SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________.
Commission file number 0-15194
SOUND ADVICE, INC.
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(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
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(Address of principal executive offices) (Zip Code)
(954) 922-4434
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.
COMMON STOCK, PAR VALUE $.01 PER SHARE - 3,728,894 SHARES OUTSTANDING AS
OF FEBRUARY 6, 1998.
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 1997 and June 30, 1997 3-4
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Six Months Ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended December 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 11-14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
SOUND ADVICE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1997
DECEMBER 31, 1997 JUNE 30, 1997
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ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 282,620 $ 81,280
Receivables:
Vendors 4,544,445 2,864,121
Trade 949,092 674,848
Employees 213,040 300,586
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5,706,577 3,839,555
Less allowance for doubtful accounts (390,800) (286,400)
------------ ------------
5,315,777 3,553,155
Inventories, net 29,703,456 27,789,250
Prepaid and other current assets 360,192 670,818
Deferred tax assets -- 92,930
Income taxes receivable 55,000 328,000
------------ ------------
Total current assets 35,717,045 32,515,433
Property and equipment, net 14,057,293 13,667,085
Deferred tax assets, net -- 96,098
Other assets 130,323 125,069
Goodwill, net 134,216 146,441
------------ ------------
$ 50,038,877 $ 46,550,126
============ ============
See accompanying notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1997
DECEMBER 31, 1997 JUNE 30, 1997
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Borrowings under revolving credit facility $ 7,537,809 $11,874,533
Accounts payable 12,652,296 7,627,791
Cash overdraft 1,604,922 --
Accrued liabilities 7,210,567 5,050,445
Current maturities of long-term debt 593,902 171,478
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Total current liabilities 29,599,496 24,724,247
Long-term debt, excluding current maturities 66,879 574,524
Capital lease obligation 806,413 809,486
Other liabilities and deferred credits 3,702,254 4,144,028
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34,175,042 30,252,285
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Shareholders' Equity:
Common stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
3,728,894 shares at December 31, 1997
and June 30, 1997 37,289 37,289
Additional paid-in capital 11,058,655 11,058,655
Retained earnings 4,767,891 5,201,897
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Total shareholders' equity 15,863,835 16,297,841
Commitments and contingencies
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$50,038,877 $46,550,126
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 47,383,754 $ 47,724,208 $ 83,855,241 $ 88,074,972
Cost of goods sold 32,162,953 32,720,986 57,277,407 60,772,656
------------ ------------ ------------ ------------
Gross profit 15,220,801 15,003,222 26,577,834 27,302,316
Selling, general and administrative
expenses 13,815,187 13,578,452 25,438,314 25,540,818
------------ ------------ ------------ ------------
Income from operations 1,405,614 1,424,770 1,139,520 1,761,498
Other income (expense):
Interest expense (412,939) (442,595) (779,530) (777,962)
Other, net 23,949 18,034 42,805 20,858
------------ ------------ ------------ ------------
Income before income taxes 1,016,624 1,000,209 402,795 1,004,394
Income taxes 676,800 475,000 836,800 475,000
------------ ------------ ------------ ------------
Net income (loss) $ 339,824 $ 525,209 $ (434,005) $ 529,394
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.09 $ 0.14 $ (0.12) $ 0.14
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 3,728,894 3,728,894 3,728,894 3,728,894
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (434,005) $ 529,394
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 1,564,785 1,536,792
Loss on sale of assets -- 876
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables (1,762,622) (1,592,534)
Inventories (1,914,206) 14,191
Prepaid and other current assets 310,626 (99,838)
Deferred tax asset 189,028 103,000
Income taxes receivable 273,000 (103,000)
Other assets (31,754) (35,015)
Increase (decrease) in:
Accounts payable 5,024,505 925,564
Accrued liabilities 2,160,122 2,097,028
Other liabilities and deferred credits (441,774) (50,927)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 4,937,705 3,325,531
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,916,268) (2,043,973)
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NET CASH USED IN INVESTING ACTIVITIES (1,916,268) (2,043,973)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility 85,035,273 92,272,658
Repayments on revolving credit facility (89,371,998) (95,188,912)
Net repayments of long-term debt (85,221) (80,643)
Increase in cash overdraft 1,604,922 892,876
Reductions in capital lease obligation (3,073) (2,542)
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NET CASH USED IN FINANCING ACTIVITIES (2,820,097) (2,106,563)
------------ ------------
Increase (decrease) in cash 201,340 (825,005)
Cash, beginning of period 81,280 1,007,231
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CASH, END OF PERIOD $ 282,620 $ 182,226
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 705,797 $ 559,734
============ ============
Income taxes paid, net of refunds $ 69,773 $ --
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SOUND ADVICE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with instructions to Form 10-Q and, therefore,
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Certain items
included in these statements are based on management estimates. In the opinion
of management, the accompanying financial statements contain all adjustments,
consisting of normal, recurring accruals, necessary to present fairly the
financial position of the Company at December 31, 1997 and June 30, 1997 and the
statements of operations for the three and six month periods ended December 31,
1997 and 1996 and statements of cash flows for the six month periods ended
December 31, 1997 and 1996. The results of operations for the three and six
months ended December 31, 1997 are not necessarily indicative of the operating
results expected for the fiscal year ending June 30, 1998. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's annual report on Form
10-K for the fiscal year ended June 30, 1997.
2.) EARNINGS PER SHARE
In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No.128, "Earnings per Share" ("Statement 128")
which establishes new standards for computing and presenting earnings per share
("EPS"). Earnings per share for all prior periods have been restated to reflect
the provisions of this statement.
Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of shares outstanding during the period. Diluted
earnings per share is computed assuming the exercise of stock options, as well
as their related income tax effects, unless their effect was antidilutive. For
loss periods, weighted average common share equivalents are excluded from the
calculation as their effect would be antidilutive.
Options to purchase 437,500 shares of common stock at $1.89 per share and
warrants to purchase 15,000 shares of common stock at $1.89 per share were
outstanding for the six months ended December 31, 1997, but were not included in
the computation of diluted earnings per share because the exercise price of the
options and warrants was greater than the average market price of the common
shares during the three and six months ended December 31, 1997. Similarly,
shareholder warrants to purchase 306,335 shares of common stock at $8.70 per
share were outstanding at December 31, 1997 and were also excluded from the
diluted EPS calculation for both periods in 1997. In addition, options to
purchase 213,500 shares of common stock at a range from $1.69 to $1.77 per share
were not included in the diluted EPS calculation for the three month period
ended December 31, 1997 because the exercise price of the options was greater
than the average market price of the common shares. The average market price of
the common shares for the six months ended December 31, 1997 exceeded the
exercise price of the options to purchase 213,500 shares, however, due to the
net loss reported by the Company for this period, these options were excluded
from the calculation. The options and the 15,000 warrants expire between
February 21, 2001 and April 28, 2002 and the 306,335 shareholder warrants expire
June 14, 1999.
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Options to purchase 181,500 shares of common stock, at prices ranging from
$1.70 to $6.29 per share, were outstanding for the six months ended December 31,
1996, but were not included in the computation of diluted earnings per share
because the exercise price of the options was greater than the average market
price of the common shares during the three and six months ended December 31,
1996. Similarly, shareholder warrants to purchase 306,335 shares of common stock
at $8.70 per share were outstanding at December 31, 1996 and were also excluded
from the diluted EPS calculation. The options expire between and May 24, 1998
and March 29, 2001 and the shareholder warrants expire June 14, 1999.
3.) SEASONALITY
Historically, the Company's net sales are greater during the holiday
season than during other periods of the year. Net sales by fiscal quarters and
their related percentages for the trailing four quarters ended December 31, 1997
and 1996 are as follows:
TRAILING FOUR QUARTERS ENDED DECEMBER 31,
-----------------------------------------
(Dollars in Thousands)
QUARTERLY SALES
1997 1996
------------------- ------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
Second Quarter $ 47,384 31.3% $ 47,724 29.9%
(October - December)
First Quarter 36,471 24.1 40,351 25.3
(July - September)
Fourth Quarter 32,117 21.2 32,481 20.3
(April - June)
Third Quarter 35,431 23.4 39,079 24.5
(January - March)
SALES FOR TRAILING TWELVE $151,403 100% $159,635 100%
MONTHS ENDED DECEMBER 31, ======== ===== ======== =====
1997 AND 1996, RESPECTIVELY
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4.) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -------------
Land $ 521,465 $ 521,465
Building 1,119,605 1,119,605
Furniture and equipment 8,594,113 8,222,690
Leasehold improvements 16,259,385 15,363,402
Display fixtures 5,995,593 5,358,234
Vehicles 932,088 920,585
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Total 33,422,249 31,505,981
Less accumulated depreciation (19,364,956) (17,838,896)
------------ ------------
Property and equipment, net $ 14,057,293 $ 13,667,085
============ ============
5.) REVOLVING CREDIT FACILITY
Effective as of December 8, 1997, the Company amended and extended its
revolving credit facility with its existing lender through July 31, 2001. The
terms of the $25,000,000 facility were amended to allow the Company 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 Company pays a monthly
fee based upon the unused portion of the commitment less $5,000,000 at .375% 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 revolving credit facility contains various affirmative and
negative covenants including those requiring the Company 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
Company's assets including depository accounts, receivables, inventory, property
and equipment and intangible assets.
6.) STOCK OPTIONS
During the quarter ended December 31, 1997, incentive stock options
covering 5,000 shares of common stock having an exercise price of $1.77 per
share and 3,000
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shares of common stock having an exercise price of $4.76 per share expired. In
addition, stock options covering 10,000 shares of common stock having an
exercise price of $1.89 also expired.
7.) PROVISION (BENEFIT) FOR INCOME TAXES
The provision for income taxes includes an amount for taxes payable based
on pretax operating income and an increase in the valuation reserve on deferred
tax assets. The adjustment of the valuation reserve results from the refund of
taxes paid in prior periods which are no longer available to support the
recognition of deferred tax assets. As a result, the provision for income taxes
for the second quarter totals $676,800 or 67% of the pretax income and $836,800
or 208% of pretax income for the six months ended December 31, 1997.
8.) PUBLIC LISTING OF SHARES
The Company's common stock is currently traded on the NASDAQ Stock Market.
The NASDAQ recently changed its listing requirements which were approved by the
Securities and Exchange Commission. The Company has been notified by the NASDAQ
that the Company is not in compliance with the requirements for continued
listing on the exchange. The Company does not expect to be able to correct the
non-compliance condition in the near future and is exploring moving its listing
to the NASDAQ Small Cap Market or other public markets for which the Company is
currently able to meet the listing requirements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company's net sales for the quarter ended December 31,1997, decreased
$340,000 or .7% to $47,384,000 compared to $47,724,000 in the corresponding
period in the prior fiscal year. The overall net decrease in sales is the result
of reduced sales of extended warranties, mobile electronics and personal and
portable electronics which were partially offset by increased audio sales. Total
video sales remain constant to the prior year. Comparable store net sales
decreased 2.6% in the quarter ended December 31, 1997 over the corresponding
quarter in the prior year. The comparable store sales were adjusted to exclude
the new store opened in November 1997 and another store relocated to a larger
showroom in November 1996. The Company's operations, in common with other
retailers in general, are subject to seasonal influences. Historically, the
Company has realized more of its net sales and operating income in the second
quarter ending in December.
Net sales for the six months ended December 31, 1997, decreased by
$4,220,000 or 4.8% to $83,855,000 over the corresponding period in the prior
fiscal year. The overall decrease in net sales for the six month period is
primarily attributable to reduced video sales primarily in the category of
projection and large direct view televisions. Audio sales increased for the six
months 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 6.0% in the six
months ended December 31, 1997 compared to the corresponding six month period in
the prior fiscal year.
Gross profit increased by $218,000 or 1.5% in the quarter ended December
31, 1997 compared to the corresponding quarter in fiscal 1997. The gross profit
percentage was 32.1% in the quarter ended December 31, 1997 as compared to 31.4%
in the quarter ended December 31, 1996. The increase in gross profit and gross
profit percentage is directly related to the Company's sales mix of higher
margin categories.
Gross profit decreased by $724,000 or 2.7% in the six months ended
December 31, 1997 compared to the corresponding 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
31.7% in the six months ended December 31, 1997. The gross profit percentage for
the six months ended December 31, 1996 was 31.0%. As stated above, the increase
in gross profit percentage is directly related to the Company's sales mix of
higher margin categories.
Selling, general and administrative expenses ("SG&A") increased by
$237,000 in the quarter ended December 31, 1997 over the corresponding period in
the prior year. The increase is primarily attributable to increased holiday
advertising expenses in the 1997 quarter. SG&A decreased by $103,000 in the six
months ended December 31, 1997 over the corresponding period in the prior year.
The Company continues to monitor and
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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 29.2% and 30.3% in the
quarter and six months ended December 31, 1997 from 28.5% and 29.0%,
respectively, in the comparable periods of the previous fiscal year. The
percentage increase is directly attributable to the reduction in net sales from
the previous comparable periods.
Interest expense decreased by $30,000 for the quarter ended December 31,
1997 compared to the same period in the prior year. The decrease was primarily
reflective of a decreased level of average outstanding borrowings, net of a
slightly higher average interest rate based on its prime rate, under the
Company's revolving credit facility during the first and second quarters of
fiscal 1998 as compared to the first and second quarters of fiscal year 1997.
Interest expense increased slightly by $2,000 for the six months ended December
31, 1997 compared to the same period in the prior year.
In the quarter ended December 31, 1997, the Company recorded an income tax
provision of $677,000, 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 Company had an effective income tax rate of
approximately 66.7% for the quarter and 207.7% for the six months ended December
31, 1997. The Company had an income tax rate of approximately 47.5% for the
quarter and 47.3% for the six months ended December 31, 1996.
Net income for the quarter ended December 31, 1997 was $340,000 or $.09
per share compared to net income of $525,000 or $.14 per share for the same
quarter in the previous fiscal year. Net loss for the six months ended December
31, 1997 was $434,000 or $.12 per share compared to net income of $529,000 or
$.14 per share in the same period of the prior fiscal year. The net loss in the
1998 fiscal year 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.
FINANCIAL CONDITION
Net cash provided by operating activities was approximately $4,938,000 for
the six months ended December 31, 1997 primarily due to the increase in the
Company's accounts payable since June 30, 1997. The Company had working capital
of approximately $6,118,000 at December 31, 1997, as compared to the $7,791,000
in working capital at June 30, 1997 for an overall decrease of $1,673,000. The
increase in current assets of $3,202,000 during the six month period was
primarily related to the $1,914,000 increase in inventory and the increase in
accounts receivable of $1,763,000. The net increase in current assets was offset
by an overall increase of $4,875,000 in current liabilities. The net increase in
current liabilities resulted primarily from an increase in accounts payable of
$5,025,000, and increases in cash overdraft and accrued liabilities of
$1,605,000 and $2,160,000 respectively, which was substantially offset by the
decrease in borrowings under the revolving credit facility of $4,337,000.
The Company'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
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amended to allow the Company 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 Company pays a monthly fee based upon the unused portion
of the commitment less $5,000,000 at .375% 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 revolving credit facility contains various affirmative and
negative covenants including those requiring the Company 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
Company's assets including depository accounts, receivables, inventory, property
and equipment and intangible assets.
The Company currently believes that funds from the Company's operations
combined with borrowings available under its revolving credit facility and
vendor credit programs will be sufficient to satisfy its currently projected
operating cash requirements for fiscal 1998, including any capital expenditures
required in connection with store improvements, additional stores or store
relocations during the remainder of fiscal 1998. The Company is currently
seeking suitable sites for two new stores and one store relocation. It cannot be
determined at this time as to the timing of expenditures associated with this
expansion. The Company may need to seek additional sources of financing (debt
and/or equity or a combination thereof) in order to proceed with any expansion
program beyond fiscal 1998.
The principal balance of approximately $428,000 of the mortgage loan
encumbering the Company's former Fort Lauderdale store is due in July. This
obligation will be repaid through funds available under the revolving credit
facility, refinancing of the mortgage or sale of the property.
The Company recognizes the potential problems for many computer systems
relating to the Year 2000. The preponderance of the Company'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 Company 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
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critical cutover dates. Consequently, the Company 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 Company's computer system.
In addition, the Company is assessing the impact of vendors' compliance to Year
2000 and what the impact will be on the Company's ongoing results of operations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended) representing
the Company's current expectations, beliefs, estimates or intentions concerning
the Company's future performance and operating results, its products, services,
markets and industry, and/or future events relating to or effecting the Company
and its business and operations. When used in this Form 10-Q, the words
"believes," "estimates," "plans," "expects," "intends," "anticipates," "Year
2000" and similar expressions as they relate to the Company or its management
are intended to identify forward-looking statements. The actual results or
achievements of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties related to
and including, without limitation, the effectiveness of the Company's business
and marketing strategies, the product mix sold by the Company, 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 Company, management of expenses, gross profit margins, the
opening of additional stores, availability and terms of financing to refinance
or repay existing financings or to fund capital and expansion needs, the
continued and anticipated growth of the retail home entertainment and consumer
electronics industry, a change in interest rates, exchange rate fluctuations,
the seasonality of the Company's business and the other risks and factors
detailed in this Form 10-Q and in the Company's other filings with the
Securities and Exchange Commission. These risks and uncertainties are beyond the
ability of the Company to control. In many cases, the Company cannot predict the
risks and uncertainties that could cause actual results to differ materially
from those indicated by the forward-looking statements.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are filed with this report:
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Amendment Number One to Loan and Security Agreement
dated as of December 8, 1997 between Registrant and
Foothill Capital Corporation.
27. Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during
the quarter ended December 31, 1997.
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SIGNATURES
Pursuant to the requirements 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.
SOUND ADVICE, INC.
(Registrant)
Date FEBRUARY 12, 1998 /s/ PETER BESHOURI
-------------------------
Peter Beshouri, Chairman of the
Board, President and Chief
Executive Officer
Date FEBRUARY 12, 1998 /s/ KENNETH L. DANIELSON
-------------------------
Kenneth L. Danielson, Chief
Financial and Accounting Officer
Page 16
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EXHIBIT INDEX
Exhibit
NO. DESCRIPTION
10.1 Amendment Number One to Loan and Security Agreement.
27. Financial Data Schedule (filed herewith).
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED
DECEMBER 31, 1997
COMMISSION FILE NUMBER
0-15194
-----------------------------------------------------
SOUND ADVICE, INC.
-----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
EXHIBIT 10.1
AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT
This Amendment Number One to Loan and Security Agreement
("Amendment") is entered into as of December 8, 1997, by and between FOOTHILL
CAPITAL CORPORATION, a California corporation ("Foothill"), and SOUND ADVICE,
INC., a Florida corporation ("Borrower"), in light of the following:
FACT ONE: Borrower and Foothill have previously entered into
that certain Loan and Security Agreement, dated as of April 11, 1996 (the
"Agreement").
FACT TWO: Borrower and Foothill desire to amend the Agreement
as provided for herein.
NOW, THEREFORE, Borrower and Foothill hereby amend the
Agreement as follows:
1. DEFINITIONS. All initially capitalized terms used in this
Amendment shall have the meanings given to them in the Agreement unless
specifically defined herein.
2. AMENDMENTS.
(A) Section 1.1 of the Agreement is hereby amended by
adding the following definitions thereto:
"EFFECTIVE DATE" has the meaning set forth
in Section 2.8 (c).
"EURODOLLAR SUPPLEMENT" means that certain
Eurodollar Supplement to Loan and Security Agreement, dated as of
December 8, 1997, between Foothill and Borrower.
"REFERENCE RATE MARGIN" means 1.00% per
annum through and including June 30, 1998; and 0.75% per annum
commencing on July 1, 1998; PROVIDED, HOWEVER, that the Reference Rate
Margin may be reduced by 0.25% per annum (but in no event shall it be
less than 0.50% per annum) upon Foothill's determination that, as of
the end of Borrower's fiscal year ending on or after December 31, 1998,
and the end of any subsequent fiscal year of Borrower, (y) there did
not exist any Event of Default (including any breaches of financial
covenants) and (z) Borrower's Working Capital was greater than
$6,500,000; such reduction in rate to be effective retroactively to the
first day of the first full month of the fiscal year in which such
determination is made.
1
<PAGE>
For purposes of this definition and for any date of determination,
Foothill shall determine compliance with financial covenants, and the
amount of Borrower's Working Capital, based upon Borrower's most recent
Form 10-K Annual Report delivered pursuant to SECTION 6.4, and verified
by Foothill.
(B) Section 1.1 of the Agreement is hereby amended by
revising clause (a) of the definition of "Average Unused Portion of Maximum
Amount" to read as follows:
"(a) $20,000,000; LESS"
(C) Section 1.1 of the Agreement is hereby amended by
revising the definition of "Foothill Expenses" contained therein to read as
follows:
"FOOTHILL EXPENSES" means all: costs or expenses
(including taxes, photocopying, notarization, telecommunication and
insurance premiums) required to be paid by Borrower under any of the
Loan Documents that are paid or advanced by Foothill; documentation,
filing, recording, publication, appraisal (including periodic
Collateral appraisals), real estate survey, environmental audit, and
search fees assessed, paid, or incurred by Foothill in connection with
Foothill's transactions with Borrower; costs and expenses incurred by
Foothill in the disbursement of funds to Borrower (by wire transfer or
otherwise); charges paid or incurred by Foothill resulting from the
dishonor of checks; costs and expenses paid or incurred by Foothill to
correct any default or enforce any provision of the Loan Documents, or
in gaining possession of, maintaining, handling, preserving, storing,
shipping, selling, preparing for sale, or advertising to sell the
Collateral, or any portion thereof, irrespective of whether a sale is
consummated; costs and expenses paid or incurred by Foothill in
examining Borrower's Books; costs and expenses of third party claims or
any other suit paid or incurred by Foothill in enforcing or defending
the Loan Documents; and Foothill's reasonable attorneys fees and
expenses incurred in advising, structuring, drafting, reviewing,
administering, amending, terminating, enforcing, defending, or
concerning the Loan Documents (including attorneys fees and expenses
incurred in connection with a "workout," a "restructuring," or an
Insolvency Proceeding concerning Borrower or any guarantor of the
Obligations), irrespective of whether suit is brought.
(D) Section 1.1 of the Agreement is hereby amended by
revising the definition of "Loan Documents" to read as follows:
2
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"LOAN DOCUMENTS" means this Agreement, the
Eurodollar Supplement, the Lock Box Agreement, any other note or notes
executed by Borrower and payable to Foothill, and any other agreement
entered into in connection with this Agreement.
(E) Section 1.1 of the Agreement is hereby amended by
revising the definition of "Maximum Amount" to read as follows:
"MAXIMUM AMOUNT" means $25,000,000.
(F) "ORDERLY LIQUIDATION VALUE" means the orderly
liquidation value of Borrower's Inventory as determined by Foothill from time to
time based upon the most recent Inventory appraisal by a third party appraiser
acceptable to Foothill.
(G) Section 2.1 (a)(x) of the Agreement is hereby
amended to read as follows:
(x) the least of: (i) 70% of Borrower's Cost
of Eligible Landed Inventory; (ii) 55% of the retail selling price of Eligible
Landed Inventory; and (iii) 80% of the Orderly Liquidation Value of Eligible
Landed Inventory as may be determined by Foothill; plus
(H) Section 2.1 (c) of the Agreement is hereby
amended to read as follows:
(c) Foothill shall have no obligation to
make advances hereunder to the extent they would cause the outstanding
Obligations to exceed the Maximum Amount.
(I) Section 2.5 (a) of the Agreement is hereby
amended to read as follows:
(a) Interest Rate. Except as provided in
clause (b) below and except for Obligations as to which Borrower has
elected to have interest charged based upon the Eurodollar Supplement,
all Obligations, except for undrawn L/Cs and L/C Guarantees, shall bear
interest at a per annum rate equal to the Reference Rate PLUS the
Reference Rate Margin.
(J) Section 2.8 (c) is hereby revised to read as
follows:
(c) Annual Facility Fee. On each anniversary
of the date that Amendment Number One to this Agreement becomes
effective (the
3
<PAGE>
"Effective Date"), until and including the third anniversary of the
Effective Date in 2000, and on the effective date of each automatic
extension of this Agreement pursuant to SECTION 3.3, commencing on the
Renewal Date, a fee in the amount of $50,000, each such fee to be fully
earned on each such date;
(K) Section 2.8 (e) is hereby revised to read as
follows:
(e) Servicing Fee. On the first day of each
month during the term of this Agreement, and thereafter so long as any
Obligations are outstanding, a servicing fee in an amount equal to
$2,000 per month. Such fee shall be payable in arrears.
(L) The first sentence of Section 3.3 is hereby
revised to read as follows:
This Agreement shall become effective upon
the execution and delivery hereof by Borrower and Foothill and shall
continue in full force and effect for a term ending on July 31, 2001
(the "Renewal Date"), and automatically shall be renewed for successive
one year periods thereafter, unless sooner terminated pursuant to the
terms hereof.
(M) Section 3.5 of the Agreement is hereby revised to
read as follows:
3.5 EARLY TERMINATION BY BORROWER. The
provisions of SECTION 3.3 that allow termination of this Agreement by
Borrower only on the Renewal Date and certain anniversaries thereof
notwithstanding, Borrower has the option, at any time upon 60 days
prior written notice to Foothill, to terminate this Agreement by paying
to Foothill, in cash, the Obligations (including an amount equal to the
full amount of the outstanding L/Cs or L/C Guarantees), together with a
premium (the "Early Termination Premium") equal to: (a) 1.0% of the
Maximum Amount, if terminated before August 1, 1998; (b) 0.75% of the
Maximum Amount, if terminated on or after August 1, 1998 but before
August 1, 1999; (c) 0.50% of the Maximum Amount, if terminated on or
after August 1, 1999 but before August 1, 2000; and (d) 0.25% the
Maximum Amount if terminated on or after August 1, 2000, but before the
Renewal Date; and (e) $0 if terminated on or after the Renewal Date.
(N) Section 5.2 of the Agreement is hereby amended by
deleting therefrom any references to Sound Advice Electronics of Maryland, Inc.,
Sound Advice of Virginia, Inc., and SAI Realty Investments, Inc.
4
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(O) Section 6.13 (a) of the Agreement is hereby
amended by deleting clauses ii) and iii) therefrom.
(P) Section 6.13 (b) of the Agreement is hereby
amended to read as follows:
(b) Borrower's cumulative aggregate net
losses from and after October 1, 1997 shall not at any time exceed
$4,000,000.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to
Foothill that all of Borrower's representations and warranties set forth in the
Agreement are true, complete and accurate in all respects as of the date hereof,
except to the extent expressly modified hereby.
4. NO DEFAULTS. Borrower hereby affirms to Foothill that no
Event of Default has occurred and is continuing as of the date hereof.
5. COSTS AND EXPENSES. Borrower shall pay to Foothill all of
Foothill's out-of-pocket costs and expenses (including, without limitation, the
fees and expenses of its counsel, which counsel may include any local counsel
deemed necessary, search fees, filing and recording fees, title insurance
premiums, documentation fees, appraisal fees, travel expenses, and other fees)
arising in connection with the preparation, execution, and delivery of this
Amendment and all related documents.
6. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon: (a) the receipt by each of the parties of a
counterpart of this Amendment and the Eurodollar Supplement, executed by the
other party; and (b) the receipt by Foothill of an amendment and extension fee
in the amount of $45,000 which shall be fully earned and due and payable on the
effective date of this Amendment and shall be charged to Borrower's loan account
pursuant to Section 2.5(d) of the Agreement.
7. LIMITED EFFECT. In the event of a conflict between the
terms and provisions of this Amendment and the terms and provisions of the
Agreement, the terms and provisions of this Amendment shall govern. In all other
respects, the Agreement, as amended and supplemented hereby, shall remain in
full force and effect.
8. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed
in any number of counterparts and by different parties on separate counterparts,
each
5
<PAGE>
of which when so executed and delivered shall be deemed to be an original. All
such counterparts, taken together, shall constitute but one and the same
Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first set forth above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: Todd W. Colpitts
Title: Assistant Vice President
SOUND ADVICE, INC.,
a Florida corporation
By: Kenneth L. Danielson
Title: C.F.O. & Treasurer
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTH PERIOD ENDED DECEMBER 31,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 282,620
<SECURITIES> 0
<RECEIVABLES> 5,706,577
<ALLOWANCES> 390,800
<INVENTORY> 29,703,456
<CURRENT-ASSETS> 35,717,045
<PP&E> 33,422,249
<DEPRECIATION> 19,364,956
<TOTAL-ASSETS> 50,038,877
<CURRENT-LIABILITIES> 29,599,496
<BONDS> 873,292
0
0
<COMMON> 37,289
<OTHER-SE> 15,826,546
<TOTAL-LIABILITY-AND-EQUITY> 50,038,877
<SALES> 83,855,241
<TOTAL-REVENUES> 83,855,241
<CGS> 57,277,407
<TOTAL-COSTS> 57,277,407
<OTHER-EXPENSES> 25,438,314
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 779,530
<INCOME-PRETAX> 402,795
<INCOME-TAX> 836,800
<INCOME-CONTINUING> (434,005)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (434,005)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
