168,985,000, a decrease of approximately $21,519,000 or 11.3%
over the prior fiscal year. The decrease in net sales
21
<PAGE>
overall is primarily attributable to the Registrant's decision to eliminate
personal computers and other nonperforming low margin products from the product
mix and increased competition on widely available lower end electronic products.
In addition, net sales declined during the first three months of fiscal year
1996 primarily as a result of weather related effects of Hurricane Erin during
the Registrant's annual August scratch and dent sale. The Registrant believes
that part of the reduction was also attributable to consumer concerns over the
general economy and increased levels of consumer debt. Comparable store net
sales decreased 14% in fiscal year 1996 compared to fiscal year 1995. The
comparable store net sales were adjusted to exclude the new store opened in
November 1994 and another relocated to a larger showroom in December 1994.
Gross profit for fiscal year 1996 was approximately $49,210,000, a
decrease of approximately $6,494,000 or 11.7% over the prior fiscal year. Gross
profit as a percentage of net sales decreased slightly to 29.1% for the fiscal
year ended June 30, 1996, as compared to 29.2% for the prior fiscal year. The
overall reduction in gross profit is related to the reduction in net sales and
includes a $1,500,000 provision in the second quarter of fiscal 1996 for loss on
personal computer inventory and related accessories in connection with such
product category's elimination from the Registrant's product mix through
subsequent sale and disposal. See note (8) of Notes to Consolidated Financial
Statements. Exclusive of this loss provision, the gross profit percentage was
30.0% in fiscal year 1996. This increase from the prior fiscal year is directly
related to the Company's renewed specialty retailing focus on value added
selling in the core product categories of high end audio, video and mobile
electronics during the second half of fiscal year 1996.
SG&A for the fiscal year ended June 30, 1996, was approximately
$52,393,000, a decrease of approximately $2,109,000 or 3.9% over the prior
fiscal year. The overall decrease is primarily attributable to cost reduction
programs initiated by the Registrant during the second half of the fiscal year
which were partially offset by increased selling expenses during the first half
of the fiscal year. See "ITEM 1. BUSINESS - General." The increased selling
expenses reflected the net effect of increased advertising expenditures over
reduced salesmen's commissions on lower sales volume. In addition, in fiscal
year 1995 the Registrant's operations were impacted by a $400,000 provision for
asset impairment. See note (8) of Notes to Consolidated Financial Statements.
SG&A as a percentage of net sales increased to 31.0% from 28.8% (inclusive of
the provision for asset impairment) in the prior fiscal year. The percentage
increase is directly attributable to the reduction in net sales from the
previous fiscal year.
Interest expense for the fiscal year ended June 30, 1996, was
$1,526,000, an increase of $102,000 from the prior fiscal year. The increase was
primarily reflective of interest rate increases and fees paid under the
Registrant's prior and new revolving credit facilities during fiscal year 1996.
22
<PAGE>
For the fiscal year ended June 30, 1996, the effective income tax
benefit was 10.3% and for fiscal year 1995 the effective income tax benefit was
24.0%. The recorded tax benefit in fiscal year 1996 excludes the recognition of
temporary differences which cannot be recovered from federal income taxes paid
during the loss carryback period. See note (5) of Notes to Consolidated
Financial Statements.
Net loss for the fiscal year ended June 30, 1996, was approximately
$4,227,000, or $1.13 per share, compared to net loss of approximately $481,000,
or $.13 per share, for the prior fiscal year. The net loss in fiscal year 1996
was primarily attributable to the reduction in net sales and the corresponding
reduction in gross profit (of which $1,500,000 is attributable to the provision
for loss on personal computers). The overall reduction in gross profit was only
partially offset by the net reduction in SG&A.
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Registrant replaced its then existing $16,000,000
revolving credit and term loan facility with a new $25,000,000 revolving credit
facility from a new lender, Foothill Capital Corporation ("Foothill"). Under the
Foothill revolving credit facility, the Registrant is able to borrow, repay and
reborrow based upon a borrowing base equal to the lesser of 65% of eligible
inventory (as defined) at cost or 50% of eligible inventory at retail selling
price. The availability is reduced by outstanding letters of credit which are
limited to $3,000,000. The revolving credit facility matures on July 31, 1998,
and bears interest on the outstanding balance at prime plus 1%. The Registrant
paid a .625% commitment fee in connection with the closing of such financing and
is obligated to pay additional commitment fees of .5% annually on the total
facility and a monthly fee on the unused portion of the commitment of .375% per
annum. The Foothill loan and security agreement contains various affirmative and
negative covenants including those requiring the Registrant to (i) maintain a
quarterly ratio of current assets to current liabilities of not less than 1.05
to 1.0, (ii) maintain a quarterly ratio of total liabilities to tangible net
worth of not more than 2.75 to 1.0, (iii) maintain tangible net worth at the end
of each quarter of at least $14,000,000 and (iv) maintain working capital at the
end of each quarter of at least $3,500,000. In addition, cumulative net losses
from and after April 1, 1996, may not exceed $4,000,000. The loan and security
agreement also limits the incurrence of additional debt, liens, capital
expenditures, acquisitions and investments and prohibits cash dividends and the
repurchase of capital stock. Borrowings under the revolving credit facility are
collateralized by all of the Registrant's assets including depository accounts,
receivables, inventory, property and equipment and intangible assets. See note
(4) of Notes to Consolidated Financial Statements for a further discussion of
the Foothill revolving credit facility.
In May 1994, the Registrant obtained a five year term loan of
approximately $1,608,000 from General Electric Capital Corporation
23
<PAGE>
("GECC") for the purpose of financing a new management information system and
related communications equipment. The interest rate under the GECC financing is
based upon a short term commercial paper rate plus 259 basis points. The
Registrant has the option to convert to a fixed interest rate loan based on
certain Treasury Note rates tied to the then remaining term of the loan plus 310
basis points. The repayment of such financing was collateralized by the
management information system and related communications equipment. The
outstanding principal amount of the GECC financing was reduced to approximately
$575,000 in July 1995 as a result of the return of such management information
system and the settlement with the vendor thereof and, as a result, is now
repayable in consecutive monthly installments of principal and interest in the
approximate amount of $13,800 each and a final installment of unpaid principal
and interest due on May 1, 1999. The remaining unpaid balance of such financing
remains collateralized by certain computer equipment. See note (4)(b) of Notes
to Consolidated Financial Statements.
The Registrant's ownership of its former Fort Lauderdale store is
encumbered by a first mortgage loan from a bank in the amount of $640,000, with
a balance of approximately $449,000 at June 30, 1997. See "ITEM 2. PROPERTIES."
Such loan bears interest at the rate of 1/2 of 1% above the prime rate of such
lender (such lender's prime rate was 8.50% at June 30, 1997) and is payable in
one hundred ninety consecutive monthly installments of principal in the amount
of $1,779 each, together with accrued interest, and in one balloon principal
payment of approximately $428,300, together with any accrued and unpaid
interest, due on July 12, 1998. See note (4)(b) of Notes to Consolidated
Financial Statements.
The Registrant had working capital of approximately $7,791,000 as of
June 30, 1997, a decrease of approximately $834,000 from June 30, 1996. The
decrease in working capital between fiscal years results primarily from the
decrease in accounts payable of approximately $3,978,000, which was partially
offset by the increase of approximately $2,774,000 in borrowings under the
Registrant's revolving credit facility, the collection of approximately $843,000
of income taxes receivable and a $926,000 reduction in the Registrant's cash
balances. The decrease in accounts payable is directly related to the reduced
inventory turn in the last quarter of fiscal year 1997 together with reduced
vendor payment terms.
The interest rate under the Registrant's revolving credit facility
fluctuated between 9.25% and 9.50% during fiscal year 1997. As of June 30, 1997,
the outstanding borrowings under the Registrant's revolving credit facility were
$11,875,000. The increase of approximately $2,774,000 in outstanding borrowing
in fiscal year 1997 as compared to the prior fiscal year is primarily related to
the installation of a new computer system and the store relocation in November
1996, which in the aggregate represented approximately $1,582,000 of the
Registrant's capital expenditures of approximately $2,724,000 during fiscal year
1997. Over the past year, certain trade creditors have reduced the time period
for eligibility for cash or payment discounts. This reduction coupled
24
<PAGE>
with the reduction in inventory turn ratio are the primary reasons for the
reduction in accounts payable. Accordingly, the Registrant utilized its
revolving credit facility in part to take advantage of such discount terms.
The Registrant currently believes that funds from the Registrant's
operations combined with borrowings available under its revolving credit
facility with Foothill and vendor credit programs will be sufficient to satisfy
its currently projected operating cash requirements during fiscal year 1998,
including those capital expenditures required in connection with the store
expansion and store relocation currently planned in fiscal 1998. In that regard,
the Registrant is also considering use of sale-leaseback or other financing
techniques in connection with financing such expansion and store relocation
provided that such financing techniques can be utilized with respect to the
store locations chosen. See "Expansion" in ITEM 1. The Registrant may need to
seek additional sources of financing (debt and/or equity or a combination
thereof) in order to proceed with any expansion program beyond fiscal year 1998.
The Foothill revolving credit facility matures in July 1998 together
with the principal balance in the approximate amount of $428,300 of the mortgage
loan encumbering the Registrant's former Fort Lauderdale store. The Registrant
has held preliminary discussions with Foothill in connection with the extension
of its facility and has received interest from other lenders to refinance the
Foothill facility. Management believes, although there is no assurance they will
be successful in doing so, that the extension or refinancing of the Foothill
facility will be accomplished prior to July 1998, as well as the refinancing or
other repayment of the above-described mortgage loan.
IMPACT OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
The Registrant does not believe that either inflation or foreign
currency fluctuations has had a material impact upon its operating results
because technological advances in the products sold by the Registrant and
changes in the components of products, together with increased competition among
the Registrant's vendors, have kept the product prices stable. Where the prices
of products have increased, the Registrant has generally been able to pass on
such increases to its customers.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997 Statement of Financial Accounting Standards No. 128
("SFAS 128"), EARNINGS PER SHARE, which supersedes Accounting Principles Board
("APB") Opinion No. 15, EARNINGS PER SHARE, was issued. SFAS 128 requires dual
presentation of basic and diluted earnings per share ("EPS") for complex capital
structures on the face of the income statement. Basic EPS is computed by
dividing income by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution from the exercise of
stock options or conversion of securities into common stock. SFAS 128 is
effective for annual and interim reporting after December 15, 1997; earlier
application is not permitted. The Registrant's management does not currently
expect the basic or diluted EPS measured under SFAS 128 to be
25
<PAGE>
materially different than the primary or fully-diluted EPS measured
under APB No. 15.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended) representing
the Registrant's current expectations, beliefs, estimates or intentions
concerning the Registrant's future performance and operating results, its
products, services, markets and industry, and/or future events relating to or
effecting the Registrant and its business and operations. When used in this
report, the words "believes," "estimates," "plans," "expects," "intends,"
"anticipates," and similar expressions as they relate to the Registrant are
intended to identify forward-looking statements. The actual results or
achievements of the Registrant could differ materially from those indicated by
the forward-looking statements because of various risks, factors and
uncertainties related to and including, without limitation, the effectiveness of
the Registrant's business and marketing strategies, the product mix sold by the
Registrant, customer demand, availability of existing and new merchandise from
and the establishment and maintenance of relationships with suppliers, price
competition for products and services sold by the Registrant, management of
expenses, gross profit margins, the opening of additional stores, availability
and terms of financing to refinance or repay existing financings or to fund
capital and expansion needs, the continued and anticipated growth of the retail
home entertainment and consumer electronics industry, a change in interest
rates, exchange rate fluctuations, the seasonality of the Registrant's business
and the other risks and factors detailed in this report and in the Registrant's
other filings with the SEC. These risks and uncertainties are beyond the ability
of the Registrant to control. In many cases, the Registrant cannot predict the
risks and uncertainties that could cause actual results to differ materially
from those indicated by the forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements and notes thereto and the
Consolidated Financial Statement Schedule and the report of the independent
auditors thereon set forth on pages F-1 to F-22 and S-1 herein are filed as part
of this report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the Registrant's 1997 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K,
except that the information regarding the Registrant's executive officers called
for by Item 401 of Regulation S-K has been included in Item 4.1 in PART I of
this report.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Registrant's 1997 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated by reference from the Registrant's 1997 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the Registrant's 1997 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. and 2. The financial statements and the required
financial statement schedule listed in the accompanying Table
of Contents to Consolidated Financial Statements and Financial
Statement Schedule at page F-1 herein are filed as part of
this report.
(a) 3. The exhibits listed in the Exhibit Index to the Exhibit Volume
accompanying this report are filed with or incorporated by reference as
part of this report.
(b) Reports on Form 8-K. A Report on Form 8-K was filed by the
Registrant on May 13, 1997, in Item 5 (Other Events) of which the
Registrant disclosed the adoption by its Board of Directors of the 1997
Common Stock Purchase Rights Plan and the declaration of a dividend
distribution of one Common Stock Purchase Right on each outstanding
share of Common Stock.
27
<PAGE>
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, on the 29th day of
September, 1997.
Sound Advice, Inc.
By: \S\ PETER BESHOURI
----------------------------------
Peter Beshouri, Chairman of
the Board, President and
Chief Executive Officer
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman of the Board,
\S\ PETER BESHOURI President and Chief Executive Officer
- ------------------------------- (Principal Executive Officer) September 29, 1997
Peter Beshouri
Director,
Senior Vice President
\S\ MICHAEL BLUMBERG and
- ------------------------------- Secretary September 29, 1997
Michael Blumberg
\S\ G. KAY GRIFFITH
- -------------------------------
G. Kay Griffith Director September 29, 1997
\S\ HERBERT A. LEEDS
- -------------------------------
Herbert A. Leeds Director September 29, 1997
\S\ RICHARD W. MCEWEN
- -------------------------------
Richard W. McEwen Director September 29, 1997
\S\ GREGORY STURGIS
- -------------------------------
Gregory Sturgis Director September 29, 1997
Chief Financial Officer
and Treasurer
\S\ KENNETH L. DANIELSON (Principal Financial and
- ------------------------------- Accounting Officer) September 29, 1997
Kenneth L. Danielson
</TABLE>
28
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3 to F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-22
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Sound Advice, Inc.:
We have audited the accompanying consolidated balance sheets of Sound Advice,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997. In connection
with our audits of the consolidated financial statements, we also have audited
the accompanying financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sound Advice, Inc.
and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
September 12, 1997
F-2
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
ASSETS 1997 1996
------ ------------ ------------
Current assets:
Cash $ 81,280 1,007,231
Receivables:
Vendors 2,864,121 3,259,226
Trade 674,848 623,840
Employees 300,586 217,742
------------ ------------
3,839,555 4,100,808
Less allowance for doubtful accounts (286,400) (572,000)
------------ ------------
3,553,155 3,528,808
Inventories, net 27,789,250 27,587,101
Prepaid and other current assets 670,818 638,113
Deferred tax assets 92,930 712,930
Income taxes receivable 328,000 1,170,571
------------ ------------
Total current assets 32,515,433 34,644,754
Property and equipment, net 13,667,085 13,947,974
Deferred tax asset, net 96,098 96,098
Other assets 125,069 196,035
Goodwill, net 146,441 170,891
------------ ------------
$ 46,550,126 49,055,752
============ ============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ----------- -----------
Current liabilities:
Borrowings under revolving credit facility $11,874,533 9,100,115
Accounts payable 7,627,791 11,605,540
Accrued liabilities 5,050,445 5,152,353
Current maturities of long-term debt 171,478 161,406
----------- -----------
Total current liabilities 24,724,247 26,019,414
Long-term debt, excluding current maturities 574,524 745,564
Capital lease obligation 809,486 815,940
Other liabilities and deferred credits 4,144,028 4,305,995
----------- -----------
30,252,285 31,886,913
----------- -----------
Shareholders' equity:
Common stock; $.01 par value. Authorized
10,000,000 shares; issued and outstanding
3,728,894 shares in 1997 and 1996 37,289 37,289
Additional paid-in capital 11,058,655 11,058,655
Retained earnings 5,201,897 6,072,895
----------- -----------
16,297,841 17,168,839
Commitments and contingencies
----------- -----------
$46,550,126 49,055,752
=========== ==========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For each of the years in the three-year
period ended June 30, 1997
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 155,623,213 168,984,777 190,503,745
Cost of goods sold 105,605,396 119,774,833 134,800,287
------------- ------------- -------------
Gross profit 50,017,817 49,209,944 55,703,458
Selling, general and administrative expense 49,044,756 52,393,352 54,501,903
Loss due to impairment of asset -- -- 400,000
------------- ------------- -------------
Income (loss) from operations 973,061 (3,183,408) 801,555
Other income (expense):
Interest expense (1,556,314) (1,526,199) (1,424,693)
Provision for shareholder settlement -- -- 56,000
Other income (expense) 101,255 (3,569) (65,529)
------------- ------------- -------------
Loss before income taxes (benefit) (481,998) (4,713,176) (632,667)
Income taxes (benefit) 389,000 (486,000) (151,840)
------------- ------------- -------------
Net loss $ (870,998) (4,227,176) (480,827)
============= ============= =============
Common and common equivalent per share
amounts:
Net loss per share $ (.23) (1.13) $ (.13)
============= ============= =============
Weighted average number of shares outstanding 3,728,894 3,728,894 3,728,894
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For each of the years in the three-year
period ended June 30, 1997
COMMON STOCK
-----------------------
NO. OF ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
--------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 3,728,894 $ 37,289 11,114,655 10,780,898 21,932,842
Net loss -- -- -- (480,827) (480,827)
Adjustment to common stock warrant
valuation -- -- (56,000) -- (56,000)
--------- ----------- ---------- ----------- -----------
Balance, June 30, 1995 3,728,894 37,289 11,058,655 10,300,071 21,396,015
Net loss -- -- -- (4,227,176) (4,227,176)
--------- ----------- ---------- ----------- -----------
Balance, June 30, 1996 3,728,894 37,289 11,058,655 6,072,895 17,168,839
Net loss -- -- -- (870,998) (870,998)
--------- ----------- ---------- ----------- -----------
Balance, June 30, 1997 3,728,894 $ 37,289 11,058,655 5,201,897 16,297,841
========= =========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the years in the three-year
period ended June 30, 1997
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (870,998) (4,227,176) (480,827)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,090,078 3,273,013 3,322,041
Deferred income taxes 620,000 731,437 (285,157)
Loss on sale of assets 876 11,386 65,529
Provision for asset impairment -- -- 400,000
Common stock warrant valuation -- -- (56,000)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables (24,347) 1,524,828 (608,326)
Inventories (202,149) 4,171,643 3,370,921
Prepaid and other current assets (32,705) 604,456 684,391
Income taxes receivable 842,571 (618,888) (183,683)
Other assets 9,038 72,961 15,096
Increase (decrease) in:
Accounts payable (3,977,749) 514,285 1,282,108
Accrued liabilities (101,908) (278,168) 28,824
Other liabilities and deferred credits (161,967) (163,974) 437,672
------------- ------------ ------------
Net cash (used in) provided by
operating activities (809,260) 5,615,803 7,992,589
------------- ------------ ------------
Cash flows from investing activities:
Capital expenditures (2,723,687) (1,164,308) (5,115,790)
------------- ------------ ------------
Net cash used in investing activities (2,723,687) (1,164,308) (5,115,790)
------------- ------------ ------------
Cash flows from financing activities:
Borrowings on revolving credit facility 171,896,950 138,785,743 66,119,893
Repayments on revolving credit facility (169,122,532) (138,363,041) (67,172,165)
Net repayments of long-term debt (160,968) (2,674,513) (1,231,170)
Increase/(decrease) in cash overdraft -- (1,234,066) (589,190)
Reduction in capital lease obligation (6,454) (5,337) (2,209)
------------- ------------ ------------
Net cash provided by (used in) financing
activities 2,606,996 (3,491,214) (2,874,841)
------------- ------------ ------------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
(Decrease) increase in cash $ (925,951) 960,281 1,958
Cash, beginning of year 1,007,231 46,950 44,992
------------- ------------ ------------
Cash, end of year $ 81,280 1,007,231 46,950
============= ============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 1,380,742 1,371,736 1,281,687
============= ============ ============
Income taxes paid, net of refunds $ (1,273,571) (598,549) 317,000
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Sound Advice, Inc. and subsidiaries (the "Company") operate in a single
business segment, which is the retailing and servicing of home and car
audio systems, video products, cellular telephones, personal
electronics, home entertainment furniture and related customized
services and accessories. Its operations are conducted in Florida
through 21 stores and three support centers.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(C) RECEIVABLES
Receivables from vendors consist of cooperative advertising and other
amounts earned based on annual promotional and market development
agreements under various incentive programs. The funds received under
these programs are determined based upon the Company's level of
purchases and/or the inclusion of the vendors' products in the Company's
advertising and promotional programs. Once earned, the funds are applied
against product cost or recorded as a reduction of advertising expense.
Advertising expense, net, approximated $4,086,000, $6,476,000 and
$4,745,000 for the years ended June 30, 1997, 1996, and 1995,
respectively. Also included in receivables from vendors are amounts due
for warranty repairs. Trade receivables consist primarily of amounts due
from cellular activation providers and credit card and finance companies
resulting from customer purchases.
(D) INVENTORIES
Merchandise and service parts inventories are stated at the lower of
cost or market. Cost is determined using a moving average which
approximates the first-in, first-out method and is recorded net of
volume and purchase discounts and rebates.
The Company allocates to inventory certain costs associated with
purchasing, pricing and preparation of inventories for sale. For the
years ended June 30, 1997 and 1996, allocated costs were $2,314,000 and
$3,487,000, respectively, with $593,000 and $882,000 remaining in
inventory at June 30, 1997 and 1996, respectively.
F - 9 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided over the following estimated useful lives using the
straight-line method.
DESCRIPTION YEARS
----------- -----
Building 30
Furniture and equipment 5 to 7
Leasehold improvements 15 or term of lease, if shorter
Display fixtures 7
Vehicles 5
(F) GOODWILL
Goodwill is amortized on a straight-line basis over 15 years. Goodwill
is presented net of accumulated amortization of $220,000 and $196,000 at
June 30, 1997 and 1996, respectively.
(G) INCOME TAXES
The Company accounts for income taxes under the provisions of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes,
which generally requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities
and are measured by applying enacted tax rates and laws for the taxable
years in which those differences are expected to reverse. In addition,
SFAS No. 109 requires adjustment of previously deferred income taxes for
changes in tax rates under the liability method.
(H) SELF-INSURANCE ACCRUALS
The Company was self-insured through December 31, 1996, up to certain
limits, for workers' compensation benefits and, accordingly, has accrued
unpaid claims and associated expenses, including incurred but not
reported losses.
(I) EXTENDED WARRANTY SERVICE CONTRACTS AND SALES INCENTIVE PROGRAM
The Company offers extended warranty service contracts on behalf of an
unrelated third party on most of its products. These contracts are on a
nonrecourse basis to the Company. The Company includes revenues from the
sale of extended warranty contracts in net sales and records as cost of
goods sold the amounts due to the third party for the cost for such
contracts at the time of sale as the earnings process has been
completed. Revenues from the sale of such contracts represented
approximately five percent to six percent of consolidated net sales in
1995 through 1997. Gross margins from the sale of extended warranty
contracts are higher than gross margins from the sale of the Company's
other products.
F - 10 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From 1986 through February 1993 and from July 1994 through May 1997, the
Company, subject to certain conditions, offered the purchasers of
extended warranty service contracts the right to apply the sales price
of the contract towards future purchases of merchandise if the purchaser
did not utilize the contract during its term. Non-utilized warranty
contracts are generally redeemable for a 60 day period after expiration
of the contract. The term of the warranty contract is for one to five
years. Effective June 1, 1997, the Company discontinued offering this
program on future purchases. The total amount of extended warranty
contracts sold from July 1990 through February 1993 and July 1994
through May 1997 was approximately $21 million and $27 million,
respectively. The Company records a liability at the time of sale for
the estimated amount of future redemptions under this program.
Historically, the overall redemption rate has ranged from nine percent
to 11 percent of the value of contracts issued. Such liability is based
on estimates and, while management believes that such amounts are
adequate, there can be no assurance that changes to management's
estimates may not occur due to limitations inherent in the estimation
process. Changes in the estimates are charged or credited to income in
the period determined. Amounts estimated to be paid within one year have
been classified as accrued liabilities with the remainder included in
other liabilities and deferred credits. At June 30, 1997 and 1996, the
liability for estimated redemptions was approximately $1,772,000 and
$1,892,000, respectively. Amounts charged against the liability recorded
for future redemptions were $926,000, $833,000 and $628,000 for fiscal
years 1997, 1996 and 1995, respectively.
(J) NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock and common stock equivalents
outstanding during each year. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding stock
options and warrants. Common stock equivalents are not included in net
loss per share in 1997, 1996 and 1995 because their effect would be
anti-dilutive.
(K) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(1) FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK
The carrying amount of cash, receivables, revolving credit facility and
trade accounts payable approximates fair value because of the short
maturity of these instruments. The fair value of the Company's long-term
debt is estimated by discounting the future cash flows for each
instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities, which approximates the carrying
value.
F - ll (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of vendor receivables.
Although credit risk is affected by conditions and occurrences in the
industry, the Company reviews the credit risk of specific vendors,
historical trends and other information. Two vendors accounted for 38
percent and 16 percent, respectively, of the Company's vendor
receivables at June 30, 1997 and 34 percent and 13 percent,
respectively, at June 30, 1996.
The Company is a specialty retailer with a focus on upscale electronics
and is a primary distributor in its markets for certain products.
Although competitive sources of supply are available for most of its
products, the loss of a source for which the Company is a primary
distributor could have an adverse impact on the Company. The Company
would most likely be able to replace these products, but such
replacement products may be widely available in its markets. The
Company's principal competitors include other retailers, department and
discount stores, mass merchandises, catalog and specialty stores. Many
of the Company's competitors are national in scope and have greater
financial resources than the Company.
(M) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, on July 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the
Company's financial position, results of operations or liquidity.
(N) STOCK-BASED COMPENSATION PLAN
Prior to July 1, 1996, the Company accounted for its stock-based
compensation plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. As such, compensation expense
would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On July 1, 1996,
the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants made in 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No.25 and provide the
pro forma disclosure provisions of SFAS No. 123.
F- 12 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(O) NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
EARNINGS PER SHARE, which supersedes APB Opinion No. 15, EARNINGS PER
SHARE, was issued in February 1997. SFAS 128 requires dual presentation
of basic and diluted earnings per share (EPS) for complex capital
structures on the face of the income statement. Basic EPS is computed by
dividing income by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
from the exercise of stock options or conversion of securities into
common stock. SFAS 128 is effective for annual and interim reporting
after December 15, 1997; earlier application is not permitted.
Management does not expect the basic or diluted EPS measured under SFAS
128 to be materially different than the primary or fully-diluted EPS
measured under APB No. 15.
(P) RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 consolidated financial statements
have been reclassified to conform to the 1997 presentation.
(2) Liquidity
As discussed in note 4, the Company's revolving facility and mortgage
mature in July 1998. Management of the Company has held preliminary
negotiations with its current lender and has received interest from
other lenders to refinance the current facility. Management of the
Company believes, although there is no assurance they will be successful
in doing so, that they will be able to refinance this facility prior to
July 1998. Management of the Company also believes that operating cash
flows, combined with currently available borrowings under the current
facility and existing vendor credit programs, will be sufficient for the
Company to meet its operating cash requirements during fiscal 1998.
(3) Property and Equipment, net
Property and equipment, net, consists of the following:
1997 1996
---- ----
Land $ 521,465 521,465
Building 1,119,605 1,119,605
Furniture and equipment 8,222,690 8,545,945
Leasehold improvements 15,363,402 14,494,852
Display fixtures 5,358,234 5,049,940
Vehicles 920,585 949,168
------------ ------------
31,505,981 30,680,975
Less accumulated depreciation (17,838,896) (16,733,001)
------------ ------------
Property and equipment, net $ 13,667,085 13,947,974
============ ============
Depreciation expense approximated $3,004,000, $3,064,000, and $3,161,000
for the years ended June 30, 1997, 1996 and 1995, respectively.
F - 13 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) DEBT
(A) REVOLVING CREDIT FACILITY
On April 12, 1996, the Company replaced its then existing revolving
credit and term loan facility with a $25,000,000 revolving credit
facility from a new lender. The revolving credit facility matures on
July 31, 1998, and bears interest on the outstanding balance at prime
plus one percent. Borrowings under the revolving credit facility are
collateralized by all of the Company's assets including depository
accounts, receivables, inventory, property and equipment and intangible
assets. Under the revolving credit facility, borrowings are repaid from
sales proceeds which are deposited and automatically transferred and
applied against the outstanding loan balance. Funds are reborrowed as
required based on a borrowing base equal to the lesser of 65 percent of
eligible inventory at cost or 50 percent of eligible inventory at retail
selling price. The availability under the borrowing base is reduced by
borrowings and outstanding letters of credit which are limited to
$3,000,000. In connection with the financing, the Company paid a .625
percent commitment fee and is obligated to pay additional commitment
fees of .5 percent annually on the total facility and a monthly fee on
the unused portion of the commitment of .375 percent per annum.
The loan and security agreement contains various affirmative and
negative covenants requiring the Company to quarterly (i) maintain a
ratio of current assets to current liabilities of not less than 1.05 to
1.0, (ii) maintain a ratio of total liabilities to tangible net worth of
not more than 2.75 to 1.0, (iii) maintain tangible net worth of at least
$14,000,000 and (iv) maintain working capital of at least $3,500,000. In
addition, cumulative net losses from and after April 1, 1996 may not
exceed $4,000,000. The loan and security agreement also limits the
incurrence of additional debt, liens, capital expenditures, acquisitions
and investments and prohibits cash dividends and the repurchase of
capital stock.
The effective interest rate on the outstanding loan balance under the
financing arrangement in effect at June 30, 1997, 1996 and 1995 was 11.5
percent, 12.6 percent, and 9.25 percent, respectively.
(B) LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996
---- ----
Promissory note $ 296,919 436,539
Mortgage note 449,083 470,431
--------- --------
Total 746,002 906,970
Less current maturities 171,478 161,406
--------- --------
Long-term debt, excluding current maturities $ 574,524 745,564
========= ========
F - 14 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The promissory note is payable in 60 equal monthly installments based
upon a short-term commercial paper rate plus 2.6 percent. The Company
has the option to convert to a fixed interest rate loan based on certain
Treasury note rates tied to the then-remaining term of the loan plus 3.1
percent. The promissory note is secured by certain computer equipment
with a net book value of approximately $50,000 at June 30, 1997.
The mortgage note is payable in monthly installments of $1,779,
including interest at the lender's prime rate plus .5 percent with a
balloon payment due July 12, 1998. The loan is secured by land, building
and improvements with a net book value of approximately $833,000 at June
30, 1997.
The aggregate maturities of long-term debt for each of the years
subsequent to June 30, 1997 are as follows:
YEARS ENDED AMOUNT
----------- ------
1998 $ 171,478
1999 574,524
---------
Total $ 746,002
=========
(C) LETTERS OF CREDIT
The Company has standby letters of credit, in the aggregate of
approximately $885,000, maturing at various dates through April, 1998,
primarily supporting self-insurance reserves. The letters of credit were
not drawn upon as of June 30, 1997.
(5) INCOME TAXES
The components of the provision for income taxes (benefit) are as
follows:
Years ended June 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Current:
Federal $ (231,000) (1,217,437) 89,702
State - - 43,615
---------- ---------- --------
(231,000) (1,217,437) 133,317
Deferred 620,000 731,437 (285,157)
---------- ---------- --------
Total $ 389,000 (486,000) (151,840)
========== ========== ========
F- 15 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for deferred income taxes (benefit) consists of the
following:
<TABLE>
<CAPTION>
June 30,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Allowance for doubtful accounts $ 90,304 (33,546) (5,682)
Inventory adjustments 155,618 (101,424) (47,414)
Preopening expenses - (54,814) 60,667
Prepaid expenses 60,601 44,373 (196,849)
Accelerated depreciation (204,601) (222,001) (246,477)
Accrued rent expense (8,433) 54,733 (106,449)
Provision for warranty redemption 40,836 (20,902) 26,049
Deferred tax valuation allowance 349,000 1,080,426 20,000
Other 136,675 (15,408) 210,998
--------- --------- ---------
Total $ 62O,000 731,437 (285,157)
========= ========= =========
</TABLE>
The reconciliation of the Federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Statutory income tax rate (34.0)% (34.0) (34.0)
Effect of state taxes - - (.2)
Reserve for tax examination 41.5 - -
Provision for valuation allowance 72.6 22.9 1.4
Nondeductible expenses .7 .8 8.8
----- ----- -----
Effective income tax rate 80.8% (10.3) (24.0)
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at June 30,
1997 and 1996 are as follows:
1997 1996
---- ----
Allowance for doubtful accounts $ 121,950 212,261
Inventory adjustments (78,559) 77,052
Prepaid advertising (69,467) (48,003)
Prepaid insurance (74,104) (34,972)
Accelerated depreciation 232,240 93,845
Deferred gain on sale 49,260 51,790
Accrued rent expense 825,368 816,934
Accrued insurance 62,079 81,593
Legal settlement expense 28,064 29,755
Provision for warranty redemption 668,835 709,671
Other 60,068 106,808
Deferred tax valuation allowance (1,636,706) (1,287,706)
----------- ----------
Total $ 189,028 809,028
=========== ==========
F- 16 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 109 requires that the tax benefit of deductible temporary
differences be recorded as an asset to the extent that management
assesses the utilization of such temporary differences to be "more
likely than not." The Company has sufficient taxable income in the three
year carryback period to support the recognition of its deferred tax
assets. A valuation allowance has been established to the extent future
deductible amounts cannot be recovered through federal income taxes paid
within the statutory carryback period.
The valuation allowance for deferred tax assets as of June 30, 1997 and
1996 was $1,636,706 and $1,287,706, respectively. The net change in the
total valuation allowance for the years ended June 30, 1997 and 1996 was
an increase of $349,000 and $1,080,426, respectively.
The Internal Revenue Service (IRS) is in the process of completing its
examination of the Company's income tax returns for the years 1993
through 1996. The Company has received a notice of proposed adjustments
for the 1993 through 1996 years. The Company believes that the accruals
provided in connection with this matter are adequate and that the
resolution of this matter will not have a material adverse effect on the
Company's financial condition or results of operations.
(6) SHAREHOLDERS' EQUITY
(A) SHAREHOLDER RIGHTS PLAN
In May 1997, the Board of Directors adopted a Common Stock Purchase
Rights Plan and subsequently declared a dividend distribution of one
Common Stock Purchase Right ("Right") on each outstanding share of
common stock. Each Right has an initial exercise price of $12 for
one share of common stock. Generally, the Rights will be exercisable
only if a person or group acquires 15 percent or more of the common
stock or announces a tender offer, the consummation of which would
result in ownership by a person or group of 15 percent or more of
the common stock. Upon such occurrence, each Right (other than
Rights owned by such person or group) will entitle the holder to
purchase from the Company the number of shares of common stock
having a market value equal to twice the exercise price of the
Right. Generally, prior to the acquisition by a person or group of
beneficial ownership of 15 percent or more of the common stock, the
Rights are redeemable for $.001 per Right at the option of the Board
of Directors. The Rights will expire on May 4, 2007. As of June 30,
1997, approximately 3,728,894 rights were outstanding.
(B) STOCK OPTION PLAN
The Company has a stock option plan (the "Plan") which provides for
the issuance of either incentive stock options or non-qualified
stock options. Under the Plan, as amended, the Company has reserved
up to 750,000 shares of common stock for future issuance. The
exercise price of incentive stock options shall not be less than the
fair market value per share on the date of grant. The exercise price
of any non-qualified stock option shall not be less than 85 percent
of the fair market value per share on the date of grant. For each of
the years ended June 30, 1997, 1996 and 1995, the option price
represents the fair market value of each underlying share of common
stock at the date of grant established by the Company's board of
directors. The option term may not be longer than ten years. No
options may be granted under the stock option plan after November
10, 2001.
F - 17 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 10, 1997, the Company issued 75,000 stock options at an
exercise price of $1.69 per share. In addition, incentive stock options
to purchase 31,000 shares of common stock, previously granted to two
officers at an exercise price of $6.29 per share, were canceled and
reissued by the Company at an exercise price of $1.69 per share. These
options are immediately exercisable through March 9, 2002.
On April 29, 1997, the Company issued 412,500 stock options at an
exercise price of $1.89 per share. These options vest in increments of
one third upon attainment of a market price of the Company's common
stock at $4.00, $5.00 and $6.50, respectively. These options are also
subject to full vesting on the earlier to occur of April 29, 2001 or a
change in control (as defined) of the Company. These options have a term
of five years expiring April 28, 2002. In addition, the Company granted
5,000 warrants to purchase common stock to each of three non-employee
directors of the Company subject to the same exercise price and vesting
terms as the options issued on April 29, 1997. In addition, stock
options to purchase 35,000 shares of common stock, previously granted to
a director at an exercise price of $5.96 per share for 15,000 shares and
$6.29 per share for 20,000 shares, were canceled and reissued by the
Company and subject to the same exercise price and vesting terms as the
options issued on April 29, 1997.
Changes in stock options outstanding are as follows:
Number of
Shares Price
--------- -----
Outstanding, June 30, 1994 155,000 $ 4.20-10.48
Granted 45,000 5.96
Exercised -
Canceled (58,500) 4.20-10.48
---------
Outstanding, June 30, 1995 141,500 5.45-9.27
Granted 147,500 1.70-6.29
Exercised -
Canceled (69,000) 5.45-9.27
---------
Outstanding, June 30, 1996 220,000 1.70-7.27
Granted 553,500 1.69-1.89
Exercised -
Canceled (104,500) 5.45-7.27
---------
Outstanding, June 30, 1997 669,000 $1.69-4.76
=========
Exercisable 221,500
=========
Available for future grants 20,000
=========
F - 18 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would
have been reduced to the pro forma amounts indicated below:
1997 1996
---- ----
(in thousands, except per
share amounts)
-------------------------
Net loss As reported $ (871) (4,227)
==== =====
Pro forma $ (891) (4,227)
==== =====
Loss per share As reported $ (.23) (1.13)
==== =====
Pro forma $ (.24) (1.13)
==== =====
Pro forma net income reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of 5 years and compensation cost for options
granted prior to July 1, 1995 is not considered.
The fair value of each options' grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
1997 1996
---- ----
Expected dividend yield - -
Expected stock price volatility 1.01 1.01
Risk-free interest rate 5.9-6.1 % 5.1-5.8%
Expected life of options 3 years 3 years
Stock option activity during the periods indicated is as follows:
Number of Weighted-average
Shares Exercise Price
--------- ----------------
Balance at June 30, 1995 141,500 $ 6.07
Granted 147,500 2.79
Exercised - -
Canceled (69,000) 6.08
-------
Balance at June 30, 1996 220,000 3.87
Granted 553,500 1.85
Exercised - -
Canceled (104,500) 6.12
-------
Balance at June 30, 1997 669,000 $ 2.04
=======
F - 19 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1997, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $1.69 to $4.76 and 4.5 years, respectively.
At June 30, 1997 and 1996, the number of options exercisable was
221,500 and 220,000, respectively, and the weighted-average exercise
price of those options was $3.86 and $3.87, respectively.
(C) SHAREHOLDERS' EQUITY
During fiscal 1995, the Company issued 306,335 warrants to purchase
common stock of the Company in connection with the settlement of two
shareholder class actions filed in 1992. The warrants are
exercisable through June 14, 1999 and each warrant is exercisable
into one share of common stock at an exercise price of $8.70 per
share.
(7) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Effective as of July 1, 1989, the Company established and adopted an
Employee Stock Ownership Plan and Trust (the "ESOP") for all of its
employees. Contributions to the ESOP are made at the discretion of the
board of directors. No contributions were made in 1997, 1996 or 1995.
(8) PROVISIONS FOR DISPOSAL OF INVENTORY AND ASSET IMPAIRMENT
During 1996, the Company eliminated personal computers and related
accessories from its product line. In December 1995, the Company
recorded a $1,500,000 provision to write down its remaining personal
computer and related accessories inventory to estimated net realizable
value and to recognize expenses associated with the sale and disposal.
The provision for loss was included in cost of goods sold.
During fiscal 1995, the Company was unable to successfully complete the
implementation of a new management information system and recorded a
provision of $400,000 for loss on impairment of these assets.
(9) LEASES
The Company is obligated under a number of operating leases for retail
store space, distribution and installation centers, and certain property
and equipment, which expire at various dates through 2014. The retail
store leases generally contain provisions for increases based on the
Consumer Price Index and contain options for periods of up to 15 years
to renew at the then fair rental value.
In June 1994, the Company entered into a limited partnership agreement
with a development company in connection with the acquisition and
development of a parcel of land in Fort Myers, Florida. The Company was
a 40 percent limited partner and made capital contributions of
approximately $250,000. The Company agreed to lease this building for a
period of 20 years and has recorded a portion of the Fort Myers lease as
a capital lease. In April 1995, the land and building were sold by the
limited partnership. The Company's portion of the gain on sale is being
amortized over the life of the lease.
F - 20 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property under capital lease includes the following amounts in the
accompanying consolidated financial statements:
1997 1996
---- ----
Building $ 685,000 685,000
Furniture and equipment 142,900 142,900
--------- --------
827,900 827,900
Less accumulated depreciation (142,910) (87,590)
--------- --------
$ 684,990 740,310
========= ========
Future minimum annual rental payments required under operating leases
that have initial or remaining noncancelable lease terms in excess of
one year (including option periods) as of June 30, 1997 and the capital
lease payments are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ended lease leases
---------- ------- ---------
<S> <C> <C>
1998 $ 162,396 5,990,441
1999 162,396 5,310,395
2000 162,396 5,015,390
2001 162,396 4,872,731
2002 162,396 4,643,491
Thereafter 2,016,417 21,837,303
---------- -----------
Total minimum lease payments 2,828,397 $47,669,751
===========
Less amounts representing interest (at an
effective interest rate of approximately 19%) (2,012,457)
----------
Present value of minimum capital lease
payments 815,940
Less current installments of obligations under
capital lease (6,454)
----------
Obligations under capital lease,
excluding current installments $ 809,486
==========
</TABLE>
Total rental expense under the noncancelable operating leases was
approximately $6,542,000, $6,058,000, and $6,123,000 for the years ended
June 30, 1997, 1996 and 1995, respectively.
F - 21 (Continued)
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) ACCRUED LIABILITIES
Certain store lease agreements provide for scheduled base rental
increases over the lease term or provide free rent periods. The Company
recognizes the aggregate rent expense on a straight-line basis over the
lease term, and the difference between rent expense on a straight-line
basis and the base rental is accrued and included in other liabilities
and deferred credits in the consolidated balance sheet. At June 30, 1997
and 1996, the recorded liability for accrued rent was approximately
$2,174,000 and $2,148,000, respectively.
Included in accrued liabilities at June 30, 1997 and 1996 are
approximately $2,159,000 and $2,637,000, respectively, of customer
deposits on future sales orders.
(11) COMMITMENT AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS
Two of the Company's officers have employment agreements, which
provided for aggregate annual base salaries of $611,050 for each of
the fiscal years ending June 30, 1997, 1996, and 1995. These
agreements have been extended through June 30, 1998.
(B) SEVERANCE AGREEMENTS
The Company has entered into agreements with corporate officers and
certain other key employees that provide severance pay benefits
under certain conditions if there is a change in control (as
defined) of the Company.
(C) BONUS PLAN
During 1995, the Company implemented a bonus plan for certain
managerial positions based upon the annual operating performance of
the Company. Under the terms of the bonus plan, bonuses ranging
between 10 percent and 25 percent of annual compensation may be
earned for achievement of various levels of targeted operating
performance as approved by the Board of Directors. For the three
years ended June 30, 1997, no bonus amounts were earned under the
plan.
(D) OTHER
The Company is a party to various legal actions arising in the
normal course of business. It is the opinion of management that the
ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position or results of
operations.
F-22
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO COSTS OTHER CHANGES BALANCE AT END
DESCRIPTION BEGINNING OF YEAR AND EXPENSES ADD (DEDUCT) OF YEAR
----------- ----------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
June 30, 1997 $ 572,000 410,152 (695,752)(A) 286,400
========== ======= ========= =========
June 30, 1996 $ 470,000 722,000 (620,000)(A) 572,000
========== ======= ========= =========
June 30, 1995 $ 460,000 380,474 (370,474)(A) 470,000
========== ======= ========= =========
Allowance for redemption of extended
service warranty contracts:
June 30, 1997 $1,891,920 -- (120,105)(B) 1,771,815
========== ======= ========= =========
June 30, 1996 $1,830,445 61,475(B) -- 1,891,920
========== ======= ========= =========
June 30, 1995 $1,761,222 69,223(B) -- 1,830,445
========== ======= ========= =========
Allowance for inventory obsolescence:
June 30, 1997 $ 830,000 -- (130,000)(C) 700,000
========== ======= ========= =========
June 30, 1996 $ 600,000 230,000(C)(D) -- 830,000
========== ======= ========= =========
June 30, 1995 $ 273,000 327,000(D) -- 600,000
========== ======= ========= =========
<FN>
(A) Amounts represent write-off of uncollectible receivables.
(B) Amounts represent net change between beginning of period and end of period
balances.
(C) Amounts represent provision and disposition of personal computer and related
accessory inventories.
(D) General obsolescence.
</FN>
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Page No.
- ------- ----------
3.1 Articles of Incorporation, as
amended, of the Registrant
(incorporated by reference from
Registration Statement No. 33-5942,
Exhibit 3.1, filed May 23, 1986)
3.2 By-laws of the Registrant
(incorporated by reference from
Registration Statement No. 33-5942,
Exhibit 3.2, filed May 23, 1986)
4.1 Form of 1997 Common Stock Purchase
Rights Agreement, dated as of May
5, 1997, between the Registrant and
American Stock Transfer & Trust
Company (incorporated by reference
from the Registrant's Registration
Statement on Form 8-A, Exhibit 4.1,
filed on May 13, 1997)
9. Right of First Refusal and Voting
Trust Agreement, dated June 30,
1986, among Peter Beshouri, Gregory
Sturgis, Michael Blumberg and
Joseph Piccirilli (incorporated by
reference from the Registrant's
Annual Report on Form 10-K for the
fiscal year ended June 30, 1986,
Exhibit 9, File No. 33-5942)
10.1 Loan and Security Agreement
(without schedules), dated as of
April 11, 1996, between the
Registrant and Foothill Capital
Corporation (incorporated by
reference from the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996,
Exhibit 10.2, File No. 0-15194)
10.2 Mortgage Note, dated July 12, 1988,
from the Registrant payable to Bank
Atlantic in the principal amount of
$640,000, together with Mortgage
and Security Agreement, dated July
i
<PAGE>
Exhibit Sequential
No. Page No.
- ------- ----------
12, 1988, between the Registrant
and BankAtlantic and Assignment of
Leases, Rents and Profits, dated
July 12, 1988, between the
Registrant and BankAtlantic
(incorporated by reference from the
Registrant's Annual Report on Form
10-K for the fiscal year ended June
30, 1988, Exhibit 10.42, File No.
0-15194)
10.3* Second Amended and Restated Sound
Advice, Inc. 1986 Stock Option Plan
(incorporated by reference from the
Registrant's Registration Statement
No. 333-27051 on Form S-8, Exhibit
4.3, filed on May 14, 1997)
10.4* Sound Advice, Inc. Employee Stock
Ownership Plan and Trust, made
January 15, 1990, between the
Registrant and Peter Beshouri,
Michael Blumberg, Gregory Sturgis,
Joseph Piccirilli and Jacob E.
Farkas, the trustees (incorporated
by reference from the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended March 31, 1990,
Exhibit 10.2, File No. 0-15194),
First Amendment to the Sound
Advice, Inc. Employee Stock
Ownership Plan and Trust, dated as
of December 23, 1992 (incorporated
by reference from the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31,
1992, Exhibit 10.2, File No. 0-
15194), Second Amendment to the
Sound Advice, Inc. Employee Stock
Ownership Plan and Trust, dated as
of July 9, 1993 (incorporated by
reference from the Registrant's
- --------
* Management contract or compensation plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) of
Form 10-K.
ii
<PAGE>
Exhibit Sequential
No. Page No.
- ------- ----------
Annual Report on Form 10-K for the
fiscal year ended June 30, 1993,
Exhibit 10.15, File No. 0-15194)
and Third Amendment to the Sound
Advice, Inc. Employee Stock
Ownership Plan and Trust, dated as
of December 30, 1994 (incorporated
by reference from the Registrant's
Annual Report on Form 10-K for the
fiscal year ended June 30, 1995,
Exhibit 10.9, File No. 0-15194)
10.5* Employment Agreements, dated June
30, 1986, between Registrant and
each of Peter Beshouri and Michael
Blumberg (incorporated by reference
from the Registrant's Annual Report
on Form 10-K for the fiscal year
ended June 30, 1986, Exhibit 10.26,
File No. 33-5942), First Amendments
to Employment Agreements, both
dated as of May 20, 1989, between
the Registrant and each of Peter
Beshouri and Michael Blumberg
(incorporated by reference from
Registration Statement No. 33-
28745, Exhibit 10.20, filed May 16,
1989), Second Amendments to
Employment Agreements, both dated
as of October 27, 1989, between the
Registrant and each of Peter
Beshouri and Michael Blumberg
(incorporated by reference from the
Registrant's Quarterly Report on
Form 10-Q for the quarter ended
December 31, 1989, Exhibit 10.2,
File No. 0-15194), Third Amendments
to Employment Agreements, both
dated as of July 1, 1992, between
the Registrant and each of Peter
Beshouri and Michael Blumberg
(incorporated by reference from the
Registrant's Annual Report on Form
10-K for the fiscal year ended June
30, 1992, Exhibit 10.15, File No.
- --------
* Management contract or compensation plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) of
Form 10-K.
iii
<PAGE>
Exhibit Sequential
No. Page No.
- ------- ----------
0-15194), Fourth Amendments to
Employment Agreements, both dated
as of July 1, 1993, between the
Registrant and each of Peter
Beshouri and Michael Blumberg
(incorporated by reference from the
Registrant's Annual Report on Form
10-K for the fiscal year ended June
30, 1993, Exhibit 10.16, File No.
0-15194), Fifth Amendments to
Employment Agreements, both
effective as of July 1, 1994,
between the Registrant and each of
Peter Beshouri and Michael Blumberg
(incorporated by reference from the
Registrant's Quarterly Report on
Form 10-Q for the quarter ended
December 31, 1994, Exhibit 10.2,
File No. 0-15194), Sixth Amendments
to Employment Agreements, both
effective as of July 1, 1995,
between the Registrant and each of
Peter Beshouri and Michael Blumberg
(incorporated by reference from the
Registrant's Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1995, Exhibit 10.1,
File No. 0-15194), Seventh
Amendments to Employment
Agreements, both effective as of
July 1, 1996, between the
Registrant and each of Peter
Beshouri and Michael Blumberg
(incorporated by reference from the
Registrant's Annual Report on Form
10-K for the fiscal year ended June
30, 1996, Exhibit 10.8, File No. 0-
15194), and Eighth Amendment(s) to
Employment Agreements, both dated
as of May 24, 1997, between the
Registrant and each of Peter
Beshouri and Michael Blumberg
(incorporated by reference from the
Registrant's Quarterly Report on
Form 10-Q for the quarter ended
March 31, 1997, Exhibit 10.2, File
No. 0-15194)
iv
<PAGE>
Exhibit Sequential
No. Page No.
- ------- ----------
10.6 * Form of Agreement entered into as
of May 1, 1997, between the
Registrant and each of two
executive officers of the
Registrant (Kenneth L. Danielson
and Christopher P. O'Neil) and
twelve other employees of the
Registrant relating to the making
of a severance payment (two years
gross wages for the executive
officers and six months gross wages
for the other employees) under
certain circumstances upon a change
of control (as defined) (filed
herewith)
10.7 Associate Agreement, dated March 1,
1986 between the Registrant and
Progressive Retailers Organization,
Inc. ("PRO"), together with PRO
Policy and Procedure Manual
(incorporated by reference from
Amendment No. 1 to Registration
Statement No. 33-5942, Exhibit
10.28, filed June 24, 1986)
10.8 Lease, dated September 23, 1987,
between Designer's Place at Dania,
a Florida general partnership
consisting of Marvin Mandel, Philip
Mandel and G&E Investment Company,
and the Registrant (incorporated by
reference from the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended September 30,
1987, Exhibit 10.1, File No.
0-15194)
10.9 Amended and Restated Lease, dated
as of December 1, 1991, between
Chase, Gunsaullus, Scherer and the
Registrant (incorporated by
reference from the Registrant's
Annual Report on Form 10-K for the
- --------
* Management contract or compensation plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) of
Form 10-K.
v
<PAGE>
Exhibit Sequential
No. Page No.
- ------- ----------
fiscal year ended June 30, 1992,
Exhibit 10.19, File No. 015194)
10.10 Dealer Agreement, dated January 1,
1995, between McCaw Communications
of Florida, Inc. d/b/a Cellular One
("McCaw") and the Registrant, as
amended by that certain Amendment
to Dealer Agreement, dated January
1, 1995, between McCaw and the
Registrant (incorporated by
reference from the Registrant's
Annual Report on Form 10-K for the
fiscal year ended June 30, 1995,
Exhibit 10.14, File No. 0-15194)
10.11 Form of Warrant to Purchase 5,000
Shares of Common Stock of Sound
Advice, Inc. entered into as of
April 29, 1997, by the Registrant
with and in favor of each of
Gregory Sturgis, Richard W. McEwen
and Herbert A. Leeds, who are
directors of the Registrant (filed
herewith)
10.12 Credit Card Program Agreement,
dated August 12, 1992, between
Monogram Credit Card Bank of
Georgia ("Monogram") and the
Registrant (incorporated by
reference from the Registrant's
Annual Report on Form 10-K for the
fiscal year ended June 30, 1992,
Exhibit 10.29, File No. 0-15194),
together with Amendment thereto,
dated June 14, 1996, between
Monogram and Registrant
(incorporated by reference from the
Registrant's Annual Report on Form
10-K for the fiscal year ended June
30, 1996, Exhibit 10.14, File No.
0-15194)
10.13 Sales Agreement, dated August 10,
1989, between Progressive Casualty
Insurance Company and the
Registrant (incorporated by
reference from the Registrant's
Annual Report on Form 10-K for the
vi
<PAGE>
Exhibit Sequential
No. Page No.
- ------- ----------
fiscal year ended June 30, 1992,
Exhibit 10.32, File No. 0-15194)
10.14 Lease, dated as of May 22, 1993,
between L&T Limited Partnership, as
landlord, and the Registrant, as
tenant (incorporated by reference
from the Registrant's Annual Report
on Form 10-K for the fiscal year
ended June 30, 1993, Exhibit 10.34,
File No. 0-15194)
10.15 Promissory Note, dated May 4, 1994,
from the Registrant payable to
General Electric Capital
Corporation ("GECC") in the
original principal amount of
$1,607,661.17, as amended, together
with Master Security Agreement,
dated as of May 4, 1994, between
the Registrant and GECC
(incorporated by reference from the
Registrant's Annual Report on Form
10-K for the fiscal year ended June
30, 1994, Exhibit 10.28, File No.
0-15194)
10.16 Stipulation of Settlement, dated as
of January 26, 1994, regarding IN
RE: SOUND ADVICE, INC. SECURITIES
LITIGATION, which has annexed as
one of the exhibits thereto, among
other documents, the Form of
Warrant Agreement between the
Registrant and American Stock
Transfer & Trust Company, as
warrant agent, covering the 306,335
warrants issued in connection with
the settlement of the class action
(incorporated by reference from the
Registrant's current report on Form
8-K, dated January 31, 1994,
reporting an event on January 28,
1994, Exhibit 2, File No. 0-15194)
21 Subsidiaries of the Registrant
(filed herewith)
23 Consent of Independent Public
Accountants of KPMG Peat Marwick
LLP (filed herewith)
27 Financial Data Schedule (filed
herewith)
vii
EXHIBIT 10.6
AGREEMENT
AGREEMENT made and entered into as of the 1st day of May, 1997 by and
between SOUND ADVICE, INC., a Florida corporation (the "Employer"), and
___________________ (the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee serves in a management capacity with the Employer and
makes and is expected to continue to make significant and material contributions
to the growth, development and expansion of the business of the Employer; and
WHEREAS, the Employee has acquired and developed experience and knowledge
concerning the business and operations of the Employer, which experience and
knowledge the Employer desires to continue to have available to it; and
WHEREAS, to help ensure that continued availability, the Employer desires
to provide the Employee with a severance payment in the event that a Change in
Control (as hereinafter defined) results in the Employee's loss of the
Employee's position with the Employer.
NOW, THEREFORE, for and in consideration of the foregoing preambles and the
covenants and conditions hereinafter set forth, the parties hereto mutually
agree as follows:
1. TERM. The term of this Agreement shall be for a period of one year
commencing on the date hereof and ending on April 30, 1998, unless hereafter
extended by a written instrument executed by the Employer and the Employee (the
"Term").
2. SEVERANCE PAYMENT. In the event that prior to the expiration of the Term
(a) a Change in Control (as hereinafter defined) occurs and (b) the Employee
remains and continues as an employee of the Employer until the Change in Control
Date (as hereinafter defined) unless the
<PAGE>
Employee is terminated by the Employer prior to the Change in Control Date other
than for Cause (as hereinafter defined), the Employee shall be entitled to be
paid the Severance Payment (as hereinafter defined), in addition to any other
compensation then owed to the Employee, in one lump sum payment payable in full
on the Change in Control Date unless (i) the Employee is offered on or prior to
the Change in Control Date by the Employer or any successor to the Employer as a
result of the Change in Control (the "Successor Employer") to continue as an
employee of the Employer or the Successor Employer (as the case may be) in
substantially the same position as the Employee was holding prior to the Change
in Control AND (ii) the Employee receives prior to the Change in Control Date a
written agreement from the Employer or the Successor Employer in form reasonably
acceptable to the Employee to the effect that, in the event that Employee's
employment is terminated without Cause by the Employer or the Successor Employer
within one year after the Change in Control Date, the Employee shall be paid by
the Employer or the Successor Employer the Severance Payment in one lump sum
payment on the date of termination.
3. DEFINITIONS. For purposes of this Agreement the following terms will
have the meanings set forth below:
(a) "Cause" shall include any of the following with respect to the
Employee: a fraud, gross dishonesty or gross misconduct or breach of duty
perpetrated on the Employer or the Successor Employer, a criminal conviction for
a felony, fraud or theft, the imposition of any material sanction against the
Employee or the Employer or the Successor Employer solely by reason of the
actions of the Employee by any regulatory or governmental agency governing the
Employer or Successor Employer or the habitual use of alcohol or illegal drugs
by the Employee.
- 2 -
<PAGE>
(b) A "Change in Control" shall be deemed to have occurred upon any of
the following events: (i) the acquisition in one or more transactions by any
"person" (as the term person is used for purposes of Section 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial
ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of
fifteen percent (15%) or more of the combined voting power of the Employer's
then outstanding voting securities (the "Voting Securities"), provided, however,
that for purposes hereof the Voting Securities acquired (by sale, merger,
consolidation or in any other manner) from the Employer by any person shall be
excluded from the determination of such person's beneficial ownership of Voting
Securities (but such Voting Securities shall be included in the calculation of
the total number of Voting Securities then outstanding); or (ii) the individuals
who, as of the date hereof, are members of the Board of Directors of the
Employer (the "Incumbent Board") cease for any reason to constitute more than
one-half of the Board; provided, however, that, if the election, or nomination
for election by the Employer's shareholders, of any new director was approved by
a vote of more than one-half of the Incumbent Board, such new director shall,
for purposes hereof, be considered as a member of the Incumbent Board; or (iii)
approval by shareholders of the Employer of (A) a merger or consolidation
involving the Employer if the shareholders of the Employer immediately before
such merger or consolidation do not own, directly or indirectly immediately
following such merger or consolidation, more than one-half of the combined
voting power of the outstanding voting securities of the corporation resulting
from such merger or consolidation in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger or
consolidation (unless, however, the event described in subparagraph (ii) above
does not occur in connection therewith) or (B) a complete liquidation or
dissolution of the Employer or
- 3 -
<PAGE>
an agreement for the sale or other disposition of all or substantially all of
the assets of the Employer; provided, however, that, notwithstanding the
foregoing, (x) a change in control shall not be deemed to occur solely because
fifteen percent (15%) or more of the then outstanding Voting Securities is
acquired by (1) a trustee or other fiduciary holding securities under one or
more employee benefit plans maintained by the Employer or any of its
subsidiaries, (2) any corporation which, immediately prior to such acquisition,
is owned directly or indirectly by the shareholders of the Employer in the same
proportion as their ownership of stock in the Employer immediately prior to such
acquisition or (3) Peter Beshouri and/or Michael Blumberg or any person directly
or indirectly controlled, under common control with or controlled by either or
both of them, and (y) a change in control shall not be deemed to occur solely
because any person (the "Subject Person") acquired beneficial ownership of more
than the permitted amount of the outstanding Voting Securities as a result of
the acquisition of Voting Securities by the Employer which, by reducing the
number of Voting Securities outstanding, increases the proportional number of
shares beneficially owned by the Subject Person, provided that if a change in
control would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Employer and, after such share
acquisition by the Employer, the Subject Person becomes the beneficial owner of
any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities beneficially owned by the Subject Person, then a
change in control shall occur.
(c) The "Change in Control Date" shall be the later to occur of the
closing date or the effective date (as the case may be) of the transaction or
event resulting in the Change in Control; provided, however, that,
notwithstanding the foregoing, the Change in Control Date
- 4 -
<PAGE>
solely for the event set forth in item (i) of subsection (b) of this Section 3
shall be the date fifteen (15) business days after the occurrence of such event.
(d) The "Severance Payment" shall mean and equal the product of (i)
____ multiplied by (ii) the total amount of the gross wages paid by the Employer
to the Employee during the twelve full months immediately preceding the month in
which the Change in Control Date occurs.
4. RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Agreement shall confer
upon the Employee the right to continue in the employment of the Employer for
any specific period of time or affect the right of the Employer to terminate the
Employee at any time, subject, however, to the provisions of this Agreement or
any employment agreement which may hereafter be entered into between the
Employer and the Employee.
5. NOTICES. Whenever any notice or other communication is required to be
given or delivered pursuant to this Agreement, such notice shall be given in
writing, and shall be delivered in person or by certified mail, return receipt
requested, and shall be sufficiently given if received, delivered personally or
if mailed, addressed as follows: If to the Employer, to Sound Advice, Inc., 1901
Tigertail Boulevard, Dania, Florida 33004, Attention: President; and, if to
Employee, to his or her residence with a copy to his or her office at the
Employer, or such other address as either party hereto may by written notice
designate to the other party in accordance with this Section. Notices delivered
personally or by courier shall be deemed given as of actual receipt. Mailed
notices shall be deemed given as of four (4) days after mailing.
6. GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of Florida.
- 5 -
<PAGE>
7. ATTORNEYS' FEES AND COSTS. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' and paralegals' fees, costs and
necessary disbursements in addition to any other relief to which it, he or she
may be entitled, before and at trial, whether or not trial on the merits occurs,
and at all tribunal levels.
8. SEVERABILITY. If any provision of this Agreement shall be held void,
voidable, invalid, or unenforceable, the remainder of this Agreement shall
nevertheless remain in full force and effect. If any provision is held void,
voidable, invalid or unenforceable with respect to particular circumstances, it
shall nevertheless remain in full force and effect with respect to all other
circumstances.
9. HEADINGS. Titles or headings of paragraphs or sections contained in this
Agreement are inserted only as a matter of convenience and for reference, and in
no way define, limit, extend or prescribe the scope of this Agreement or the
intent of any provision.
10. ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior and contemporaneous oral and written understandings and
agreements between the parties. The provisions of this Agreement may not be
waived, modified or amended except by a writing signed by the party sought to be
bound. Waiver by either of the parties of a breach by the other of the parties
of any of the terms of this Agreement shall not be deemed a waiver of future
non-compliance herewith. An attempted modification that fails to comply with
this Section shall not operate as a waiver.
- 6 -
<PAGE>
11. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original, and which together shall
constitute one and the same instrument.
12. SUCCESSORS AND PERMITTED ASSIGNS. This Agreement shall bind and inure
to the benefit of and be enforceable by the Company and its successors and
assigns and the Employee and his or her heirs and legal representatives;
provided, however, that the Employee may not assign this Agreement or his or her
rights hereunder.
IN WITNESS WHEREOF, the Employer and Employee have duly executed this
Agreement effective as of the day and year first above written.
EMPLOYER:
SOUND ADVICE, INC., a Florida corporation
By:____________________________________
Peter Beshouri, President
EMPLOYEE:
_______________________________________
- 7 -
EXHIBIT 10.11
VOID AFTER 5:00 P.M., FLORIDA TIME, ON APRIL 28, 2002 OR, IF NOT A BUSINESS DAY,
AS DEFINED HEREIN, AT 5:00 P.M., FLORIDA TIME, ON THE NEXT FOLLOWING BUSINESS
DAY UNLESS TERMINATED EARLIER AS HEREIN PROVIDED.
WARRANT TO PURCHASE
5,000 SHARES
OF
COMMON STOCK
OF
SOUND ADVICE, INC.
TRANSFER RESTRICTED -- SEE SECTION 2.05
This certifies that, for good and valuable consideration, receipt of which
is hereby acknowledged, ____________________(the "Warrantholder") is entitled to
purchase from Sound Advice, Inc., a corporation incorporated under the laws of
the State of Florida (the "Company"), subject to the terms and conditions hereof
(including, without limitation, the vesting of such purchase right as provided
in Sections 2.03 and 2.04 hereof) and to earlier termination as herein provided,
at any time after the date hereof and before 5:00 P.M., Florida time, April 28,
2002 (or, if such day is not a Business Day, as defined herein, at or before
5:00 P.M., Florida time, on the next following Business Day), 5,000 shares of
Common Stock, $.01 par value, of the Company (the "Common Stock") at the
Exercise Price (as defined herein). The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment as provided in Article III
hereof.
ARTICLE I
SECTION 1.01: DEFINITION OF TERMS. As used in this Warrant, the following
capitalized terms shall have the following respective meanings:
(a) BUSINESS DAY. A day other than a Saturday, Sunday or other day
on which banks in the State of Florida are authorized by law to remain closed.
(b) COMMON STOCK. Common Stock, $.01 par value per share, of the
Company.
(c) EXERCISE PRICE. $1.89 per Warrant Share, as such price may be
adjusted from time to time pursuant to Article III hereof.
(d) EXPIRATION DATE. 5:00 P.M., Florida time, on April 28, 2002, or
such earlier date as provided in Section 2.06 hereof.
(e) PERSON. An individual, partnership, joint venture, limited
liability company, corporation, trust, unincorporated organization or government
or any department or agency thereof.
<PAGE>
(f) SEC. The Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
(g) SECURITIES ACT. The Securities Act of 1933, as amended.
(h) WARRANT. This Warrant and other warrants that may be issued in
its place (together evidencing the right to purchase an aggregate of 5,000
shares of Common Stock).
(i) WARRANTHOLDER. _______________ in whose name this Warrant is
registered upon the books to be maintained by the Company for that purpose.
(j) WARRANT SHARES. Common Stock purchasable upon exercise of
the Warrant.
ARTICLE II
DURATION AND EXERCISE OF WARRANT
SECTION 2.01: DURATION OF WARRANT. Subject to all of the terms and
conditions contained herein (including, without limitation, those covering the
vesting of the right to purchase any and all of the Warrant Shares as set forth
in Sections 2.03 and 2.04 and the earlier termination of this Warrant as set
forth in Section 2.06), the vested portion of this Warrant may be exercised by
the Warrantholder in whole or in part from time to time, but only on or after
the date of this Warrant and before 5:00 P.M., Florida time, on the Expiration
Date (or, if such day is not a Business Day, at or before 5:00 P.M. Florida
time, on the next following Business Day). If this Warrant is not exercised at
or before 5:00 P.M., Florida time, on the Expiration Date, it shall become void
and all rights hereunder shall thereupon cease.
SECTION 2.02: MANNER OF EXERCISE OF WARRANT.
(a) The Warrantholder may exercise any vested portion of this
Warrant, in whole or in part, upon surrender of this Warrant with the
Subscription Form hereon duly executed to the Company at its corporate office in
Dania, Florida, together with the full Exercise Price for each Warrant Share to
be purchased in lawful money of the United States or paid by certified check,
bank draft or postal or express money order payable in United States Dollars to
the order of the Company and upon compliance with and subject to the conditions
set forth herein.
(b) Upon receipt of this Warrant with the Subscription Form duly
executed and accompanied by payment of the aggregate Exercise Price for the
Warrant Shares for which this Warrant is then being exercised, the Company will
cause to be issued certificates for the total number of whole shares of Common
Stock for which this Warrant is being exercised (adjusted to reflect the effect
of the anti-dilution provisions contained in Article III hereof, if any, and as
provided in Section 4.04 hereof) in such denominations as are required for
delivery to the Warrantholder, and the Company shall thereupon deliver such
certificates to the Warrantholder. If at the time this Warrant is exercised, a
2
<PAGE>
registration statement is not in effect to register under the Securities Act the
Warrant Shares issuable upon exercise of this Warrant, the Company may require
the Warrantholder to make such investment intent and other representations and
covenants and may place such legends on certificates representing the Warrant
Shares, as may be required by the Securities Act and the rules and regulations
promulgated thereunder or by the SEC and/or as may be reasonably required in the
opinion of counsel to the Company to permit the Warrant Shares to be issued
without such registration.
(c) In case the Warrantholder shall exercise this Warrant with
respect to less than all of the shares of Common Stock that may be purchased
under this Warrant, the Company will execute a new warrant in the form of this
Warrant for the balance of the shares of Common Stock that may be purchased upon
exercise of this Warrant and deliver such new warrant to the Warrantholder.
(d) The Company covenants and agrees that it will pay when due and
payable any and all taxes which may be payable in respect of the issue of this
Warrant or in respect of the issue of any Warrant Shares. Notwithstanding the
foregoing, the Company shall not, however, be required to pay any tax imposed on
income or gross receipts or any tax which may be payable in respect of any
transfer involved in the issuance or delivery of this Warrant or of Warrant
Shares in a name other than that of the Warrantholder at the time of surrender
and, until the payment of such tax, shall not be required to issue such Warrant
Shares.
SECTION 2.03: VESTING OF WARRANT. Notwithstanding anything to the contrary
contained herein, this Warrant shall only be exercisable to the extent that this
Warrant has vested as provided in this Section 2.03 or Section 2.04 below.
Subject to such further limitations as are provided for herein, this Warrant
shall vest as hereinafter set forth, if at all (and be exercisable once vested),
upon and only to the extent that after the date of this Warrant the market price
(as hereinafter defined) of a share of Common Stock shall reach the following
values: (i) one-third (1/3) of this Warrant shall vest when and only if the
market price equals or exceeds $4.00 per share; (ii) two-thirds (2/3) of this
Warrant shall vest when and only if the market price equals or exceeds $5.00 per
share; and (iii) all of this Warrant shall vest when and only if the market
price equals or exceeds $6.50 per share. For purposes of determining whether and
when (if at all) the market price equals or exceeds the foregoing prices, the
"market price" shall be deemed to be the average of the closing sales price (or,
in the absence of reported sales on any day, the mean between the reported
closing bid and asking prices) of a share of Common Stock on the NASDAQ National
Market (or in lieu thereof such other securities exchange that the Company's
Common Stock is listed or quoted) in any period of thirty (30) consecutive
business days after the date of this Warrant.
Notwithstanding the vesting schedule set forth above or the accelerated
vesting provided in Section 2.04 below, Warrantholder shall not become vested in
any part of this Warrant subsequent to the termination of the Warrantholder's
serving as a director of the Company regardless of any exercise period provided
in Section 2.06 below.
3
<PAGE>
SECTION 2.04: ACCELERATED VESTING. Notwithstanding anything to the
contrary contained herein (including the vesting schedule set forth in Section
2.03 above) and to the extent that this Warrant has not previously fully vested,
this Warrant shall fully (100%) vest and become exercisable in full immediately
upon the earlier to occur of (i) a change of control (as defined below) or (ii)
April 29, 2001.
A "change in control" shall be deemed to have occurred upon any of the
following events: (i) the acquisition in one or more transactions by any
"person" (as the term person is used for purposes of Section 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial
ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of
fifteen percent (15%) or more of the combined voting power of the Company's then
outstanding voting securities (the "Voting Securities"), provided, however, that
for purposes hereof, the Voting Securities acquired (by sale, merger,
consolidation or in any other manner) from the Company by any person shall be
excluded from the determination of such person's beneficial ownership of Voting
Securities (but such Voting Securities shall be included in the calculation of
the total number of Voting Securities then outstanding); or (ii) the individuals
who, as of the date hereof, are members of the Board of Directors of the Company
(the "Incumbent Board") cease for any reason to constitute more than one-half of
the Board; provided, however, that, if the election, or nomination for election
by the Company's shareholders, of any new director was approved by a vote of
more than one-half of the Incumbent Board, such new director shall, for purposes
hereof, be considered as a member of the Incumbent Board; or (iii) approval by
shareholders of the Company of (A) a merger or consolidation involving the
Company if the shareholders of the Company immediately before such merger or
consolidation do not own, directly or indirectly immediately following such
merger or consolidation, more than one-half of the combined voting power of the
outstanding voting securities of the corporation resulting from such merger or
consolidation in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger or consolidation (unless,
however, the event described in subparagraph (ii) above does not occur in
connection therewith) or (B) a complete liquidation or dissolution of the
Company or an agreement for the sale or other disposition of all or
substantially all of the assets of the Company; provided, however, that,
notwithstanding the foregoing, (x) a change in control shall not be deemed to
occur solely because fifteen percent (15%) or more of the then outstanding
Voting Securities is acquired by (1) a trustee or other fiduciary holding
securities under one or more employee benefit plans maintained by the Company or
any of its subsidiaries, (2) any corporation which, immediately prior to such
acquisition, is owned directly or indirectly by the shareholders of the Company
in the same proportion as their ownership of stock in the Company immediately
prior to such acquisition or (3) Peter Beshouri, Michael Blumberg, Joseph
Piccirilli, Gregory Sturgis or any other person who, as of December 14, 1994,
directly or indirectly beneficially owned 5% or more of the Voting Securities of
the Company, and (y) a change in control shall not be deemed to occur solely
because any person (the "Subject Person") acquired beneficial ownership of more
than the permitted amount of the outstanding Voting Securities as a result of
the acquisition of Voting Securities by the Company which, by reducing the
number of Voting Securities outstanding, increases the proportional number of
shares beneficially owned by the Subject Person, provided that if a change in
control would occur (but for the operation
4
<PAGE>
of this sentence) as a result of the acquisition of Voting Securities by the
Company and, after such share acquisition by the Company, the Subject Person
becomes the beneficial owner of any additional Voting Securities which increases
the percentage of the then outstanding Voting Securities beneficially owned by
the Subject Person, then a change in control shall occur.
SECTION 2.05: NON-TRANSFERABILITY OF WARRANT. This Warrant shall not be
sold, transferred, pledged, hypothecated, encumbered or otherwise dispose of by
Warrantholder other than a transfer by Warrantholder by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employment Retirement Income Security Act,
or the rules thereunder (but subject, however, to all of the other provisions
hereof), and, except with respect to a qualified domestic relations order as
aforesaid, may be exercised during Warrantholder's lifetime only by
Warrantholder. If any part of this Warrant is exercised after Warrantholder's
death, the Company may require evidence reasonably satisfactory to it of the
appointment and qualification of Warrantholder's personal representatives and
their authority and of the right of any heir or distributee to exercise this
Warrant.
SECTION 2.06: TERMINATION. Notwithstanding the Expiration Date of April
28, 2002 previously set forth in Section 2.01: (a) if the Warrantholder no
longer serves as a director of the Company for any reason whatsoever [including,
without limitation, as a result of disability, voluntary resignation within 60
days after a change in control or retirement (provided that for purposes hereof
"retirement" shall mean voluntarily resigning as a director of the Company after
Warrantholder has reached the age of 65)] other than as a result of
Warrantholder=s death or as described in item (c) or (d) below; the Expiration
Date shall become for all purposes hereof 5:00 P.M., Florida time, on the date
that is two (2) years after the date Warrantholder no longer serves as a
director of the Company; or (b) in the event of the death of Warrantholder prior
to any event described in item (a) above or item (c) or (d) below, the
Expiration Date shall become for all purposes hereof 5:00 P.M., Florida time, on
the date that is two (2) years after the date of the death of Warrantholder; or
(c) in the event Warrantholder has been removed as a director for cause, the
Expiration Date shall become for all purposes 5:00 p.m. Florida time, on the
date of such removal; or (d) in the event that Warrantholder no longer serves as
a director of the Company as a result of the Warrantholder's voluntary
resignation as a director other than within sixty (60) days after a change in
control or as a result of retirement, the Expiration Date shall become for all
purposes hereof 5:00 p.m., Florida time, on the date that is three (3) months
after the date Warrantholder no longer serves as a director of the Company;
provided that, if Warrantholder shall die during such three-month period, the
Expiration Date shall become for all purposes hereof 5:00 p.m., Florida time, on
the date that is six (6) months following the issuance of letters testamentary
or letters of administration to the personal representative(s), executor(s) or
administrator(s) of the deceased Warrantholder, but in no event later than one
year after the Warrantholder's death.
5
<PAGE>
ARTICLE III
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be
subject to adjustment from time to time upon the happening of certain events as
provided in this Article III.
SECTION 3.01: MECHANICAL ADJUSTMENTS. In the event of any stock split,
stock dividend, reclassification or recapitalization which changes the character
or amount of the Company's outstanding Common Stock prior to the full exercise
of this Warrant, the Company shall make such adjustments in the character and
number of Warrant Shares subject to this Warrant, in the Exercise Price and in
the market prices of the vesting schedule set forth in Section 2.03 as shall be
equitable and appropriate in order to make this Warrant, as nearly as may be
practicable, equivalent to this Warrant immediately prior to such change;
PROVIDED, however, that no such adjustment shall give any Warrantholder any
additional benefits under this Agreement.
SECTION 3.02: NO ADJUSTMENT FOR CASH DIVIDENDS. No adjustment in respect
of any cash dividends shall be made during the term of this Warrant or upon the
exercise of this Warrant.
SECTION 3.03: FORM OF WARRANT AFTER ADJUSTMENTS. The form of this Warrant
need not be changed because of any adjustments in the Exercise Price or the
number or kind of the Warrant Shares, and Warrants theretofore or thereafter
issued may continue to express the same price and number and kind of shares as
are stated in this Warrant, as initially issued.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF WARRANTHOLDER
SECTION 4.01: NO RIGHTS AS SHAREHOLDER. Nothing contained in this Warrant
shall be construed as conferring upon the Warrantholder or any permitted
assignee the right to vote or to receive dividends or to consent or to receive
notice as a shareholder in respect of any meeting of shareholders for the
election of directors of the Company or any other matter, or any rights
whatsoever as a shareholder of the Company, unless and until certificates for
Warrant Shares are issued to the Warrantholder upon the exercise of this Warrant
as and to the extent permitted hereunder.
SECTION 4.02: LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this
Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms
as to indemnity or otherwise as it may in its discretion impose (which shall, in
the case of a mutilated Warrant, include the surrender thereof), issue a new
Warrant of like denomination and tenor as and in substitution for this Warrant.
6
<PAGE>
SECTION 4.03: RESERVATION OF SHARES.
(a) The Company covenants and agrees that at all times it shall
reserve and keep available for the exercise of this Warrant such number of
authorized shares of Common Stock as are sufficient to permit the exercise in
full of this Warrant.
(b) The Company covenants that all shares of Common Stock issued on
exercise of this Warrant will be validly issued, fully paid, nonassessable and
free of preemptive rights.
SECTION 4.04: NO FRACTIONAL SHARES. Anything contained herein to the
contrary notwithstanding, the Company shall not be required to issue any
fraction of a share in connection with the exercise of this Warrant, and in any
case where the Warrantholder would, except for the provisions of this Section
4.04, be entitled under the terms of this Warrant to receive a fraction of a
share upon the exercise of this Warrant, the Company shall, upon the exercise of
this Warrant and receipt of the Exercise Price, issue the larger number of whole
shares purchasable upon exercise of this Warrant. The Company shall not be
required to make any cash or other adjustment in respect of such fraction of a
share to which the Warrantholder would otherwise be entitled.
SECTION 4.05: WITHHOLDING TAX. The Company shall be entitled to require as
a condition of delivery of any Warrant Shares acquired upon exercise hereunder
that the Warrantholder remit or, in the appropriate cases, agree to remit when
due an amount sufficient to satisfy all federal, state and local withholding tax
requirements relating thereto.
ARTICLE V
TREATMENT OF WARRANTHOLDER
SECTION 5.01: Prior to due presentment for registration of transfer of
this Warrant, the Company may deem and treat the Warrantholder as the absolute
owner of this Warrant (notwithstanding any notation of ownership or other
writing hereon) for the purpose of any exercise hereof and for all other
purposes and the Company shall not be affected by any notice to the contrary.
ARTICLE VI
DISCLOSURES
SECTION 6.01: DISCLOSURES. By acceptance of delivery of this Warrant, the
Warrantholder acknowledges, represents, warrants, covenants and/or agrees as
follows:
(a) That as a director of the Company he is very familiar with the
business and operations of the Company and has examined or has had an
opportunity to examine before the date hereof all SEC filings and reports of the
Company (including its Form 10-K's, Form 10-Q's and Proxy Statements) and other
7
<PAGE>
applicable documents, records and books and such other applicable information as
are available and relevant to the issuance of the Warrant, the Warrant Shares,
the Company and its business and operations and to enable him to the extent
possible to verify the accuracy of any information, documents, records or books
provided to him.
(b) That no assurances, representations or warranties of any kind or
nature whatsoever relating to the profit or loss that are to be realized, if
any, by him as a result of the issuance of the Warrant or Warrant Shares to him
have been made to him by the Company or any officer, agent or employee of the
Company. With respect to the tax aspects of the issuance of the Warrant or
Warrant Shares to him, that he is relying solely upon the advice of his own tax
advisors and upon his knowledge with respect thereto in determining the tax
affect of such issuance.
(c) That he has had an opportunity to ask questions of and receive
answers from the Company and its management and/or a person or persons
authorized to act on the Company's behalf concerning the terms and conditions of
this Warrant and the Company and its business and operations, and all such
questions have been answered to his full satisfaction.
(d) That he understands that this Warrant and as of the date hereof
the Warrant Shares have not been registered under the Securities Act or any
state securities laws in reliance on exemptions therefrom for non-public
offerings and further understands that this Warrant and the Warrant Shares have
not been approved or disapproved by the SEC, any state securities administrator
or any other federal or state agency.
(e) That he is knowledgeable and experienced in financial and
business matters and is capable of evaluating the merits and risks in connection
with the issuance of this Warrant and his exercise thereof without the services
of a purchaser representative.
(f) That he is acquiring this Warrant for his own account, for
investment purposes only and not with a view to the sale or other distribution
thereof, in whole or in part or directly or indirectly, and is aware that there
are substantial restrictions herein and under the Securities Act on the
transferability of this Warrant and the Warrant Shares.
(g) That the proceeds received by the Company from the sale of
Warrant Shares pursuant to this Warrant may be commingled with any other
corporate funds and used for any corporate purposes.
(h) That neither this Warrant nor the rights granted to
Warrantholder hereunder shall confer on Warrantholder any right to continue as a
director of the Company or limit in any respect the rights of the shareholders
of the Company (in the absence of a specific written agreement or a specific
limitation provided by law or pursuant to the Company's articles of
incorporation or by-laws, as amended, to the contrary) to terminate
Warrantholder's directorship at any time with or without cause.
8
<PAGE>
ARTICLE VII
OTHER MATTERS
SECTION 7.01: SUCCESSORS AND ASSIGNS. All the covenants and provisions of
this Warrant by or for the benefit of the Company or the Warrantholder shall
bind and inure to the benefit of its or his respective successors, heirs, legal
representatives and permitted assigns hereunder.
SECTION 7.02: AMENDMENTS AND WAIVERS. The provisions of this Warrant,
including the provisions of this sentence, may not be amended, modified or
supplemented except by a writing executed by the Company and the Warrantholder,
and any waiver or consents to departures from the provisions hereof may not be
given except in writing by the party so waiving or consenting.
SECTION 7.03: GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of Florida.
SECTION 7.04: SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provisions in every other respect and of the
remaining provisions contained herein shall not be affected or impaired thereby.
SECTION 7.05: INTEGRATION/ENTIRE AGREEMENT. This Warrant is intended by
the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. This Warrant
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
SECTION 7.06: ATTORNEY'S FEES. In any action or proceeding brought to
enforce any provisions of this Warrant, or where any provisions hereof is
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees and disbursements before and at trial and at all
appellate levels in addition to its other costs and expenses and any other
available remedies.
SECTION 7.07: NOTICES. Notice or demand pursuant to this Warrant to be
given or made by the Warrantholder to or on the Company shall be sufficiently
given or made if sent by certified or registered mail, return receipt requested
and postage prepaid, addressed, until another address is designated in writing
by the Company, as follows:
Sound Advice, Inc.
1901 Tigertail Boulevard
Dania, Florida 33004
Attention: Peter Beshouri, President.
Any notice or demand authorized by this Warrant to be given or made by the
Company to or on the Warrantholder shall be sufficiently given or made if sent
by certified or registered mail, return receipt requested and postage prepaid,
9
<PAGE>
to the Warrantholder at his last known address as it shall appear on the books
of the Company.
SECTION 7.08: PRONOUNS. Wherever from the context it appears appropriate,
each term stated in either the singular or the plural shall include the singular
and the plural, and pronouns stated in the masculine, the feminine or the neuter
gender shall include the masculine, feminine and neuter.
SECTION 7.09: HEADINGS. The Article and Section headings herein are for
convenience only and are not part of this Warrant and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by an authorized
officer of the Company effective as of the 29th day of April, 1997.
SOUND ADVICE, INC.
By:____________________________
Peter Beshouri, President
The undersigned hereby acknowledges and accepts the delivery by the
Company to him of this Warrant and agrees to be bound by and comply with all of
the terms, conditions and provisions hereof.
_______________________________
_______________________________
Address
10
<PAGE>
SUBSCRIPTION FORM
TO BE EXECUTED BY THE WARRANTHOLDER IF HE DESIRES
TO EXERCISE THE WARRANT IN WHOLE OR IN PART:
To: Sound Advice, Inc.
The undersigned, __________________________________________,
(Name of Warrantholder)
(_________________________________________)
(Please insert Social Security or other
identifying number of Warrantholder)
hereby irrevocably elects to exercise the right of purchase represented by the
within Warrant for, and to purchase thereunder, ___________ shares of Common
Stock provided for therein and tenders payment herewith to the order of Sound
Advice, Inc. in the amount of $_________. The undersigned requests that
certificates for such shares of Common Stock be issued as follows:
Name:____________________________________________________________
Address:_________________________________________________________
Deliver to:______________________________________________________
Address:_________________________________________________________
and, if said number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance remaining
of the shares of Common Stock purchasable under the within Warrant be registered
in the name of, and delivered to, the undersigned at the address stated below:
Address:_________________________________________________________
Date:_________________________
Signature:_______________________
Note: The signature of this
Subscription Form must correspond
with the name as written upon the
face of this Warrant in every
particular, without alteration or
enlargement or any change
whatsoever.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY'S NAME STATE OF INCORPORATION
- ----------------- ----------------------
SAI Distributors, Inc. Florida
The Board of Directors
Sound Advice, Inc.:
We consent to incorporation by reference in the registration statements on Form
S-8 of Sound Advice, Inc. of our report dated September 12, 1997, relating to
the consolidated balance sheets of Sound Advice, Inc. and subsidiaries (the
"Company") as of June 30, 1997 and 1996, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the years in the
three-year period ended June 30, 1997, and related schedule, which report
appears in the June 30, 1997 annual report on Form 10-K of Sound Advice, Inc.
/s/ KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
September 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL YEAR ENDED JUNE 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 81,280
<SECURITIES> 0
<RECEIVABLES> 3,839,555
<ALLOWANCES> 286,400
<INVENTORY> 27,789,250
<CURRENT-ASSETS> 32,515,433
<PP&E> 31,505,981
<DEPRECIATION> 17,838,896
<TOTAL-ASSETS> 46,550,126
<CURRENT-LIABILITIES> 24,724,247
<BONDS> 1,384,010
0
0
<COMMON> 37,289
<OTHER-SE> 16,260,552
<TOTAL-LIABILITY-AND-EQUITY> 46,550,126
<SALES> 155,623,213
<TOTAL-REVENUES> 155,623,213
<CGS> 105,605,396
<TOTAL-COSTS> 105,605,396
<OTHER-EXPENSES> 49,044,756
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,556,314
<INCOME-PRETAX> (481,998)
<INCOME-TAX> 389,000
<INCOME-CONTINUING> (870,998)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (870,998)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
