SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
[ ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended ______________ or
[X] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from JULY 1, 1997 to JANUARY 31, 1998
Commission file number 0-15194
SOUND ADVICE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-1520531
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 TIGERTAIL BOULEVARD, DANIA, FLORIDA 33004
- ---------------------------------------- ----------
(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
----------------------------
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 (17CFR 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 APRIL 17, 1998, BASED UPON THE CLOSING
MARKET PRICE OF THE REGISTRANT'S VOTING STOCK ON THE NASDAQ NATIONAL MARKET ON
APRIL 17, 1998, AS REPORTED IN THE WALL STREET JOURNAL, WAS APPROXIMATELY
$11,885,000.
THE REGISTRANT HAD 3,728,894 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF APRIL 17, 1998.
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 1998 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY
REFERENCE IN PART III OF THIS REPORT.
<PAGE>
TABLE OF CONTENTS
PAGE NO.
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PART I
ITEM 1. BUSINESS.......................................................1
General............................................1
Products...........................................2
Marketing Strategy.................................3
Advertising........................................4
Operations.........................................5
Expansion..........................................8
Seasonality........................................9
Servicemarks......................................10
Competition.......................................10
Employees.........................................11
ITEM 2. PROPERTIES....................................................12
ITEM 3. LEGAL PROCEEDINGS.............................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS..............................................13
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT..........................14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...............................16
Common Stock Information..........................16
Dividend Policy...................................16
Recent Sales of Unregistered Securities...........17
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....................25
Year 2000..........................................27
Impact of Inflation and Foreign
Currency Fluctuations...........................27
Forward-Looking Statements.........................27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.............................................29
ITEM 11. EXECUTIVE COMPENSATION........................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.........................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.......................................29
SIGNATURES..............................................................30
<PAGE>
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 selective
high-quality, upscale entertainment and consumer electronic products. As of
January 31, 1998, the Registrant operated 22 stores in Florida which sell home
and car audio systems, large screen projection and direct view 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 includes among its targeted customers those
consumers seeking informed advice concerning product selection and system
integration in conjunction with 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 where customers are encouraged to test and compare
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/Naples area (the "West Coast
Stores"), the Orlando area (the "Central Florida Stores") and Jacksonville (the
"Jacksonville Stores"). In fiscal year 1998, the Registrant added one new West
Coast store by adding a store in Naples, Florida in November 1997. As of January
31, 1998, the Registrant operated 22 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 1999 to add three additional stores which may
include the relocation of the remaining smaller West Coast Store to a larger
facility containing approximately 15,000 gross square feet. In February 1998,
the Registrant opened a mall based specialty store featuring the Bang & Olufsen
line of audio products and accessories. Such store contains approximately 1,600
square feet. See "Expansion" in this ITEM 1.
In the transition period ended January 31, 1998, the Registrant's net
sales were approximately $97 million which was a decrease from its net sales of
approximately $101 million in the
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comparable transition period in the prior year (unaudited). See "Results of
Operations - Transition Period Ended January 31, 1998 Compared to Prior
Transition Period Ended January 31, 1997" in ITEM 7.
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 which are generally not
available at most of its competitors. In a typical store a customer can choose
from more than 2,100 products from approximately 150 manufacturers.
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 projection televisions,
direct view 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.
The service, installation and product warranty group includes car audio
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.
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The table below shows the approximate percentage of the Registrant's
sales for the transition periods ended January 31, 1998 and 1997, and 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.
TRANSITION PERIODS ENDED FISCAL YEARS ENDED
JANUARY 31, JUNE 30,
------------------------ -------------------
PRODUCT GROUP 1998 1997 1997 1996 1995
- ------------- ---- ---- ---- ---- -----
(unaudited)
Home and Car Audio . . . . . . 45% 44% 48% 44% 39%
Television and Video . . . . 39 40 37 35 33
Service, Installation and
Product Warranty . . . . . . 12 12 12 11 10
Miscellaneous Products . . . . 4 4 3 5 12
Personal Computer . . . . . . - - - 5 6
--- --- --- -- --
Total . . . . . . . . . . . . 100% 100% 100% 100% 100%
=== ==== === === ====
The percentage of sales by each product group is affected by promotional
activities, consumer trends, store displays, the development of new products and
the 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, during fiscal year 1996, the Registrant commenced incorporating
audio, video and furniture combinations to demonstrate the technology of home
entertainment systems including home theater in a realistic setting. The
Registrant also has a full-service 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 available at 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.
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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 60 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 audio 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 cost 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 highlight 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 transition periods ended January 31, 1998 and
1997, and 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.
TRANSITION FISCAL
PERIODS ENDED YEARS ENDED
JANUARY 31, JUNE 30,
------------- --------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
(Dollars in Thousands)
Net advertising expense ... $3,149 $3,115 $4,086 $6,476 $4,745
Percentage of net sales ... 3.3% 3.1% 2.6% 3.8% 2.5%
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During the transition period ended January 31, 1998, net advertising
expense increased slightly as compared to the period ended January 31, 1997,
primarily due to increased holiday advertising expenses in the transition period
ended January 31, 1998.
During fiscal year 1997, net advertising expense 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
the transition period ended January 31, 1998 and fiscal 1997 as compared to the
comparable periods in the prior year. The primary reason for the increase in
market development funds is additional vendor funds received in connection with
the new store opening in November 1997 and 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 fiscal year 1997 and the transition period ended 1998, 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, four of which manufacturers accounted for approximately 53% of
the Registrant's total product purchases during the transition period ended
January 31, 1998. Such four manufacturers were Bose, Mitsubishi, 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
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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 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"). Membership in the Progressive Retailers
Organization allows the members to combine their purchases in order to negotiate
more favorable terms from vendors.
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, 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 to promptly 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
4.0 and 3.9 times during the transition periods ended January 31, 1998 and 1997,
and 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
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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.
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. The cost of such special
financing programs is borne by the Registrant. However, certain of the
Registrant's vendors periodically participate with and support the Registrant in
the cost of 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 April 17,
1998, approximately 304 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.
The Registrant's sales management group consists of two regional sales
vice presidents, each overseeing approximately one-half of the stores, both of
whom report to the Chief Executive Officer. This structure is designed to
improve decision making and communication throughout the Registrant's structure.
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 projection and
large direct view 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 audio systems, cellular telephones and
car security systems at all but one of its stores.
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SERVICE AND REPAIR:
The Registrant's service and repair facility is located 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 service and
repair facility through its warehouse distribution system.
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)(j)
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)(j)
thereto).
EXPANSION
During the transition period ended January 31, 1998, the Registrant
opened one new West Coast Store in November 1997 and did not close any stores.
Accordingly, as of January 31, 1998, it operated 22 stores. The Registrant
opened a mall based concept store in February 1998. This concept store sells a
single vendor's high-end electronics and related accessories.
During fiscal year 1999, the Registrant currently plans to open up to
three additional stores in Florida markets which have
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been determined to be of sufficient size and demographics to support the typical
15,000 square foot facility. In addition, the Registrant may relocate the
remaining smaller West Coast Store in order to increase the size of that
showroom to its current format. Each of the new facilities will contain
approximately 15,000 gross square feet. The Registrant is also exploring
additional sites for its concept store format. The Registrant expects to
continue 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.
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, the Registrant has realized greater sales and profits
during the holiday selling season which was the Registrant's second quarter
prior to the change in fiscal year end to January 31. 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.
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The following tables set forth the Registrant's quarterly net sales in
dollars and as a percentage of annual net sales for the transition periods ended
January 31, 1998 and 1997, and the three fiscal years ended June 30, 1997:
<TABLE>
<CAPTION>
NET SALES
---------
1ST 2ND 3RD 4TH TOTAL
TRANSITION QUARTER QUARTER QUARTER QUARTER FOR
PERIOD ENDED (FEBRUARY- (MAY- (AUGUST- (NOVEMBER- TRANSITION
JANUARY 31, APRIL) JULY)* OCTOBER) JANUARY) PERIOD
- ----------- --------- -------- -------- --------- ----------
(unaudited)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
1998. . . . . . N/A $11,703 $36,282 $48,808 $ 96,793
. . . . . . 12.1% 37.5% 50.4% 100%
1997. . . . . . N/A $14,031 $38,418 $48,324 $100,773
. . . . . . 13.9% 38.1% 48.0% 100%
</TABLE>
* Due to the change in fiscal year, this partial quarter represents only the
month of July.
<TABLE>
<CAPTION>
NET SALES
---------
1ST 2ND 3RD 4TH
FISCAL QUARTER QUARTER QUARTER QUARTER TOTAL
YEAR ENDED (JULY- (OCTOBER- (JANUARY- (APRIL- FOR
JUNE 30, SEPTEMBER) DECEMBER) MARCH) JUNE) YEAR
- -------- ---------- --------- --------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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
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products not generally offered by many of its competitors. During fiscal years
1996 and 1997 and to a much lesser extent in the transition period ending
January 31, 1998, 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 April 17, 1998, the Registrant employed approximately 677 persons,
of whom approximately 469 were commissioned persons, including approximately 72
car stereo and mobile installers, 34 service department technicians and 59
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.
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ITEM 2. PROPERTIES.
The Registrant's 22 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 22 stores.
STORE LOCATIONS
A map of Florida indicates the general location of the Registrant's 22 stores in
the four geographic areas.
JACKSONVILLE STORES
Jacksonville (Regency)
Jacksonville (Orange Park)
CENTRAL FLORIDA STORES
Orlando (East Colonial)
Orlando (Sandlake)
Altamonte Springs
WEST COAST STORES
St. Petersburg
Tampa (2)
Clearwater
Sarasota
Fort Myers
Naples
EAST COAST STORES
West Palm Beach
Boca Raton
Ft. Lauderdale
Plantation
Hollywood
Aventura
Hialeah Gardens
Coral Gables
West Kendall
South Kendall
12
<PAGE>
All of the Registrant's 22 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 and service and repair center. The lease
expires in March 1999 (exclusive of one ten-year renewal option). The Registrant
is currently in negotiation with the landlord for a shorter renewal option
period. 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 2000
(exclusive of one five-year renewal option). A sales training center and the
Registrant's custom sales department are located in the Hollywood store
facility.
The Registrant relocated its Tampa, Florida warehouse and support
facility for the West Coast Stores in February 1998. The lease for such new
facility containing approximately 12,500 square feet expires in January 2003
(exclusive of two five-year renewal options). The Registrant also occupies an
approximate 10,000 square foot leased facility in Orlando, 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.
13
<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 April 17, 1998) and
position(s) held by each executive officer of the Registrant:
NAME AGE POSITION(S) WITH 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
14
<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.
15
<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
TRANSITION PERIOD ENDED
JANUARY 31, 1998
- ----------------
Second Quarter-partial (7/31/97) $ 2-5/8 $ 1-7/8
Third Quarter (8/1/97 to 10/31/97) 2-5/8 1-3/8
Fourth Quarter (11/1/97 to 1/31/98) 2 1-1/8
As of April 24, 1998, there were 189 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."
16
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
On May 5, 1997, the Board of Directors of the Registrant adopted a
Common Stock Purchase Rights Plan and subsequently 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 the transition periods ended January 31,
1998 and 1997, and the fiscal years 1997, 1996 and 1995 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>
TRANSITION PERIODS
ENDED JANUARY 31, FISCAL YEARS ENDED JUNE 30,
--------------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- -------- ---------
(unaudited)
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Net Sales .................. $ 96,793 $ 100,773 $ 155,623 $ 168,985 $ 190,504 $ 174,761 $ 158,089
Cost of Goods Sold ......... 65,822 69,220 105,605 119,775 134,800 119,373 107,726
--------- --------- --------- --------- --------- --------- ---------
Gross Profit ............... 30,971 31,553 50,018 49,210 55,704 55,388 50,363
Selling, General, and
Administrative Expense .. 29,903 29,827 49,045 52,393 54,502 50,891 49,150
Loss Due to Impairment
Of Asset (1) ............ -- -- -- -- 400 -- --
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) From
Operations .............. 1,068 1,726 973 (3,183) 802 4,497 1,213
Other Income (Expense):
Interest Expense ........ (897) (891) (1,556) (1,526) (1,425) (503) (584
Provision for Shareholder
Settlement (2) ........ -- -- -- -- 56 (1,252) --
Other Income (Expense) .. 48 31 101 (4) (66) (7) 1,060
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before
Income Taxes (Benefit) .. 219 866 (482) (4,713) (633) 2,735 1,689
Income Taxes (Benefit) ..... 1,175 475 389 (486) (152) 1,008 561
---------- --------- --------- --------- --------- --------- ---------
Net (Loss) Income .......... $ (956) $ 391 $ (871) $ (4,227) $ (481) $ 1,727(2) $ 1,128
========= ========= ========= ========= ========= ========= =========
Basic (Loss) Earnings
Per Share (3) ............ $ (.26) $ .10 $ (.23) $ (1.13) $ (.13) $ .46(2) $ .30
========= ========= ========= ========= ========= ========= =========
Weighted Average Number
Of Shares Outstanding .... 3,729 3,729 3,729 3,729 3,729 3,743 3,722
========= ========= ========= ========= ========= ========= =========
</TABLE>
- ----------
Footnotes on next page.
18
<PAGE>
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
JANUARY 31, FISCAL YEARS ENDED JUNE 30,
------------- ----------------------------------------------------------
(Dollars in Thousands)
1998 1997 1996 1995 1994 1993
-------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets............. $37,546 $32,515 $34,645 $39,191 $41,641 $31,574
Current Liabilities........ 31,960 24,724 26,019 29,107 27,997 19,858
Working Capital............ 5,586 7,791 8,625 10,084 13,645 11,717
Total Assets............... 51,789 46,550 49,056 56,702 57,537 46,384
Borrowings Under Revolving
Credit Facility.......... 10,700 11,875 9,100 8,677 9,730 4,810
Current Maturities of Long-
Term Debt (included in
Current Liabilities...... 593 171 161 2,674 1,238 682
Long-Term Debt (excluding
current maturities)...... 53 575 746 908 3,575 3,273
Shareholders' Equity....... 15,342 16,298 17,169 21,396 21,933 19,181
STORE DATA:
Number of Stores Open
at End of Period......... 22 21 21 21 20 20
Weighted Average Net
Sales Per Store (4)...... $ 4,549 $ 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. The Provision for Shareholder Settlement was adjusted in
fiscal 1995 by a credit to income of $56,000.
(3) In December 1997, the Registrant adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" which establishes new guidelines for the calculation of
earnings per share. Basic earnings per share have been computed by
dividing net income by the weighted average number of shares
outstanding during the year. Diluted earnings per share have been
computed using the exercise of stock options, as well as their related
income tax effects. Earnings per share for all periods have been
restated to reflect the provision of this Statement.
(4) 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.
The transition period ended January 31, 1998 includes sales for a
seven month period.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW - TRANSITION PERIODS ENDED JANUARY 31, 1998 AND 1997
The following tables set forth for transition periods ended January 31, 1998 and
1997 (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 transition period in the prior year.
<TABLE>
<CAPTION>
PERIOD TO PERIOD
ITEMS AS A PERCENTAGE PERCENTAGE INCREASE
OF NET SALES /(DECREASE)
TRANSITION PERIODS ENDED TRANSITION PERIODS ENDED
JANUARY 31, JANUARY 31,
------------------------ ------------------------
1998 1997 1997-98
------ ------ -------
(unaudited)
<S> <C> <C> <C>
Net Sales.................... 100.0% 100.0% ( 3.9)%
Cost of Goods Sold........... 68.0 68.7 ( 4.9)
----- -----
Gross Profit................. 32.0 31.3 ( 1.8)
Selling, General and Admini-
strative Expense........... 30.9 29.6 0.3
Income from
Operations................. 1.1 1.7 (38.1)
Other Income (Expense):
Interest Expense........... (0.9) (0.9) 0.6
Other Expense, Net......... * * *
----- ----
Income Before Income
Taxes (Benefit)............ 0.2 0.8 (74.7)
===== ====
Net (Loss) Income ........... (1.0)% 0.4 % (344.7)%
===== ====
</TABLE>
- ----------------
* Negligible
TRANSITION PERIOD ENDED JANUARY 31, 1998 COMPARED TO PRIOR TRANSITION PERIOD
ENDED JANUARY 31, 1997
Net sales for the transition period ended January 31, 1998 were
approximately $96,793,000, a decrease of approximately $3,980,000 or 3.9% over
the comparable transition period in the prior year. The overall net decrease in
sales is primarily attributable to reduced video sales. Audio sales increased
for the seven month period and were more than offset by reduced sales in
extended warranties, mobile electronics and personal and portable electronics.
Comparable store net sales as adjusted for the new store and the relocated store
decreased 5.3% in the seven months ended January 31, 1998 as compared to the
corresponding period in the prior year. Historically, the Registrant has
realized greater sales and profits during the holiday selling season which was
the Registrant's second quarter prior to the change in fiscal year.
Gross profit decreased by approximately $582,000 or 1.8% in the
transition period ended January 31, 1998 compared to the corresponding
transition period in the prior year. The reduction in gross profit is primarily
related to the reduction in net sales, net of the increase in gross profit
percentage. The gross profit percentage was 32.0% in the seven months ended
January 31, 1998. The gross profit percentage was 31.3% in the seven months
ended January 31, 1997. The increase in gross profit percentage is
20
<PAGE>
directly related to the Registrant's sales mix of higher margin product
categories.
Selling, general and administrative expense ("SG&A") for the transition
period ended January 31, 1998 was approximately $29,903,000, an increase of
approximately $76,000 or 0.3% over the corresponding transition period in the
prior year. The Registrant continues to monitor and attempt to control expenses
in its effort to reduce the overall level of SG&A expense. SG&A as a percentage
of net sales increased to 30.9% in the transition period ending January 31, 1998
from 29.6% in the corresponding period in the prior year. The percentage
increase is directly attributable to the reduction in net sales from the
previous comparable period.
Interest expense for the transition period ended January 31, 1998 was
$897,000, a slight increase of $6,000 from the corresponding period in the prior
year.
In the transition period ended January 31, 1998, the Registrant recorded
an income tax provision in the amount of $1,175,000 which included an amount for
taxes payable based on pretax operating income and an increase in the valuation
reserve on deferred tax assets. As a result, the Registrant had an effective
income tax rate of approximately 536.0% for the seven months ended January 31,
1998. The Registrant had an income tax rate of approximately 54.9% for the seven
months ended January 31, 1997.
Net loss for the transition period ended January 31, 1998 was
approximately $956,000 or $.26 per share compared to net income of approximately
$391,000 or $.10 per share in the same transition period in the prior year. The
net loss in the 1998 period was primarily attributable to the provision for
income taxes based upon pretax income, along with the increase in the valuation
reserve on deferred tax assets.
21
<PAGE>
OVERVIEW - FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
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 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
22
<PAGE>
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.
23
<PAGE>
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 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 is 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. 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 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 Registrant'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.
Selling, general and administrative expense ("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. 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.
24
<PAGE>
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
Registrants prior and new revolving credit facilities during fiscal year 1996.
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.
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 May 1994, the Registrant obtained a five year term loan of
approximately $1,608,000 from General Electric Capital Corporation ("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 $437,000 at January 31, 1998. 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 January 31, 1998) 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 $428,000, together with any accrued and
unpaid interest, due on July 12, 1998. Such balloon payment obligation will be
repaid through funds available under the Revolving Credit Facility, refinancing
of the
25
<PAGE>
mortgage or sale of the property. See note (4)(b) of Notes to Consolidated
Financial Statements.
The Registrant's existing $25,000,000 revolving credit facility was
amended and extended with its existing lender through July 31, 2001. The terms
of the facility were amended to allow the Registrant to borrow, repay, and
reborrow based upon a borrowing base equal to the lesser of 70% of eligible
inventory (as defined) at cost or 55% of eligible inventory at retail selling
price. The availability under the facility is reduced by outstanding letters of
credit. The revolving credit facility bears interest on the outstanding balance
at prime plus 1% and allows for a LIBOR pricing option for one, two, three or
six month periods at 2.5% over the corresponding LIBOR rate for the respective
period. The interest rate is eligible for a .25% reduction in 1998 and 1999
provided certain conditions are met. The Registrant pays a monthly fee based
upon the unused portion of the commitment less $5,000,000 at .375% per annum.
The Registrant paid a closing fee of $45,000 and is obligated to an additional
commitment fee of $50,000 per annum beginning December 8, 1998.
The amended revolving credit facility contains various affirmative and
negative covenants including those requiring the Registrant to maintain a
quarterly ratio of current assets to current liabilities of not less than 1.05
to 1 and maintain working capital at the end of each quarter of at least
$3,500,000. In addition, cumulative net losses after October 1, 1997 may not
exceed $4,000,000. The revolving credit facility limits the incurrence of
additional debt, capital expenditures, acquisitions and investments and
prohibits cash dividends.
Borrowings under the revolving credit facility are collateralized by the
Registrant's assets including depository accounts, receivables, inventory,
property and equipment and intangible assets.
The interest rate under the Registrant's revolving credit facility
fluctuated between 8.10% and 9.50% during the transition period ended January
31, 1998. The 8.10% rate is a result of the LIBOR pricing option included as
part of the amendment of the revolving credit facility. As of January 31, 1998,
the outstanding borrowings under the Registrant's revolving credit facility were
$10,700,000. The decrease of approximately $1,174,000 in outstanding borrowing
in the 1998 transition period as compared to the corresponding prior transition
period is primarily related to cash generated from operations.
The Registrant had working capital of approximately $5,586,000 as of
January 31, 1998, a decrease of approximately $2,205,000 from June 30, 1997. The
decrease in working capital results primarily from the increases in accounts
payable and accrued liabilities of approximately $5,536,000 and $2,452,000,
respectively, which were partially offset by the decrease of approximately
$1,175,000 in borrowings under the Registrant's revolving credit facility, the
increase of approximately $3,239,000 in inventory and a $1,340,000 increase in
the Registrant's cash balances.
The Registrant currently believes that funds from the Registrant's
operations combined with borrowings available under
26
<PAGE>
its revolving credit facility and vendor credit programs will be sufficient to
satisfy its currently projected operating cash requirements during fiscal year
1999. However, in order to fully complete the store expansion and store
relocation currently planned in fiscal 1999, the Registrant may need to seek
additional financing sources. In that regard, the Registrant is exploring
additional financing sources in connection with the expansion and store
relocation. See "Expansion" in ITEM 1. The Registrant may also 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 1999.
YEAR 2000
The Registrant recognizes the potential problems for many computer
systems relating to the Year 2000. The majority of the Registrant's systems are
purchased from outside vendors. Those installed systems which are not currently
able to fully function in the Year 2000 either have new versions which are Year
2000 compliant and which the Registrant is preparing to install on the system,
or the vendor has committed to a Year 2000 compliant release in sufficient time
to allow installation and testing prior to critical cutover dates. Consequently,
the Registrant presently does not anticipate either a significant amount of
incremental expense or a disruption in service associated with the Year 2000 and
its impact on the Registrant's computer system. In addition, the Registrant is
assessing the impact of vendors' compliance to Year 2000 and what the impact
will be on the Registrant's ongoing results of operations. There can be no
assurance that the Registrant's systems nor the computer systems of other
companies with whom the Registrant conducts business will be Year 2000 compliant
prior to December 31, 1999.
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.
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
27
<PAGE>
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, Year 2000, 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-25 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.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Registrant's 1998 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 1998 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 1998 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 1998 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 February 20, 1998, in Item 8 (Change in Fiscal Year) of
which the Registrant disclosed the change in the Registrant's fiscal
year end from the twelve month period ending on June 30 to January 31.
29
<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 30th day of
April, 1998.
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>
\s\ PETER BESHOURI Chairman of the Board,
- -------------------------- President and Chief Executive Officer
Peter Beshouri (Principal Executive Officer) April 30, 1998
Director,
\s\ MICHAEL BLUMBERG Senior Vice President
- --------------------------- and
Michael Blumberg Secretary April 30, 1998
\s\ G. KAY GRIFFITH
- --------------------------
G. Kay Griffith Director April 30, 1998
\s\ WILLIAM F. HAGERTY, IV
- --------------------------
William F. Hagerty, IV Director April 30, 1998
\s\ HERBERT A. LEEDS
- ---------------------------
Herbert A. Leeds Director April 30, 1998
\s\ GREGORY STURGIS
- ---------------------------
Gregory Sturgis Director April 30, 1998
Chief Financial Officer
\s\ KENNETH L. DANIELSON and Treasurer
- --------------------------- (Principal Financial and
Kenneth L. Danielson Accounting Officer) April 30, 1998
</TABLE>
30
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
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-25
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 subsidiary (the "Company") as of January 31, 1998 and June 30, 1997 and
1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the seven-month period ended January 31,
1998 and 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 subsidiary as of January 31, 1998 and June 30, 1997 and 1996, and the
results of their operations and their cash flows for the seven-month period
ended January 31, 1998 and 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
- -------------------------------
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
April 22, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
January 31, 1998 and June 30, 1997 and 1996
JUNE 30,
JANUARY 31, ----------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 1,421,392 81,280 1,007,231
Receivables:
Vendors 3,964,078 2,864,121 3,259,226
Trade 883,832 674,848 623,840
Employees 215,411 300,586 217,742
----------- ----------- -----------
5,063,321 3,839,555 4,100,808
Less allowance for doubtful accounts 384,100 286,400 572,000
----------- ----------- -----------
4,679,221 3,553,155 3,528,808
Inventories, net 31,027,992 27,789,250 27,587,101
Prepaid and other current assets 362,078 670,818 638,113
Deferred tax assets -- 92,930 712,930
Income taxes receivable 55,000 328,000 1,170,571
----------- ----------- -----------
Total current assets 37,545,683 32,515,433 34,644,754
Property and equipment, net 13,977,184 13,667,085 13,947,974
Deferred tax assets, net -- 96,098 96,098
Other assets 134,012 125,069 196,035
Goodwill, net 132,179 146,441 170,891
----------- ----------- -----------
$51,789,058 46,550,126 49,055,752
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
JANUARY 31, ----------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility $10,700,152 11,874,533 9,100,115
Accounts payable 13,163,813 7,627,791 11,605,540
Accrued liabilities 7,502,918 5,050,445 5,152,353
Current maturities of long-term debt 593,020 171,478 161,406
----------- ----------- -----------
Total current liabilities 31,959,903 24,724,247 26,019,414
Long-term debt, excluding current maturities 53,483 574,524 745,564
Capital lease obligation 805,113 809,486 815,940
Other liabilities and deferred credits 3,628,481 4,144,028 4,305,995
----------- ----------- -----------
Total liabilities 36,446,980 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
1998, 1997 and 1996 37,289 37,289 37,289
Additional paid-in capital 11,058,655 11,058,655 11,058,655
Retained earnings 4,246,134 5,201,897 6,072,895
----------- ----------- -----------
Total shareholders' equity 15,342,078 16,297,841 17,168,839
Commitments and contingencies
$51,789,058 46,550,126 49,055,752
=========== =========== ===========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Transition period ended January 31, 1998, prior period
ended January 31, 1997 (unaudited) and the fiscal years ended
June 30, 1997, 1996 and 1995
JUNE 30,
JANUARY 31, JANUARY 31, ----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $ 96,792,912 100,772,628 155,623,213 168,984,777 190,503,745
Cost of goods sold 65,822,097 69,219,709 105,605,396 119,774,833 134,800,287
------------ ------------ ------------ ------------ ------------
Gross profit 30,970,815 31,552,919 50,017,817 49,209,944 55,703,458
Selling, general and administrative expenses 29,903,064 29,827,020 49,044,756 52,393,352 54,501,903
Loss due to impairment of asset -- -- -- -- 400,000
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 1,067,751 1,725,899 973,061 (3,183,408) 801,555
Other income (expense):
Interest expense (897,086) (891,497) (1,556,314) (1,526,199) (1,424,693)
Provision for shareholder settlement -- -- -- -- 56,000
Other income (expense) 48,572 31,217 101,255 (3,569) (65,529)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes
(benefit) 219,237 865,619 (481,998) (4,713,176) (632,667)
Income taxes (benefit) 1,175,000 475,000 389,000 (486,000) (151,840)
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (955,763) 390,619 (870,998) (4,227,176) (480,827)
============ ============ ============ ============ ============
Common and common equivalent per share amounts:
Basic net (loss) income per share $ (.26) .10 (.23) (1.13) (.13)
============ ============ ============ ============ ============
Weighted average number of shares outstanding 3,728,894 3,728,894 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 SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Transition period ended January 31, 1998 and the
fiscal years ended June 30, 1997, 1996 and 1995
COMMON STOCK
--------------------------
ADDITIONAL
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT 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
Net loss -- -- -- (955,763) (955,763)
----------- ----------- ----------- ----------- -----------
Balance, January 31, 1998 3,728,894 $ 37,289 11,058,655 4,246,134 15,342,078
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Transition period ended January 31, 1998, prior period
ended January 31, 1997 (unaudited) and the fiscal years ended
June 30, 1997, 1996 and 1995
JUNE 30,
JANUARY 31, JANUARY 31, -------------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (955,763) 390,619 (870,998) (4,227,176) (480,827)
Adjustments to reconcile net (loss)
income to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,875,315 1,800,078 3,090,078 3,273,013 3,322,041
Deferred income taxes 189,028 103,000 620,000 731,437 (285,157)
Loss on sale of assets -- 876 876 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 (1,126,066) (873,963) (24,347) 1,524,828 (608,326)
Inventories (3,238,742) 1,127,462 (202,149) 4,171,643 3,370,921
Prepaid and other current
assets 308,740 (333,787) (32,705) 604,456 684,391
Income taxes receivable 273,000 (103,000) 842,571 (618,888) (183,683)
Other assets (31,753) (41,188) 9,038 72,961 15,096
Increase (decrease) in:
Accounts payable 5,536,022 (1,771,281) (3,977,749) 514,285 1,282,108
Accrued liabilities 2,452,473 700,651 (101,908) (278,168) 28,824
Other liabilities and deferred
credits (515,547) (73,443) (161,967) (163,974) 437,672
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 4,766,707 926,024 (809,260) 5,615,803 7,992,589
----------- ----------- ----------- ----------- -----------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
JUNE 30,
JANUARY 31, JANUARY 31, -------------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures $ (2,148,341) (2,180,478) (2,723,687) (1,164,308) (5,115,790)
------------- ------------- ------------- ------------- -------------
Net cash used in investing
activities (2,148,341) (2,180,478) (2,723,687) (1,164,308) (5,115,790)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Borrowings on revolving credit facility 102,128,424 110,350,997 171,896,950 138,785,743 66,119,893
Repayments on revolving credit facility (103,302,806) (109,396,955) (169,122,532) (138,363,041) (67,172,165)
Net repayments of long-term debt (99,499) (94,082) (160,968) (2,674,513) (1,231,170)
Decrease in cash overdraft -- -- -- (1,234,066) (589,190)
Reduction in capital lease obligation (4,373) (2,990) (6,454) (5,337) (2,209)
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by financing activities (1,278,254) 856,970 2,606,996 (3,491,214) (2,874,841)
------------- ------------- ------------- ------------- -------------
Increase (decrease) in cash $ 1,340,112 (397,484) (925,951) 960,281 1,958
Cash, beginning of year 81,280 1,007,231 1,007,231 46,950 44,992
------------- ------------- ------------- ------------- -------------
Cash, end of year $ 1,421,392 609,747 81,280 1,007,231 46,950
============= ============= ============= ============= =============
Supplemental disclosures of cash flow
information:
Interest paid $ 849,347 800,450 1,380,742 1,371,736 1,281,687
============= ============= ============= ============= =============
Income taxes paid, net of refunds $ 69,773 -- (1,273,571) (598,549) 317,000
============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1998 and June 30, 1997, 1996 and 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Sound Advice, Inc. and subsidiary (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 the state
of Florida through 22 stores and three support centers.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(C) CHANGE IN FISCAL YEAR-END
Effective February 13, 1998, the Company changed its fiscal year-end
from June 30 to January 31. The seven-month transition period of July
1, 1997 through January 31, 1998 ("transition period") precedes the
start of the new fiscal year. The unaudited financial information for
the seven months ended January 31, 1997 ("prior period") is presented
for comparative purposes and includes any adjustments (consisting of
normal, recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation.
(D) 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 recorded as a reduction of advertising expense or applied
against product cost. 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.
(E) 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.
(Continued)
F-9
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company allocates to inventory certain costs associated with
purchasing, pricing and preparation of inventories for sale. For the
transition period ended January 31, 1998, allocated costs
approximated $938,000 with $435,000 remaining in inventory as of
January 31, 1998. For the fiscal years ended June 30, 1997 and 1996,
allocated costs approximated $2,314,000 and $3,487,000, respectively,
with $593,000 and $882,000 remaining in inventory as of June 30, 1997
and 1996, respectively.
(F) 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 3 to 7
Leasehold improvements 15 or term of lease, if
shorter
Display fixtures 3 to 7
Vehicles 3 to 5
(G) GOODWILL
Goodwill is amortized on a straight-line basis over 15 years.
Goodwill is presented net of accumulated amortization of
approximately $235,000 as of January 31, 1998 and approximately
$220,000 and $196,000 as of June 30, 1997 and 1996, respectively.
(H) 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
assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated 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.
(I) SELF-INSURANCE ACCRUALS
The Company was self-insured through December 31, 1996 and beginning
January 1, 1998, up to certain limits, for workers' compensation
benefits and, accordingly, has accrued unpaid claims and associated
expenses, including incurred, but not reported losses.
(Continued)
F-10
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(J) EXTENDED WARRANTY SERVICE CONTRACTS AND SALES INCENTIVE PROGRAM
The Company offers extended warranty service contracts on behalf of a
third party on most of its products. These contracts are on a
nonrecourse basis to the Company. The Company includes revenue 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. Revenue from the sale of such contracts represented
approximately 5 percent to 6 percent of consolidated net sales for
each period presented. Gross margins from the sale of extended
warranty service contracts are higher than gross margins from the
sale of the Company's other products.
Prior to March 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 extended warranty service
contracts is from one to five years. Effective June 1, 1997, the
Company discontinued offering this program on future purchases. The
total amount of extended warranty service 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 9 percent to 11 percent of the value
of the 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. As of January 31, 1998, the liability for
estimated redemptions approximated $1,270,000. As of June 30, 1997
and 1996, the liability for estimated redemptions approximated
$1,772,000 and $1,892,000, respectively. Amounts charged against the
liability recorded for future redemptions approximated $578,000 for
the transition period ended January 31, 1998 and $926,000, $833,000
and $628,000 for fiscal years ended June 30, 1997, 1996 and 1995,
respectively.
(K) ADVERTISING
The Company expenses advertising costs when the advertisement occurs.
Advertising expense is recorded net of funds received from vendor
advertising and promotional programs. Advertising expense, net, for
the transition period ended January 31, 1998 and for the fiscal years
ended June 30, 1997, 1996 and 1995, approximated $3,149,000,
$4,086,000, $6,476,000 and $4,745,000, respectively.
(Continued)
F-11
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(L) 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
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
(M) 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.
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 40 percent, 54 percent and 47 percent of the
Company's receivables as of January 31, 1998 and June 30, 1997 and
1996, respectively. The Company estimates an allowance for doubtful
accounts based on the credit risk and payment trends of the customer.
An adverse change in these factors would affect the Company's
estimate of bad debt.
The Company is a specialty retailer in Florida 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. Four vendors accounted for 53 percent of the Company's
purchases during the transition period ended January 31, 1998. The
loss of one of these vendors could have an adverse impact on the
Company. The Company's principal competitors include other retailers,
department and discount stores, mass merchandisers, catalog showrooms
and specialty stores. Many of the Company's competitors are national
in scope and have greater financial resources than the Company.
(N) 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 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
(Continued)
F-12
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(O) 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.
(P) EARNINGS PER SHARE
The Company has adopted SFAS No. 128, EARNINGS PER SHARE. In
accordance with SFAS No. 128, primary earnings per share have been
replaced with basic earnings per share, and fully diluted earnings
per share have been replaced with diluted earnings per share which
includes potentially dilutive securities such as outstanding options.
Prior periods have been presented to conform to SFAS No. 128,
however, basic and diluted loss or income per share are the same as
the primary loss or income per share previously presented.
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the
period increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common
shares had been issued. The dilutive effect of outstanding options is
reflected in diluted earnings per share by application of the
treasury stock method.
Options to purchase 213,500, 218,500, 112,500 and 3,000 shares of
common stock at prices ranging from $1.69 to $1.77 per share were
outstanding for the transition period ended January 31, 1998, and for
the fiscal years ended June 30, 1997, 1996 and 1995, respectively,
but were not included in the computation of diluted earnings per
share because the inclusion of the options would be antidilutive.
(Continued)
F-13
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options to purchase 437,500, 450,500, 107,500 and 138,500 shares of
common stock at prices ranging from $1.77 to $7.27 per share were
outstanding for the transition period ended January 31, 1998, and for
the fiscal years ended each of the years in the three year period
June 30, 1997, 1996 and 1995, respectively, but were not included in
the computation of diluted earnings per share because the options
exercise prices were greater than the average market price of common
shares for the respective periods.
(Q) RECLASSIFICATIONS
Certain amounts in the fiscal year 1997, 1996 and 1995 consolidated
financial statements have been reclassified to conform to the 1998
transition period presentation.
(2) LIQUIDITY
As discussed in note 4, a mortgage with a balance of approximately
$428,000 will mature in July 1998. Management of the Company believes,
although there is no assurance they will be successful in doing so, that
this obligation will be repaid through funds available under the revolving
credit facility, refinancing of the mortgage or sale of the property.
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
satisfy its operating cash requirements during fiscal year 1999. The
Company may need to seek additional financing for capital expenditures
required in connection with its expansion program for additional stores or
store relocations in fiscal year 1999. There can be no assurance that the
Company will be able to obtain such additional financing.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
TRANSITION
PERIOD
ENDED
JANUARY 31, YEARS ENDED JUNE 30,
-------------------------
1998 1997 1996
---- ---- ----
Land $ 521,465 521,465 521,465
Building 1,119,605 1,119,605 1,119,605
Furniture and equipment 8,708,705 8,222,690 8,545,945
Leasehold improvements 16,345,129 15,363,402 14,494,852
Display fixtures 5,999,650 5,358,234 5,049,940
Vehicles 959,768 920,585 949,168
--------- ---------- ----------
33,654,322 31,505,981 30,680,975
Less accumulated depreciation 19,677,138 17,838,896 16,733,001
---------- ---------- ----------
Property and equipment, net $13,977,184 13,667,085 13,947,974
=========== ========== ==========
Depreciation expense, including amortization of capital leases, for the
transition period ended January 31, 1998 and for the fiscal years ended
June 30, 1997, 1996 and 1995, approximated $1,838,000, $3,004,000,
$3,064,000, and $3,161,000, respectively.
(Continued)
F-14
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) DEBT
(A) REVOLVING CREDIT FACILITY
Effective as of December 8, 1997, the Company amended and extended
its revolving line of credit facility with its existing lender
through July 31, 2001. The terms of the agreement were amended to
allow the Company to borrow, repay, and reborrow, based upon a
borrowing base equal to the lesser of 70 percent of eligible
inventory (as defined) at cost or 55 percent of eligible inventory at
retail selling price. The availability under the facility is reduced
by outstanding letters of credit. The revolving credit facility bears
interest on the outstanding balance at prime plus 1 percent and
allows for a LIBOR pricing option for one-, two-, three- or six-month
periods at 2.5 percent over the corresponding LIBOR rate for the
respective period.The interest rate is eligible for a .25 percent
reduction in 1998 and 1999 provided certain conditions are met. The
Company pays a monthly fee based upon the unused portion of the
commitment less $5,000,000 at .375 percent per annum. The Company
paid a closing fee of $45,000 and is obligated to an additional
commitment fee of $50,000 per annum beginning December 8, 1998.
The amended loan and security agreement contains various affirmative
and negative covenants requiring the Company to maintain a quarterly
ratio of current assets to current liabilities of not less than 1.05
to 1.0 and maintain working capital of at least $3,500,000. In
addition, cumulative net losses from and after October 1, 1997 may
not exceed $4,000,000. The amended 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
the Company's assets, including depository accounts, receivables,
inventory, property and equipment and intangible assets.
The effective interest rate on the outstanding loan balance under the
financing arrangement in effect as of January 31, 1998 was 12.3
percent and as of June 30, 1997 and 1996 was 11.5 percent and 12.6
percent, respectively.
(Continued)
F-15
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(B) LONG-TERM DEBT
Long-term debt consists of the following:
TRANSITION
PERIOD
ENDED
JANUARY 31, YEARS ENDED
JUNE 30,
------------------
1998 1997 1996
---- ---- ----
Promissory note $ 209,873 296,919 436,539
Mortgage note 436,630 449,083 470,431
------- ------- -------
Total 646,503 746,002 906,970
Less current maturities 593,020 171,478 161,406
------- ------- -------
Long-term debt, excluding current
maturities $ 53,483 574,524 745,564
======= ======= =======
The promissory note is payable in 60-equal monthly installments due
May 1999 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 $27,000 as of January 31, 1998.
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 of approximately $428,000 due July 12, 1998. The loan
is secured by land, building and improvements with a net book value
of approximately $827,000 as of January 31, 1998.
The aggregate maturities of long-term debt for each of the years
subsequent to January 31, 1998 are as follows:
YEARS ENDED AMOUNT
----------- ------
1999 $ 593,020
2000 53,483
(C) LETTERS OF CREDIT
The Company has standby letters of credit, in the aggregate of
approximately $885,000, maturing at various dates through April 1999,
primarily supporting self-insurance reserves. The letters of credit
were not drawn upon as of January 31, 1998.
(Continued)
F-16
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) INCOME TAXES
The components of the provision for income taxes (benefit) are as follows:
TRANSITION
PERIOD
ENDED
JANUARY 31, YEARS ENDED JUNE 30,
----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
Current:
Federal $ 985,972 (231,000) (1,217,437) 89,702
State - - - 43,615
-------- ------- --------- ------
985,972 (231,000) (1,217,437) 133,317
Deferred 189,028 620,000 731,437 (285,157)
--------- ------- --------- -------
Total $1,175,000 389,000 (486,000) (151,840)
========== ======= ========= =======
The provision for deferred income taxes (benefit) consists of the
following:
<TABLE>
<CAPTION>
TRANSITION
PERIOD
ENDED
JANUARY 31, YEARS ENDED JUNE 30,
-----------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance for doubtful $ (8,630) 90,304 (33,546) (5,682)
accounts
Inventory adjustments (427,154) 155,618 (101,424) (47,414)
Preopening expenses - - (54,814) 60,667
Prepaid expenses (79,994) 60,601 44,373 (196,849)
Accelerated depreciation (547,581) (204,601) (222,001) (246,477)
Accrued rent expense 74,873 (8,433) 54,733 (106,449)
Provision for warranty
redemption 236,906 40,836 (20,902) 26,049
Deferred tax valuation
allowance 804,358 349,000 1,080,426 20,000
Other 136,250 136,675 (15,408) 210,998
------- ------- -------- -------
Total $ 189,028 620,000 731,437 (285,157)
======= ======= ========= =======
</TABLE>
(Continued)
F-17
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
TRANSITION
PERIOD
ENDED
JANUARY 31, YEARS ENDED JUNE 30,
----------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory income tax rate 34.0% (34.0) (34.0) (34.0)
Effect of state taxes - - - (.2)
Reserve for tax examination 276.0 41.5 - -
Provision for valuation allowance 201.0 72.6 22.9 1.4
Nondeductible expenses 25.0 .7 .8 8.8
----- ---- ---- ----
Effective income tax rate 536.0% 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 are as
follows:
<TABLE>
<CAPTION>
TRANSITION
PERIOD
ENDED
JANUARY 31, YEARS ENDED JUNE 30,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Allowance for doubtful accounts $ 130,580 121,950 212,261
Inventory adjustments 348,595 (78,559) 77,052
Prepaid advertising (45,850) (69,467) (48,003)
Prepaid insurance (10,445) (74,104) (34,972)
Accelerated depreciation 779,821 232,240 93,845
Deferred gain on sale 42,545 49,260 51,790
Accrued rent expense 750,495 825,368 816,934
Accrued insurance 54,797 62,079 81,593
Legal settlement expense 10,389 28,064 29,755
Provision for warranty redemption 431,929 668,835 709,671
Other (51,792) 60,068 106,808
Deferred tax valuation allowance (2,441,064) (1,636,706) (1,287,706)
--------- --------- ---------
Total $ - 189,028 809,028
======== ========== ==========
</TABLE>
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." 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 January 31, 1998 and June 30, 1997 and 1996 was
$2,441,064, $1,636,706 and $1,287,706, respectively. The net change in the
total valuation allowance for the transition period ended January 31, 1998
and for the fiscal years ended June 30, 1997 and 1996 was an increase of
$804,358, $349,000 and $1,080,426, respectively.
(Continued)
F-18
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 January 31, 1998, 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 the
transition period ended January 31, 1998 and for each of the fiscal
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.
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.
(Continued)
F-19
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE
SHARES PRICE PRICE
<S> <C> <C> <C>
Outstanding, June 30, 1994 155,000 $4.20-10.48 5.86
Granted 45,000 5.96 5.96
Exercised - - -
Canceled (58,500) 4.20-10.48 5.47
--------
Outstanding, June 30, 1995 141,500 5.45-9.27 6.07
Granted 147,500 1.70-6.29 2.79
Exercised - -
Canceled (69,000) 5.45-9.27 6.08
--------
Outstanding, June 30, 1996 220,000 1.70-7.27 3.87
Granted 553,500 1.69-1.89 1.85
Exercised - -
Canceled (104,500) 5.45-7.27 6.12
--------
Outstanding, June 30, 1997 669,000 1.69-4.76 2.04
Granted - -
Exercised - -
Canceled (18,000) 1.77-4.76 2.34
--------
Outstanding, January 31, 1998 651,000 $1.69-1.89 1.83
========
Exercisable 213,500
========
Available for future grants 38,000
========
</TABLE>
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
(Continued)
F-20
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts
approximated:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss: As reported $ (956,000) $(871,000) $(4,227,000)
========= ======= =========
Pro forma $(1,131,000) $(891,000) $(4,227,000)
========= ======= =========
Loss per share: As reported $ (.26) $ (.23) $ (1.13)
========= ======= =========
Pro forma $ (.30) $ (.24) $ (1.13)
========= ======= =========
</TABLE>
Pro forma net income reflects only options granted in 1997 and 1996.
There were no options granted during the transition period.
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 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
As of June 30, 1997 and 1996, the weighted average fair value of
options granted during the fiscal year was $1.15 and $1.03,
respectively. There were no options granted during the transition
period.
As of January 31, 1998, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $1.69 to $1.89 and 3.9 years, respectively.
As of January 31, 1998 and June 30, 1997 and 1996, the number of
options exercisable was 213,500, 221,500 and 220,000, respectively,
and the weighted-average exercise price of those options was $1.72,
$1.76 and $3.87, respectively.
(C) SHAREHOLDERS' EQUITY
During fiscal year 1995, the Company issued 306,335 warrants to
purchase common stock of the Company in connection with the
settlement of two shareholder class action suits 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. No options have been exercised as of January 31,
1998.
(Continued)
F-21
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) EMPLOYEE BENEFIT PLANS
(A) 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 transition
period ended January 31, 1998 or fiscal years ended June 30, 1997,
1996 or 1995.
(B) RETIREMENT SAVINGS PLANS
The Company offers a 401(k) savings and investment plan (the "401(k)
Plan") to employees who meet certain eligibility requirements such as
one year of service, 1,000 hours worked during the year and age of 21
years. The Company makes matching contributions to the 401(k) Plan up
to a maximum percentage of each participating employee's annual
investment. Matching and discretionary contributions to the 401(k)
Plan are authorized by the Company's board of directors.
Contributions for the transition period ended January 31, 1998 and
for the fiscal years ended June 30, 1997, 1996 and 1995 approximated
$0, $215,000, $232,000 and $159,000, respectively.
(8) PROVISIONS FOR DISPOSAL OF INVENTORY AND ASSET IMPAIRMENT
During fiscal year 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 year 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.
(Continued)
F-22
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property under capital lease includes the following amounts in the
accompanying consolidated financial statements:
TRANSITION
PERIOD ENDED
JANUARY 31, YEARS ENDED JUNE 30,
--------------------
1998 1997 1996
---- ---- ----
Building $ 685,000 685,000 685,000
Furniture and equipment 142,900 142,900 142,900
------- ------- -------
827,900 827,900 827,900
Less accumulated
depreciation 175,180 142,910 87,590
------- ------- -------
$ 652,720 684,990 740,310
======= ======= =======
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 January 31, 1998 and the capital lease
payments are as follows:
CAPITAL OPERATING
YEAR ENDED LEASE LEASES
1999 $ 162,396 $ 5,906,044
2000 162,396 5,316,608
2001 162,396 5,126,694
2002 162,396 4,874,849
2003 162,396 4,490,719
Thereafter 1,921,686 20,433,137
--------- ----------
Total minimum lease payments 2,733,666 $ 46,148,051
==========
Less amounts representing interest
(at an effective interest rate of
approximately 19%) 1,921,340
---------
Present value of minimum
capital lease payments 812,326
Less current installments of
obligations under capital lease 7,213
---------
Obligations under capital
lease, excluding current
installments $ 805,113
===========
The Company opened a specialty store in Aventura, Florida in February
1998. The future minimum annual lease payments are included in the table
above.
(Continued)
F-23
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total rental expense under the noncancelable operating leases for the
transition period ended January 31, 1998 and for the fiscal years ended
June 30, 1997, 1996 and 1995, was approximately $3,981,000, $6,542,000,
$6,058,000, and $6,123,000, respectively.
(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. The base
rental is accrued and included in other liabilities and deferred credits
in the consolidated balance sheets. As of January 31, 1998 and June 30,
1997 and 1996, the recorded liability for accrued rent was approximately
$2,207,000, $2,174,000 and $2,148,000, respectively.
Included in accrued liabilities as of January 31, 1998 and June 30, 1997
and 1996 are approximately $3,080,000, $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 base salaries of $360,000 for the transition
period ended January 31, 1998 and $611,050 for each of the fiscal
years ended June 30, 1997, 1996, and 1995. These agreements have been
extended through June 30, 1998 under the same terms as the original
agreement.
(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.
(Continued)
F-24
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 transition
period ended January 31, 1998 and for the fiscal years ended June 30,
1997, 1996 and 1995, 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-25
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND CHANGES ADD BALANCE AT
DESCRIPTION YEAR EXPENSES (DEDUCT) END OF YEAR
----------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
January 31, 1998 $ 286,400 226,600 (128,900) (A) 384,100
============= ======= ======== =========
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:
January 31, 1998 $ 1,771,815 - (501,437) (B) 1,270,378
============= ======= ======== =========
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:
January 31, 1998 $ 700,000 - - 700,000
============= ======= ======== =========
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) Amounts represent general obsolescence.
</FN>
</TABLE>
S-1
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
EXHIBITS
TO
FORM 10-K
Annual Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period Ended Commission File Number
January 31, 1998 0-15194
----------------------------------
SOUND ADVICE, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NO. PAGE NO.
- ------- ----------
<S> <C> <C>
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)
Amendment Number One to Loan and Security Agreement dated as of
December 8, 1997 between Registrant and Foothill Capital Corporation
(incorporated by reference from the Registrant's Quarterly Report on
form 10-Q for the quarter ended December 31, 1997, Exhibit 10.1,
File No. 0-15194)
i
<PAGE>
EXHIBIT SEQUENTIAL
NO. PAGE NO.
- ------- ----------
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 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
ii
<PAGE>
EXHIBIT SEQUENTIAL
NO. PAGE NO.
- ------- ----------
reference from the Registrant's 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. 0-15194), Fourth Amendments to Employment Agreements,
both dated as of July 1, 1993, between the Registrant and each of
Peter
iii
<PAGE>
EXHIBIT SEQUENTIAL
NO. PAGE NO.
- ------- ----------
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)
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
iv
<PAGE>
EXHIBIT SEQUENTIAL
NO. PAGE NO.
- ------- ----------
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) (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997, Exhibit 10.6, File No. 0-15194)
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
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
v
<PAGE>
EXHIBIT SEQUENTIAL
NO. PAGE NO.
- ------- ----------
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 (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997, Eshibit 10.11, File No. 0-15194)
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 fiscal year ended
June 30, 1992, Exhibit 10.32, File No. 0-15194)
vi
<PAGE>
EXHIBIT SEQUENTIAL
NO. PAGE NO.
- ------- ----------
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)
</TABLE>
- ----------
* 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.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY'S NAME STATE OF INCORPORATION
----------------- ----------------------
SAI Distributors, Inc. Florida
EXHIBIT 23.1
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 April 22, 1998, relating to the
consolidated balance sheets of Sound Advice, Inc. and subsidiary (the "Company")
as of January 31, 1998 and June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the seven-month period ended January 31, 1998 and for each of the years in the
three-year period ended June 30, 1997, and related schedule, which report
appears in the January 31, 1998 transition report on Form 10-K of Sound Advice,
Inc. and subsidiary.
/s/ KPMG PEAT MARWICK LLP
- -----------------------------
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
April 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
FINANCIAL STATEMENTS AS OF AND FOR THE TRANSITION PERIOD ENDED JANUARY 31, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 1,421,392
<SECURITIES> 0
<RECEIVABLES> 5,063,321
<ALLOWANCES> 384,100
<INVENTORY> 31,027,992
<CURRENT-ASSETS> 37,545,683
<PP&E> 33,654,322
<DEPRECIATION> 19,677,138
<TOTAL-ASSETS> 51,789,058
<CURRENT-LIABILITIES> 31,959,903
<BONDS> 858,596
0
0
<COMMON> 37,289
<OTHER-SE> 15,304,789
<TOTAL-LIABILITY-AND-EQUITY> 51,789,058
<SALES> 96,792,912
<TOTAL-REVENUES> 96,792,912
<CGS> 65,822,097
<TOTAL-COSTS> 65,822,097
<OTHER-EXPENSES> 29,903,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 897,086
<INCOME-PRETAX> 219,237
<INCOME-TAX> 1,175,000
<INCOME-CONTINUING> (955,763)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (955,763)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
