SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended JANUARY 31, 1999
[ ] 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 BEACH, FLORIDA 33004
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 922-4434
------------------------------
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
--------------------------------------
Title of class
------------------------------
COMMON STOCK PURCHASE RIGHTS
----------------------------
Title of class
------------------------------
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 16, 1999, BASED UPON THE CLOSING
MARKET PRICE OF THE REGISTRANT'S VOTING STOCK ON THE NASDAQ NATIONAL MARKET ON
APRIL 16,1999,AS REPORTED IN THE WALL STREET JOURNAL, WAS APPROXIMATELY
$14,935,000.
THE REGISTRANT HAD 3,733,894 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF APRIL 16, 1999.
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 1999 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY
REFERENCE IN PART III OF THIS REPORT.
<PAGE>
TABLE OF CONTENTS
PART I PAGE NO.
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ITEM 1. BUSINESS.................................................... 1
General................................................ 1
Products............................................... 2
Marketing Strategy..................................... 3
Advertising............................................ 4
Operations............................................. 5
Expansion.............................................. 8
Seasonality............................................ 9
Servicemarks........................................... 10
Competition............................................ 10
Employees.............................................. 11
ITEM 2. PROPERTIES.................................................. 12
ITEM 3. LEGAL PROCEEDINGS........................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS............................................ 14
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........................................ 17
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........................ 24
Year 2000.............................................. 26
Impact of Inflation and Foreign
Currency Fluctuations................................ 28
Interest Rates......................................... 28
Forward-Looking Statements............................. 29
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TABLE OF CONTENTS (CONTINUED)
PAGE NO.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.......................................... 30
ITEM 11. EXECUTIVE COMPENSATION..................................... 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................... 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.................................... 31
SIGNATURES........................................................... 32
ii
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PART I
ITEM 1. BUSINESS
GENERAL
Sound Advice, Inc. (the "Registrant"), incorporated in Florida on March
12, 1974, is a full service specialty retailer of a broad range of selective
high-quality, upscale entertainment and consumer electronic products. As of
January 31, 1999, the Registrant operated 24 full size stores in Florida which
sell home and car audio systems, large screen projection and direct view
televisions, video products, personal electronics, cellular telephones, car
security systems, home entertainment furniture and related customized services
and accessories. In addition, the Registrant has opened two concept stores
featuring Bang & Olufsen audio products 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 that includes a technically
proficient sales force as well as custom design, installation and repair
services. The Registrant's stores 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 into four areas of 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 the Jacksonville / Tallahassee area (the "Jacksonville" stores). In
November 1998, the Registrant added two new full size stores in North Palm Beach
and Tallahassee, Florida. The Registrant also opened two Bang & Olufsen concept
stores in Aventura in February 1998 and Boca Raton in December 1998. These
specialty Bang & Olufsen stores contain approximately 1600 square feet. As of
January 31, 1999 the Registrant operated 24 full size 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 2000 to add one additional
store and relocate the remaining smaller West Coast store to a larger facility
containing approximately 15,000 gross square feet. See "Expansion" in this ITEM
1.
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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 full size 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, digital versatile disc (DVD) players, video tape
players/recorders, video camcorders, 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 that included personal computers, peripherals and
multi-media products.
The table below shows the approximate percentage of the Registrant's
sales for the fiscal years ended January 31, 1999 and 1998, transition periods
ended January 31, 1998 and 1997, and the fiscal years ended June 30, 1997 and
1996 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.
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<TABLE>
<CAPTION>
TRANSITION PERIODS
FISCAL YEARS ENDED ENDED FISCAL YEARS ENDED
JANUARY 31, JANUARY 31, JUNE 30,
----------- ----------- --------
PRODUCT GROUP 1999 1998 1998 1997 1997 1996
------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Home and Car Audio ...................... 48% 48% 45% 44% 48% 44%
Television and Video .................... 38% 35% 39% 40% 37% 35%
Service, Installation and
Product Warranty ........................ 13% 13% 12% 12% 12% 11%
Miscellaneous Products .................. 1% 4% 4% 4% 3% 5%
Personal Computer ....................... - - - - - 5%
---- ---- ---- ---- ---- ----
Total .............................. 100% 100% 100% 100% 100% 100%
==== ==== ==== ==== ==== ====
</TABLE>
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 all of its full
size 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 stores where products can be
demonstrated to and tested by customers; and (iv) a support program including
custom design and installation and repair services.
The Registrant builds customer satisfaction by offering a comprehensive
customer support program. This program seeks to assure that each customer has
the product or system best suited for that individual. Any merchandise sold by
the Registrant may be auditioned on the customer's premises and, if a customer
is not satisfied, may be returned within 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
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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 visits
customers' homes 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 broad and high-quality name brand product selection, its technically
proficient sales force, its support program, available financing arrangements,
its customer-oriented stores, competitive prices, 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 fiscal years ending January 31, 1999 and 1998,
transition periods ended January 31, 1998 and 1997, and the fiscal years ended
June 30, 1997 and 1996. 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.
<TABLE>
<CAPTION>
FISCAL TRANSITION FISCAL
YEARS ENDED PERIODS ENDED YEARS ENDED
JANUARY 31, JANUARY 31, JUNE 30,
----------- ----------- --------
1999 1998 1998 1997 1997 1996
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Advertising Expense........... $3,640 $4,371 $3,149 $3,115 $4,086 $6,476
Percentage of Net Sales........... 2.3% 2.9% 3.3% 3.1% 2.6% 3.8%
</TABLE>
During the fiscal year ended January 31, 1999, net advertising expense
decreased from the comparable period in 1998. The decrease is primarily due to a
reduction in print media advertising expenditures associated with a change in
the mix of advertising expenditures between print media, catalog and direct
mail.
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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 reasons 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.
The Registrant prepares the majority of its advertising materials
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. The Registrant utilizes the services of outside
marketing consultants to assist in certain advertising campaigns and image
development programs.
OPERATIONS
SUPPLIERS, PURCHASING AND DISTRIBUTION:
The Registrant has no long-term merchandise purchase contracts or
commitments. The Registrant acquires its products from approximately 150
manufacturers, five of which accounted for approximately 53% of the Registrant's
total product purchases during the fiscal year ended January 31, 1999. Such five
manufacturers were Alpine, Mitsubishi, Panasonic, Sony and Yamaha. Management
believes that competitive sources of supply would be available for most of the
Registrant's products in the event that one or more of its sources were no
longer available. However, a loss of a primary source of supply could have an
adverse impact on the Registrant and, to the extent that the unavailable source
was for a product line for which the Registrant was the primary distributor in
its 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
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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
3.6 and 3.7 times during the fiscal years ending January 31, 1999 and 1998, 4.0
and 3.9 times during the transition periods ended January 31, 1998 and 1997, and
4.1, and 4.3, times during the fiscal years ended June 30, 1997, and 1996.
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 three times a year and in between such physical inventories it
periodically conducts a cycle count on selected categories 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.
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
these programs may 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 full size store has its own management structure consisting of a
full time general manager having overall responsibility at each
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location and a full time operations manager under such general manager. The
Registrant's stores also have an individual in charge of the mobile electronics
department. Each general manager's and operations manager's compensation is
dependent in part on the store's gross profit. As of April 20, 1999,
approximately 330 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. A single store manager manages the Bang &
Olufsen concept stores.
The Registrant's sales management group consists of three regional
sales vice presidents, each overseeing several stores, all of whom report to the
Chief Executive Officer. In addition, there are two mobile electronics regional
sales directors each of whom oversee approximately one half of the stores. 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 turnover 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, car security systems
and car navigation systems in all of its full size stores.
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
non-recourse 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
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averaged 4% 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 fiscal period ended January 31, 1999, the Registrant opened two
new full size stores, one in Tallahassee and one in North Palm Beach, in
November 1998 and two mall based concept stores in February and December 1998,
and did not close any stores. Accordingly, as of January 31, 1999, it operated
24 full size stores and 2 mall based concept stores. These concept stores sell a
single vendor's high-end electronics and related accessories.
During fiscal year 2000, the Registrant currently plans to open up to
one additional store in Florida markets which have been determined to be of
sufficient size and demographics to support the typical 15,000 square foot
facility. In addition, the Registrant plans to relocate the remaining smaller
West Coast store in order to increase the size of that store 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 $850,000 to
$1,100,000. 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."
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SEASONALITY
Historically, the Registrant has realized greater sales and profits
during the holiday selling season. The Registrant's marketing strategy and, in
particular, its year round use of newspaper, television and radio advertising,
catalogs, direct mail and promotions (including, without limitation, vendor
specific promotional sales in selected months), attempts to minimize the
seasonality of the Registrant's business.
The following tables set forth the Registrant's quarterly net
sales in dollars and as a percentage of annual net sales for the Fiscal Years
ended January 31, 1999 and 1998, the transition periods ended January 31, 1998
and 1997, and the two fiscal years ended June 30, 1997 and 1996:
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<TABLE>
<CAPTION>
NET SALES
---------
FISCAL YEAR 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
ENDED (FEBRUARY - (MAY - (AUGUST - (NOVEMBER - TOTAL
JANUARY 31, APRIL) JULY) OCTOBER) JANUARY) FOR YEAR
----------- ------ ----- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
1999 ................. $33,648 $33,518 $34,423 $53,002 $154,591
................. 21.8% 21.7% 22.2% 34.3% 100.0%
1998 ................. $33,206 $33,347 $36,282 $48,808 $151,643
................. 21.9% 22.0% 23.9% 32.2% 100.0%
</TABLE>
<TABLE>
<CAPTION>
NET SALES
---------
TRANSITION 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
PERIOD ENDED (FEBRUARY - (MAY - (AUGUST - (NOVEMBER - TOTAL
JANUARY 31, APRIL) JULY)* OCTOBER) JANUARY) FOR YEAR
----------- ------ ----- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
1998 ................. N/A $11,703 $36,282 $48,808 $96,793
................. N/A 12.1% 37.5% 50.4% 100.0%
1997 ................. N/A $14,031 $38,418 $48,324 $100,773
................. N/A 13.9% 38.1% 48.0% 100.0%
<FN>
* Due to the change in fiscal year, this partial quarter represents only
the month of July.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NET SALES
---------
FISCAL YEAR 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
ENDED (JULY - (OCTOBER - (JANUARY - (APRIL - TOTAL
JUNE 30, SEPTEMBER) DECEMBER) MARCH) JUNE) FOR 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% 100.0%
1996 ............... $44,165 $53,260 $39,079 $32,481 $168,985
............... 26.1% 31.5% 23.1% 19.3% 100.0%
</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,
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customer service and financing plans or programs being the main competitive
factors. The Registrant believes that it competes effectively on the basis of
such factors and its product mix has been selected to include higher-end audio
and video products not generally offered by many of its competitors. During
fiscal years 1996 and 1997 and to a much lesser extent in the transition period
ending January 31, 1998 and fiscal year ended January 31, 1999 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 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 20, 1999, the Registrant employed approximately 730
persons, of whom approximately 520 were commissioned persons, including
approximately 80 car stereo and mobile installers, 36 service department
technicians and 74 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.
11
<PAGE>
ITEM 2. PROPERTIES.
The Registrant's 26 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 car audio and
accessory installation. The stores are generally located either in freestanding
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 24 full size stores and 2 concept stores:
STORE LOCATIONS
A map of Florida indicates the general location of the Registrant's 26 stores in
the four geographic areas.
JACKSONVILLE STORES EAST COAST STORES
Jacksonville (Regency) West Palm Beach
Jacksonville (Orange Park) Boca Raton
Tallahassee North Palm Beach
Ft. Lauderdale
Plantation
CENTRAL FLORIDA STORES Hollywood
Orlando (East Colonial) Aventura
Orlando (Sandlake) Hialeah Gardens
Altamonte Springs) Coral Gables
West Kendall
WEST COAST STORES South Kendall
St. Petersburg
Tampa (2) CONCEPT STORES - BANG & OLUFSEN
Clearwater Boca Raton
Sarasota Aventura
Fort Myers
Naples
All of the Registrant's 26 stores are currently leased, one of which is
accounted for as a capital lease. Leases expire on various dates between 1999
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 full size store leases provide for a base rental with
cost of living adjustments or stipulated annual percentage increases or a
combination thereof. The leases for the concept stores provide for a base rental
with cost of living adjustments or annual percentage increases and a percentage
of sales upon attainment of a certain level of sales. Currently the level of
sales requiring percentage rent has not been obtained. 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 (8) and (9) of Notes to Consolidated
Financial Statements.
12
<PAGE>
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 June 2000 (exclusive of two five-year renewal options). 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). The Registrant's sales training
center is 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.
The Registrant's former Ft. Lauderdale store was used for car
installations, with the balance of such building having been leased to a
nonaffiliated company for a term of five years. The car installation facility
has been incorporated into the Ft. Lauderdale store and this property has been
placed for sale.
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.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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 20, 1999)
and position(s) held by each executive officer of the Registrant:
NAME AGE POSITION(S) WITH REGISTRANT
- ---- --- ---------------------------
Peter Beshouri 44 Director, Chairman of the Board, President and
Chief Executive Officer
Michael Blumberg 50 Director, Senior Vice President and Secretary
Christopher O'Neil 45 Executive Vice President, Chief Operating
Officer and Assistant Secretary
Kenneth L. Danielson 48 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 store 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
14
<PAGE>
December 1987, and Senior Vice President in May 1989. From the Registrant's
inception until February 1995, Mr. Blumberg 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.
FISCAL YEAR ENDED PRICES
JUNE 30, 1997
QUARTER PERIOD HIGH LOW
- ------- ------ ---- ---
First 07/01/96 To 09/30/96 2-1/4 1-1/4
Second 10/01/96 To 12/31/96 2 1-3/16
Third 01/01/97 To 03/31/97 2-5/8 1-3/8
Fourth 04/01/97 To 06/30/97 2-3/8 1-1/4
TRANSITION PERIOD ENDED PRICES
JANUARY 31, 1998
QUARTER PERIOD HIGH LOW
- ------- ------ ---- ---
Second Partial 07/31/97 2-5/8 1-7/8
Third 08/01/97 To 10/31/97 2-5/8 1-3/8
Fourth 11/01/97 To 01/31/98 2 1-1/8
FISCAL YEAR ENDED PRICES
JANUARY 31, 1999
QUARTER PERIOD HIGH LOW
- ------- ------ ---- ---
First 02/01/98 To 04/30/98 3-9/16 1-1/8
Second 05/01/98 To 07/31/98 4-3/8 2-1/4
Third 08/01/98 To 10/31/98 3-11/16 1-15/16
Fourth 11/01/99 To 01/31/99 4-27/32 2
As of April 26, 1999, there were 175 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.
16
<PAGE>
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."
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 (5) of Notes to
Consolidated Financial Statements.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data for the fiscal years ended January 31,
1999 and 1998, 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>
FISCAL YEARS TRANSITION PERIODS FISCAL YEARS ENDED JUNE 30,
ENDED JANUARY 31, ENDED JANUARY 31,
1999 1998 1998 1997 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
OPERATING STATEMENT DATA (Amounts in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $154,591 $151,643 $96,793 $100,773 $155,623 $168,985 $190,504
Cost of Goods Sold 101,360 102,208 65,822 69,220 105,605 119,775 134,800
------- ------- ------ ------- ------- ------- -------
Gross Profit 53,231 49,436 30,971 31,553 50,018 49,210 55,704
Selling, General and
Administrative Expenses 49,893 49,122 29,903 29,827 49,045 52,393 54,502
Loss Due To Impairment of Asset (1) - - - - - - 400
Income (Loss) From Operations 3,338 314 1,068 1,726 973 (3,183) 802
Other Income (Expense):
Interest Expense (1,417) (1,562) (897) (891) (1,556) (1,526) (1,425)
Provision for Shareholder
Settlement (2) - - - - - - 56
Other Income (Expense) 96 120 48 31 101 (4) (66)
------- ------- ------ ------- ------- ------- -------
Income (Loss) Before Income
Taxes (Benefit) 2,017 (1,128) 219 866 (482) (4,713) (633)
Income Taxes (Benefit) 1,310 1,089 1,175 475 389 (486) (152)
------- ------- ------ ------- ------- -------- -------
Net Income (Loss) $ 707 $(2,217) $ (956) $ 391 $ (871) $(4,227) $ (481)
====== ======= ====== ======= ======= ======= =======
Basic Earnings (Loss)
Per Share (3) $ .19 $ (.59) $ (.26) $ .10 $ (.23) $ (1.13) $ (.13)
====== ======= ======= ======= ======= ======= =======
Diluted Earnings (Loss)
Per Share (3) $ .18 $ (.59) $ (.26) $ .10 $ (.23) $ (1.13) $ (.13)
====== ======= ====== ======= ======= ======= =======
Weighted Average Shares - Basic 3,730 3,729 3,729 3,729 3,729 3,729 3,729
Weighted Average Shares - Diluted 3,965 3,729 3,729 3,729 3,729 3,729 3,729
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR TRANSITION PERIOD FISCAL YEARS ENDED JUNE 30,
ENDED JANUARY 31, ENDED JANUARY 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA (Amounts in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Current Assets 38,987 37,546 32,515 34,645 39,141
Current Liabilities 34,225 31,960 24,724 26,019 29,107
Working Capital 4,762 5,586 7,791 8,625 10,084
Total Assets 55,217 51,789 46,550 49,056 56,702
Borrowing Under Revolving
Credit Facility 13,776 10,700 11,875 9,100 8,677
Current Maturities of Long Term
Debt (Included in Current
Liabilities) 467 593 171 161 2,674
Long Term Debt (Excluding Current
Maturities) - 53 575 746 908
Shareholder's Equity 16,058 15,342 16,298 17,169 21,396
STORE DATA:
Number of Stores Open at End of Period:
Full Size Stores 24 22 21 21 21
Concept Stores 2 - - - -
Weighted Average Net Sales Per
Store (4) 6,789 4,549 7,411 8,047 9,261
<FN>
(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.
(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
calculations 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 of
full size stores for the period divided by the number of full
size 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. Net sales of the concept stores have not been included
in this calculation.
</FN>
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW - FISCAL YEARS ENDED JANUARY 31, 1999 AND 1998, AND
1998 AND 1997.
The following tables set forth for fiscal years ended January 31, 1999 and 1998
and the 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 period in the prior year.
<TABLE>
<CAPTION>
ITEMS AS A PERCENTAGE ITEMS AS A PERCENTAGE PERIOD TO PERIOD
OF NET SALES OF NET SALES PERCENTAGE INC/DEC
FISCAL YEAR TRANSITION
FISCAL YEARS TRANSITION PERIODS ENDED PERIOD ENDED
ENDED JANUARY 31, ENDED JANUARY 31, JANUARY 31,
1999 1998 1998 1997 98-99 97-98
---- ---- ---- ---- ----- -----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 % 100.0 % 1.9 % (3.9)%
Cost of Goods Sold 65.6 67.4 68.0 68.7 (.8) (4.9)
-------- ------- --------- ---------
Gross Profit 34.4 32.6 32.0 31.3 7.7 (1.8)
Selling, General and
Administrative Expenses 32.2 32.4 30.9 29.6 1.6 0.3
-------- ------- --------- ---------
Income from Operations 2.2 .2 1.1 1.7 964.4 (38.1)
Other Income (Expenses):
Interest Expense (.9) (1.0) (0.9) (0.9) (9.2) 0.6
Other Expenses, Net * .1 * * * *
-------- ------- --------- ---------
1.3 (.7) 0.2 0.8 ** (74.7)
-------- ------- --------- ---------
0.5 % (1.5)% (1.0)% 0.4 % ** % (344.7)%
======= ======= ========= =========
<FN>
* Negligible
</FN>
</TABLE>
FISCAL YEAR ENDED JANUARY 31, 1999 COMPARED TO PRIOR FISCAL YEAR ENDED JANUARY
31, 1998
Net sales for the fiscal year ended January 31, 1999 were approximately
$154,591,000, an increase of $2,947,000 or 1.9% over the comparable period in
the prior year. The overall increase in sales is primarily attributable to the
addition of two new full size stores in November 1998 and two Bang & Olufsen
concept stores in February 1998 and December 1998. Sales increased in the
categories of audio and video and were partially offset by decreases in cell
phones, personal electronics, extended warranties and mobile electronics.
Comparable store sales as adjusted for the new stores opened during fiscal 1999
decreased 3.2% for the fiscal year ended January 31, 1999 as compared to the
corresponding period in the prior year. The Registrant's operations, in common
with other retailers in general, are subject to seasonal influences.
20
<PAGE>
Historically, the Registrant has realized greater sales and profits during the
holiday selling season, which are included in the fourth quarter of the
Registrant's fiscal year.
Gross profit increased by approximately $3,795,000 or 7.7% in the
fiscal year ended January 31, 1999 over the comparable period in the prior year.
The increase in gross profit is attributable to the Registrant's sales mix of
higher margin categories, which include the introduction of new digital audio
and video products and the increase in overall sales. The gross profit
percentage was 34.4% in the fiscal year ended January 31, 1999 as compared to
32.6% in the corresponding period ended January 31, 1998. The increase in gross
profit percentage is directly related to the Registrant's sales mix of higher
margin categories that include the introduction of digital technology based
products coupled with a reduction of sales in lower margin categories.
Selling, general and administrative expenses (SG&A) for the fiscal year
ended January 31, 1999 were approximately $49,893,000, an increase of $771,000
or 1.6% over the comparable period in the prior year. The primary reason for the
increase in SG&A expense is increased sales commissions on the increase in gross
profit. SG&A as a percentage of net sales decreased to 32.3% in the fiscal year
ended January 31, 1999 from 32.4% in the comparable period of the prior year.
The percentage decrease is attributable to overall SG&A expenses increasing at a
reduced rate as compared to the growth in overall sales.
Interest expense for the fiscal year ended January 31, 1999 was
$1,417,000, a reduction of $145,000 from the corresponding period in the prior
year. The overall reduction is primarily reflective of a lower effective
interest rate on the Registrant's revolving credit facility on an increased
level of borrowing in relation to the comparable periods in the prior fiscal
year.
In the fiscal year ended January 31, 1999 the Registrant recorded an
income tax provision in the amount of $1,310,000 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 64.9% for the fiscal year ended January 31,
1999.
Net income for the fiscal year ended January 31, 1999 was approximately
$707,000 or $.19 per share as compared to a net loss of approximately $2,217,000
on $.59 per share in the comparable period of the prior year.
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
21
<PAGE>
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 twelve months ended
January 31, 1998. The gross profit percentage was 31.3% in the twelve months
ended January 31, 1997. The increase in gross profit percentage is 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 twelve 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.
22
<PAGE>
OVERVIEW - FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
The following tables set forth for fiscal years ended June 30, 1997 and
1996 (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>
ITEMS AS A PERCENTAGE PERIOD TO PERIOD PERCENTAGE
OF NET SALES INCREASE / (DECREASE)
FOR YEARS ENDED JUNE 30, FOR YEARS ENDED JUNE 30,
1997 1996 1996-1997
---- ---- ---------
<S> <C> <C> <C>
Net Sales 100.0 % 100.0 % (7.9) %
Cost of Goods Sold 67.9 70.9 (11.8)
----- -----
Gross Profit 32.1 29.1 1.6
Selling, General and
Administrative Expenses 31.5 31.0 (6.4)
Income (Loss) from
Operations 0.6 (1.9) 130.6
Other Income (Expense):
Interest Expense (1.0) (0.9) 2.0
Other Expenses, Net .1 * 2,937.1
----- -----
Income (Loss) before
Income Taxes (Benefit) (0.3) (2.8) (89.8)
----- -----
(0.6)% (2,5)% (79.4) %
<FN>
* Negligible
** Not Meaningful
</FN>
</TABLE>
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 full size store 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
23
<PAGE>
percentage is directly related to the Registrant's renewed focus on value added
selling in the core categories of high end audio, video and mobile electronics
and the elimination of computers and other non-performing low margin products
from the product mix. The gross profit for the prior fiscal year was impacted by
a $1,500,000 provision for loss on personal computers and related accessories
recorded in the second quarter of fiscal 1996 in connection with such product
category's elimination from the Company's product mix.
Selling, general and administrative expense ("SG&A") for the fiscal
year ended June 30, 1997, was approximately $49,045,000, a decrease of
approximately $3,349,000 or 6.4% over the prior fiscal year. The overall
decrease is primarily attributable to cost reduction programs initiated by the
Registrant primarily in the areas of advertising and personnel expense and the
elimination of personal computers from the product mix in fiscal 1996. Since a
sizeable amount of these reductions were associated with the elimination of
expenses associated with sales of personal computers, it is anticipated that
future expense reductions in this area will not be as significant. However, the
Registrant continues to monitor and control expenses in its effort to reduce the
overall level of SG&A. The Registrant's efforts are now being directed at the
improvement of operational processes to attempt to generate reduced costs. In
addition, costs, which are relatively fixed in nature, are being reviewed and
analyzed for potential reduction or elimination. SG&A as a percentage of net
sales increased slightly to 31.5% from 31.0% in the prior fiscal year. The
percentage increase is directly attributable to the reduction in net sales from
the previous fiscal year.
Interest expense for the fiscal year ended June 30, 1997, was
$1,556,000, an increase of $30,000 from the prior fiscal year. The increase was
primarily reflective of increased borrowings under the Registrant's revolving
credit facility during fiscal 1997.
In fiscal 1997 the Registrant recorded a net income tax provision in
the amount of $389,000 on the pre-tax operating loss. This provision is due to
the increase of the valuation allowance on the deferred tax assets, net of
income taxes recoverable as a result of the carryback of the fiscal 1997 net
operating loss.
Net loss for the fiscal year ended June 30, 1997 was approximately
$871,000 or $.23 per share compared to net loss of approximately $4,227,000 or
$1.13 per share for the prior fiscal year. The significant reduction in net loss
for fiscal year 1997 was primarily due to improved gross profit margins on the
Registrant's product mix, the Registrant's continuing efforts to reduce SG&A and
the impact in fiscal year 1996 of the $1.5 million provision for loss on
personal computers and related accessories.
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
24
<PAGE>
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 (3)(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 $415,000 at January 31, 1999. See "ITEM 2.
PROPERTIES." Such loan bears interest at the rate of 1% above the prime rate of
such lender (such lender's prime rate was 7.75% at January 31, 1999) and is
payable in twenty five consecutive monthly installments of principal in the
amount of $1,779 each, together with accrued interest, and in one balloon
principal payment of approximately $381,000, together with any accrued and
unpaid interest, due on September 15, 2001. Such balloon payment obligation will
be repaid through funds available under the Revolving Credit Facility,
refinancing of the mortgage or sale of the property. See note (3)(b) of Notes to
Consolidated Financial Statements.
The Registrant's amended $25,000,000 revolving credit facility expires
on July 31, 2001. The terms of the facility 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
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 is required to pay an annual facility fee of $50,000 per
annum.
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 1.0 to
1.0 and maintain working capital at the end of each quarter of at least
$2,000,000. 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.
25
<PAGE>
The interest rate under the Registrant's revolving credit facility
fluctuated between 7.30% and 9.50% during the fiscal year ended January 31,
1999. The 7.30% rate is a result of the LIBOR pricing option included as part of
the amendment of the revolving credit facility. As of January 31, 1999, the
outstanding borrowings under the Registrant's revolving credit facility were
$13,776,000. The increase of approximately $3,076,000 in outstanding borrowing
in the fiscal year ended January 31, 1999 is primarily attributable to funds
used to retrofit the properties for its store expansion in fiscal 1999 as well
as renovate certain existing stores.
Net cash provided by operating activities was approximately $2,446,000
for the fiscal year ended January 31, 1999 resulting primarily from cash flows
generated from net income and depreciation and amortization which were reduced
by increases in receivables and a decrease in accounts payable totaling
$2,318,000. In connection with the Registrant's store expansion program,
$5,435,000 of capital expenditures were incurred and funded from the $2,446,000
in net cash flows generated from operations and a $3,076,000 net increase in
borrowings under the revolving credit facility. The Registrant had working
capital of approximately $4,722,000 as of January 31, 1999, a decrease of
approximately $864,000 from January 31, 1998. The decrease in working capital
results primarily from the increases in borrowing under the Registrant's
revolving credit facility of $3,076,000 which was partially offset by increases
in accounts receivable of $1,464,000 and a reduction in accounts payable of
$854,000.
The Registrant currently believes that funds from the Registrant'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 during fiscal year 2000. However, in order
to complete the store expansion and store relocation currently planned in fiscal
2000, 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 2000.
YEAR 2000 ISSUE
The year 2000 issue is primarily the result of computer programs
being written using two digits rather than four to define the applicable year.
Such programs will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, including possible
miscalculations, and a disruption in the operation of such systems. This is
commonly referred to as the year 2000 issue.
The Registrant is executing a plan to identify and address any possible
business related to the impact of the year 2000 problem on both its information
technology ("IT") and non-IT systems (e.g., embedded technology). This plan
addresses the year 2000 issue in multiple phases, including (i) determining an
initial inventory of the
26
<PAGE>
Registrant's systems, equipment, vendors, customers and third party
administrators that may be vulnerable to system failures or processing errors as
a result of year 2000 issues, (ii) assessment and prioritization of inventoried
items to determine risks associated with their failure to be year 2000
compliant, (iii) testing of systems and equipment to determine year 2000
compliance, (iv) remediation and implementation of systems and equipment, and
(v) contingency planning to assess reasonably likely worst case scenarios. The
initial inventory and assessment of the Registrant's systems has been completed.
Action plans are being developed to address systems and equipment that are
currently non-compliant. Implementation of the required changes is expected to
be complete by October 1999.
Incremental costs, which include costs associated with internal
resources to modify existing systems in order to achieve year 2000 compliance
are charged to expense as incurred. The Registrant does not expect the cost of
making the required system changes to exceed $150,000. The anticipated cost of
the project and the dates on which the Registrant believes it will complete the
year 2000 modifications and assessments are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area and the ability to locate and correct all
relevant systems.
With respect to the Registrant's suppliers and vendors, the Registrant
is in the process of contacting suppliers and vendors to assess the potential
impact on operations if such third parties are not successful in ensuring that
their systems and operations are year 2000 compliant in a timely manner. The
Registrant's year 2000 issues and any potential business interruptions, costs,
damages or loses related thereto, are also dependent upon the year 2000
compliance of other third parties. To date, the Registrant is unable to
determine whether it will be materially affected by the failure of any of its
suppliers, vendors, or other third parties to be year 2000 compliant. The
Registrant believes that its compliance efforts have and will reduce the impact
on the Registrant of any such failures. Failure of any third parties with which
the Registrant interacts to achieve year 2000 compliance could have a material
adverse effect on the Registrant's business, financial condition and results of
operations.
Risk assessment, readiness evaluation, action plans and contingency
plans related to the Registrant's suppliers, vendors and other third parties are
expected to be completed by October 1999. The Registrant's risk management
program included emergency backup and recovery procedures to be followed in the
event of failure of a business critical system. These procedures will be
expanded to include specific procedures for the potential year 2000 issue.
Contingency plans to protect the Registrant from year 2000 related interruptions
are also being developed and are expected to be completed by October 1999. These
plans will include development of backup procedures, identification of alternate
suppliers, possible increases in inventory levels and other appropriate
measures.
27
<PAGE>
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.
INTEREST RATES
The Registrant's exposure to market risk for changes in interest rates
is limited to its outstanding borrowings at January 31, 1999. Based on the
Registrant's outstanding borrowings, a one percent change in the average
effective interest rate would have an effect on income before income taxes of
approximately $142,000.
28
<PAGE>
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended) representing
the Registrant's current expectations, beliefs, estimates or intentions
concerning the Registrant's future performance and operating results, its
products, services, markets and industry, and/or future events relating to or
effecting the Registrant and its business and operations. When used in this
report, the words "believes," "estimates," "plans," "expects," "intends,"
"anticipates," and similar expressions as they relate to the Registrant are
intended to identify forward-looking statements. The actual results or
achievements of the Registrant could differ materially from those indicated by
the forward-looking statements because of various risks, factors and
uncertainties related to and including, without limitation, the effectiveness of
the Registrant's business and marketing strategies, the product mix sold by the
Registrant, customer demand, availability of existing and new merchandise from
and the establishment and maintenance of relationships with suppliers, price
competition for products and services sold by the Registrant, management of
expenses, gross profit margins, the opening of additional stores, availability
and terms of financing to refinance or repay existing financings or to fund
capital and expansion needs, the continued and anticipated growth of the retail
home entertainment and consumer electronics industry, a change in interest
rates, exchange rate fluctuations, 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-22 and S-1 herein are filed as part
of this report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the Registrant's 1999 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 1999 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 1999 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 1999 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
30
<PAGE>
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.
31
<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 28th day of
April, 1999.
Sound Advice, Inc.
By: /s/ PETER BESHOURI
----------------------------
Peter Beshouri, Chairman of
the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
CHAIRMAN OF THE BOARD
/s/ PETER BESHOURI PRESIDENT AND CHIEF EXECUTIVE OFFICER APRIL 28, 1999
- ---------------------------- (PRINCIPAL EXECUTIVE OFFICER)
PETER BESHOURI
DIRECTOR,
/s/ MICHAEL BLUMBERG SENIOR VICE PRESIDENT APRIL 28, 1999
- ---------------------------- AND SECRETARY
MICHAEL BLUMBERG
/s/ G. KAY GRIFFITH DIRECTOR APRIL 28, 1999
- ----------------------------
G. KAY GRIFFITH
/s/ WILLIAM HAGERTY, IV DIRECTOR APRIL 28, 1999
- ---------------------------
WILLIAM HAGERTY, IV
/s/ HERBERT A. LEEDS DIRECTOR APRIL 28, 1999
- ----------------------------
HERBERT A. LEEDS
/s/ GREGORY STURGIS DIRECTOR APRIL 28, 1999
- ----------------------------
GREGORY STURGIS
CHIEF FINANCIAL OFFICER
/s/ KENNETH L. DANIELSON AND TREASURER APRIL 28, 1999
- ---------------------------- (PRINCIPAL FINANCIAL AND
DANIELSON, KENNETH L. ACCOUNTING OFFICER)
</TABLE>
32
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
Table of Contents
PAGE
-----------------
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-22
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Sound Advice, Inc.:
We have audited the accompanying consolidated balance sheets of Sound Advice,
Inc. and subsidiary (the "Company") as of January 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year ended January 31, 1999, the seven-month period ended
January 31, 1998 and the years ended June 30, 1997 and 1996. 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, 1999 and 1998, and the results of their
operations and their cash flows for the year ended January 31, 1999, the
seven-month period ended January 31, 1998 and the years ended June 30, 1997 and
1996, 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 LLP
Fort Lauderdale, Florida
April 23, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
Consolidated Balance Sheets
January 31, 1999 and 1998
JANUARY 31, JANUARY 31,
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 1,384,051 1,421,392
Receivables:
Vendors 5,376,641 3,964,078
Trade 868,378 883,832
Employees 339,451 215,411
----------- -----------
6,584,470 5,063,321
Less allowance for doubtful accounts 440,900 384,100
----------- -----------
6,143,570 4,679,221
Inventories, net 30,987,826 31,027,992
Prepaid and other current assets 472,122 362,078
Income taxes receivable -- 55,000
----------- -----------
Total current assets 38,987,569 37,545,683
Property and equipment, net 16,006,704 13,977,184
Other assets 115,040 134,012
Goodwill, net 107,729 132,179
----------- -----------
$ 55,217,042 51,789,058
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility $ 13,775,936 10,700,152
Accounts payable 12,310,092 13,163,813
Accrued liabilities 7,671,639 7,502,918
Current maturities of long-term debt 467,483 593,020
----------- -----------
Total current liabilities 34,225,150 31,959,903
Long-term debt, excluding current maturities -- 53,483
Capital lease obligation 797,180 805,113
Other liabilities and deferred credits 4,136,776 3,628,481
----------- -----------
Total liabilities 39,159,106 36,446,980
----------- -----------
Shareholders' equity:
Common stock; $.01 par value. Authorized 10,000,000 shares;
issued and outstanding 3,733,894 at January 31, 1999 and
3,728,894 shares at January 31, 1998 37,339 37,289
Additional paid-in capital 11,067,455 11,058,655
Retained earnings 4,953,142 4,246,134
----------- -----------
Total shareholders' equity 16,057,936 15,342,078
Commitments and contingencies
----------- -----------
$ 55,217,042 51,789,058
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Fiscal year ended January 31, 1999, the seven-month period ended
January 31, 1998 and the fiscal years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
TRANSITION
FISCAL YEAR PERIOD FISCAL YEAR
------------ ----------- ------------------------------
JANUARY 31, JANUARY 31, JUNE 30, JUNE 30,
1999 1998 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $154,590,933 96,792,912 155,623,213 168,984,777
Cost of goods sold 101,360,424 65,822,097 105,605,396 119,774,833
----------- ---------- ----------- -----------
Gross profit 53,230,509 30,970,815 50,017,817 49,209,944
Selling, general and administrative
expenses 49,892,795 29,903,064 49,044,756 52,393,352
----------- ---------- ----------- -----------
Income (loss) from operations 3,337,714 1,067,751 973,061 (3,183,408)
Other income (expense):
Interest expense (1,417,017) (897,086) (1,556,314) (1,526,199)
Other income (expense) 96,311 48,572 101,255 (3,569)
----------- ---------- ----------- -----------
Income (loss) before income taxes
(benefit) 2,017,008 219,237 (481,998) (4,713,176)
Income taxes (benefit) 1,310,000 1,175,000 389,000 (486,000)
----------- ---------- ----------- -----------
Net income (loss) $ 707,008 (955,763) (870,998) (4,227,176)
=========== ========== =========== ===========
Common and common equivalent per share amounts:
Basic net income (loss) per share $ 0.19 (0.26) (0.23) (1.13)
=========== ========== =========== ===========
Diluted net income (loss) per share $ 0.18 (0.26) (0.23) (1.13)
=========== ========== =========== ===========
Weighted average number of shares
outstanding - basic 3,729,519 3,728,894 3,728,894 3,728,894
=========== ========== =========== ===========
Weighted average number of shares
outstanding - diluted 3,965,333 3,728,894 3,728,894 3,728,894
=========== ========== =========== ===========
</TABLE>
See accompanying notes to consoldiated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Fiscal year ended January 31, 1999, the seven-month period ended
January 31, 1998, and the fiscal years ended June 30, 1997 and 1996
COMMON STOCK
NUMBER OF ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
------------ -------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
Net income -- -- -- 707,008 707,008
Issuance of common stock 5,000 50 8,800 -- 8,850
--------- ------ ---------- ---------- ----------
Balance, January 31, 1999 3,733,894 $ 37,339 11,067,455 4,953,142 16,057,936
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Fiscal year ended January 31, 1999, the seven-month period January 31, 1998
and the fiscal years ended June 30, 1997 and 1996
TRANSITION
FISCAL YEAR PERIOD FISCAL YEAR
------------ ------------ -----------------------------
JANUARY 31, JANUARY 31, JUNE 30, JUNE 30,
1999 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 707,008 (955,763) (870,998) (4,227,176)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 3,402,591 1,875,315 3,090,078 3,273,013
(Gain) loss on disposition of assets (26,782) -- 876 11,386
Deferred income taxes -- 189,028 620,000 731,437
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables (1,464,349) (1,126,066) (24,347) 1,524,828
Inventories 40,166 (3,238,742) (202,149) 4,171,643
Prepaid and other current assets (110,044) 308,740 (32,705) 604,456
Income taxes receivable 55,000 273,000 842,571 (618,888)
Other assets 18,972 (31,753) 9,038 72,961
Increase (decrease) in:
Accounts payable (853,721) 5,536,022 (3,977,749) 514,285
Accrued liabilities 168,721 2,452,473 (101,908) (278,168)
Other liabilities and deferred credits 508,295 (515,547) (161,967) (163,974)
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 2,445,857 4,766,707 (809,260) 5,615,803
------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (5,435,393) (2,148,341) (2,723,687) (1,164,308)
Proceeds from disposition of assets 54,514 -- -- --
------------ ------------ ------------ ------------
Net cash used in investing activities (5,380,879) (2,148,341) (2,723,687) (1,164,308)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Borrowings on revolving credit facility 171,564,703 102,128,424 171,896,950 138,785,743
Repayments on revolving credit facility (168,488,919) (103,302,806) (169,122,532) (138,363,041)
Net repayments of long-term debt (179,020) (99,499) (160,968) (2,674,513)
Decrease in cash overdraft -- -- -- (1,234,066)
Reduction in capital lease obligation (7,933) (4,373) (6,454) (5,337)
Proceeds from exercise of stock options 8,850 -- -- --
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 2,897,681 (1,278,254) 2,606,996 (3,491,214)
------------ ------------ ------------ ------------
Net (decrease) increase in cash $ (37,341) 1,340,112 (925,951) 960,281
Cash, beginning of year 1,421,392 81,280 1,007,231 46,950
------------ ------------ ------------ ------------
Cash, end of year $ 1,384,051 1,421,392 81,280 1,007,231
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 1,243,640 849,347 1,380,742 1,371,736
============ ============ ============ ============
Income taxes paid, net of refunds $ 1,035,000 69,773 (1,273,571) (598,549)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SOUND ADVICE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1999 and 1998
(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 26 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 and bridges the
gap between the Company's previous and new fiscal year ends.
(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 custom
accounts 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-7
<PAGE>
The Company allocates to inventory certain costs associated with
purchasing, pricing and preparation of inventories for sale. For
the year ended January 31, 1999 and the transition period ended
January 31, 1998, allocated costs approximated $356,000 and
$938,000 with $165,000 and $435,000 remaining in inventory as of
January 31, 1999 and 1998, respectively. 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 $259,000 and $235,000 as of January 31, 1999 and
1998, 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. For the period January 1, 1997 to December 31, 1997, the
Company was not self-insured.
(Continued)
F-8
<PAGE>
(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 4 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
8 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, 1999 and 1998,
the liability for estimated redemptions approximated $843,000 and
$1,270,000, respectively. Amounts charged against the liability
for redemptions approximated $427,000 and $578,000 for the year
ended January 31, 1999 and the transition period ended January 31,
1998 and $926,000 and $833,000 for fiscal years ended June 30,
1997 and 1996, 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 year ended January 31, 1999, the transition period
ended January 31, 1998 and for the fiscal years ended June 30,
1997 and 1996, approximated $3,640,000, $3,149,000, $4,086,000 and
$6,476,000, respectively.
(Continued)
F-9
<PAGE>
(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 48 percent and 40 percent of the Company's
receivables as of January 31, 1999 and 1998, respectively. The
Company estimates an allowance for doubtful accounts based on the
credit risk and payment trends of the vendor and 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 not be widely
available in all markets. Five vendors accounted for 53 percent of
the Company's purchases during the year ended January 31, 1999.
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.
(Continued)
F-10
<PAGE>
(N) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. This
Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(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 (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income
(loss) available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted
earnings (loss) 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 and 112,500 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 and 1996, respectively,
but were not included in the computation of diluted earnings per
share because the inclusion of the options would be antidilutive.
(Continued)
F-11
<PAGE>
Options to purchase 437,500, 450,500 and 107,500 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 June 30, 1997 and 1996, 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.
Warrants to purchase 306,335 shares of common stock at $8.70 per
share were not included in the computation of diluted earnings per
share for all periods presented because the options exercise
prices were greater than the average market price of common
shares.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
Effective February 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes
standards for reporting and presentation of comprehensive income
and its components in a full set of financial statements. The
statement requires only additional disclosures in the consolidated
financial statements; the Company's comprehensive income equals
net income.
Effective February 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for the way
public business enterprises report information about operating
segments in their financial statements; it does not affect, the
Company's consolidated financial position, results of operations
or cash flows. The Company operates as one segment.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting of the Costs of Start-up Activities." SOP 98-5 is
effective for financial statements issued for years beginning
after December 15, 1998; therefore, the Company will be required
to implement its provisions in the first quarter of Fiscal 2000.
SOP 98-5 requires that pre-opening costs be expensed as incurred.
Adoption of this statement will not have a material impact on the
Company's financial position, results of operations or cash flows.
(R) RECLASSIFICATIONS
Certain amounts in 1998, 1997 and 1996 consolidated financial
statements have been reclassified to conform to the 1999
presentation.
(Continued)
F-12
<PAGE>
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
JANUARY 31, JANUARY 31,
1999 1998
------------------ ----------------
Land $ 521,465 521,465
Building 1,119,605 1,119,605
Furniture and equipment 9,664,424 8,708,705
Leasehold improvements 19,100,481 16,345,129
Display fixtures 7,183,697 5,999,650
Vehicles 1,097,490 959,768
------------------ ----------------
38,687,162 33,654,322
Less accumulated depreciation 22,680,458 19,677,138
------------------ ----------------
Property and equipment, net $ 16,006,704 13,977,184
================== ================
Depreciation expense, including amortization of capital leases, for the
year ended January 31, 1999, the transition period ended January 31, 1998
and for the fiscal years ended June 30, 1997 and 1996, approximated
$3,378,141, $1,838,000, $3,004,000 and $3,064,000, respectively.
(3) DEBT
(A) REVOLVING CREDIT FACILITY
In December 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 is obligated for an additional commitment fee of $50,000
per annum.
The amended loan and security agreement contains various
affirmative and negative covenants requiring the Company to
maintain minimum ratios of current assets to current liabilities,
working capital requirements and limits cumulative net losses from
and after October 1, 1997. 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.
(Continued)
F-13
<PAGE>
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's borrowings balance under the line of credit
facility was $13,775,936 and $10,700,152 at January 31, 1999 and
1998, respectively. The availability under line of credit was
approximately $4,946,000 at January 31, 1999.
The effective interest rate on the outstanding loan balance under
the financing arrangement in effect as of January 31, 1999 and
1998 was 8.6 percent and 12.3 percent, respectively and as of June
30, 1997 and 1996 was 11.5 percent and 12.6 percent, respectively.
(B) LONG-TERM DEBT
Long-term debt consists of the following:
JANUARY 31, JANUARY 31, JUNE 30,
1999 1998 1997
----------- ---------- ----------
Promissory note $ 52,203 209,873 296,919
Mortgage note 415,280 436,630 449,083
----------- ---------- ----------
Total 467,483 646,503 746,002
Less current maturities 467,483 593,020 171,478
----------- ---------- ----------
Long-term debt, excluding
current maturities $ - 53,483 574,524
=========== ========== ==========
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 mortgage note is payable in monthly installments of $1,779,
plus interest at the lender's prime rate plus 1 percent, with a
balloon payment of approximately $381,000 due September 15, 2000.
The loan is secured by land, building and improvements with a net
book value of approximately $810,000 as of January 31, 1999.
(C) LETTERS OF CREDIT
The Company has standby letters of credit, in the aggregate of
approximately $911,000, maturing at various dates through April
2000, primarily supporting self-insurance reserves. The letters of
credit were not drawn upon as of January 31, 1999.
(Continued)
F-14
<PAGE>
(4) INCOME TAXES
The components of the provision for income taxes (benefit) are as
follows:
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEARS ENDED JUNE 30,
JANUARY 31, JANUARY 31, ----------------------------------
1999 1998 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Current:
Federal $ 1,202,276 985,972 (231,000) (1,217,437)
State 107,724 - - -
---------------- ---------------- ---------------- ----------------
1,310,000 985,972 (231,000) (1,217,437)
Deferred - 189,028 620,000 731,437
---------------- ---------------- ---------------- ----------------
Total $ 1,310,000 1,175,000 389,000 (486,000)
================ ================ ================ ================
</TABLE>
The provision for deferred income taxes (benefit) consists of the
following:
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEARS ENDED JUNE 30,
JANUARY 31, JANUARY 31, ----------------------------------
1999 1998 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ (35,337) (8,630) 90,304 (33,546)
Inventory adjustments (136,251) (427,154) 155,618 (101,424)
Preopening expenses - - - (54,814)
Prepaid expenses 67,946 (79,994) 60,601 44,373
Accelerated depreciation (432,013) (547,581) (204,601) (222,001)
Accrued rent expense (93,392) 74,873 (8,433) 54,733
Provision for warranty
redemption 114,608 236,906 40,836 (20,902)
Lease incentive (267,369) - - -
Deferred tax valuation
allowance 817,766 804,358 349,000 1,080,426
Other (35,958) 136,250 136,675 (15,408)
---------------- ---------------- ---------------- ----------------
Total $ - 189,028 620,000 731,437
================ ================ ================ ================
</TABLE>
The reconciliation of the federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEARS ENDED JUNE 30,
JANUARY 31, JANUARY 31, ----------------------------------
1999 1998 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Statutory income tax rate 34.0% 34.0% (34.0) (34.0)
Effect of state taxes 3.6 - - -
Reserve for tax examination - 276.0 41.5 -
Provision for valuation
allowance 25.1 201.0 72.6 22.9
Other 2.2 25.0 .7 .8
---------------- ---------------- ---------------- ----------------
Effective income tax
rate 64.9% 536.0% 80.8 (10.3)
================ ================ ================ ================
</TABLE>
(Continued)
F-15
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as
follows:
JANUARY 31, JANUARY 31,
1999 1998
------------------- -------------------
Allowance for doubtful accounts $ 165,917 130,580
Inventory adjustments 484,846 348,595
Prepaid advertising (108,646) (45,850)
Prepaid insurance (31,749) (10,445)
Accelerated depreciation 1,211,834 779,821
Deferred gain on sale 44,287 42,545
Accrued rent expense 843,887 750,495
Accrued insurance 70,951 54,797
Legal settlement expense 39,345 10,389
Provision for warranty redemption 317,321 431,929
Lease incentive 267,369 -
Other (46,532) (51,792)
Deferred tax valuation allowances (3,258,830) (2,441,064)
------------------- -------------------
Total $ - -
=================== ===================
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, 1999 and 1998 was $3,258,830
and $2,441,064, respectively. The net change in the total valuation
allowance for the year ended January 31, 1999, the transition period
ended January 31, 1998 and for the fiscal years ended June 30, 1997 and
1996 was an increase of $817,766, $804,358, $349,000 and $1,080,426,
respectively.
(5) 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, 1999,
3,728,894 Rights were outstanding.
(Continued)
F-16
<PAGE>
(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 year ended January 31, 1999,
the transition period ended January 31, 1998 and for each of the
fiscal years ended June 30, 1997 and 1996, 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 April 29, 1997, the Company issued 422,500 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. On May 18, 1998, the Company
issued an additional 10,000 stock options subject to the same
exercise price and vesting terms as the options issued on April
29, 1997. These options expire May 2003.
(Continued)
F-17
<PAGE>
Changes in stock options outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES PRICE EXERCISE PRICE
---------------- ----------------- -----------------
<S> <C> <C> <C>
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
Granted 10,000 2.86 2.86
Exercised (5,000) 1.77 1.77
Canceled - - -
----------------
Outstanding, January 31, 1999 656,000 $ 1.69-2.86 1.85
----------------
Exercisable 208,500
================
Available for future grants 28,000
================
</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 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>
January 31, January 31, June 30, June 30,
1999 1998 1997 1996
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net income As reported $ 707,000 (956,000) (871,000) (4,227,000)
(loss):
Pro forma $ 558,000 (1,131,000) (891,000) (4,227,000)
Diluted income
(loss) As reported $ .18 (.26) (.23) (1.13)
per share:
Pro forma $ .14 (.30) (.24) (1.13)
============== =============== ============== ==============
</TABLE>
(Continued)
F-18
<PAGE>
Pro forma net income reflects only options granted in 1999, 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:
<TABLE>
<CAPTION>
1999 1998 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Expected dividend yield - - - -
Expected stock price
violatility 1.34 - 1.01 1.01
Risk-free interest rate 5.3 - 5.9-6.1% 5.1-5.8%
Expected life of options 3 years - 3 years 3 years
</TABLE>
As of January 31, 1999, June 30, 1997 and 1996, the weighted
average fair value of options granted during the fiscal year was
$2.45, $1.15 and $1.03, respectively. There were no options
granted during the transition period.
As of January 31, 1999, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $1.69 to $2.86 and 3.1 years, respectively.
As of January 31, 1999 and 1998 and June 30, 1997 and 1996, the
number of options exercisable was 208,500, 213,500, 221,500 and
220,000, respectively, and the weighted-average exercise price of
those options was $1.72, $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, 1999.
(6) 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
during the year ended January 31, 1999, the transition period
ended January 31, 1998 or fiscal years ended June 30, 1997 and
1996.
(Continued)
F-19
<PAGE>
(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 year ended
January 31, 1999, the transition period ended January 31, 1998 and
for the fiscal years ended June 30, 1997 and 1996 approximated
$57,000, $0, $215,000 and $232,000, respectively.
(7) PROVISIONS FOR DISPOSAL OF INVENTORY
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.
(8) 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.
Property under capital lease includes the following amounts in the
accompanying consolidated financial statements:
JANUARY 31, JANUARY 31,
1999 1998
------------------ -------------------
Building $ 685,000 685,000
Furniture and equipment 142,900 142,900
------------------ -------------------
827,900 827,900
Less accumulated depreciation 230,500 175,180
------------------ -------------------
$ 597,400 652,720
================== ===================
(Continued)
F-20
<PAGE>
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, 1999 and the capital
lease payments are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED LEASE LEASES
- ------------------------------------------------------ ------------------- -------------------
<S> <C> <C>
2000 $ 162,396 $ 6,707,197
2001 162,396 6,120,115
2002 162,396 5,958,518
2003 162,396 5,525,079
2004 162,396 5,088,566
Thereafter 1,752,564 20,020,459
------------------- -------------------
Total minimum lease payments 2,564,544 $ 49,419,934
===================
Less amounts representing interest (at an effective
interest rate of approximately 19%)
1,759,431
-------------------
Present value of minimum capital lease
payments 805,113
Less current installments of obligations under
capital lease 7,933
-------------------
Obligations under capital lease, excluding
current installments $ 797,180
===================
</TABLE>
Total rental expense under the noncancelable operating leases for the
year ended January 31, 1999, the transition period ended January 31, 1998
and for the fiscal years ended June 30, 1997 and 1996 was approximately
$7,264,000, $3,981,000, $6,542,000 and $6,058,000, respectively.
(9) OTHER 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,
1999 and 1998, the recorded liability for accrued rent was approximately
$2,243,000 and $2,207,000, respectively.
(Continued)
F-21
<PAGE>
Included in accrued liabilities as of January 31, 1999 and 1998 are
approximately $3,361,000, and $3,080,000, respectively, of customer
deposits on future sales orders.
(10) COMMITMENT AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS
Two of the Company's officers have employment agreements, which
provided for aggregate base salaries of $611,050 and $360,000,
respectively, for the year ended January 31, 1999 and the
transition period ended January 31, 1998 and $611,050 for each of
the fiscal years ended June 30, 1997 and 1996. These agreements
have been extended through June 30, 1999 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.
(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 year
ended January 31, 1999, approximately $47,000 was earned under the
plan. No bonus amounts were earned under the plan for the previous
fiscal years.
(D) OTHER
The Company is a party to various legal actions arising in the
normal course of business. It is the opinion of management that
the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position or results of
operations.
F-22
<PAGE>
<TABLE>
<CAPTION>
SOUND ADVICE, INC. AND SUBSIDIARY
Schedule II
Valuation and Qualifying Accounts
BALANCE AT
BEGINNING OF CHARGED TO COSTS OTHER CHANGES BALANCE AT END
DESCRIPTION YEAR AND EXPENSES ADD (DEDUCT) OF YEAR
- ------------------------------------- ------------ ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
January 31, 1999 $ 384,100 482,110 (426,210)(A) 440,900
========= ======= ======== =========
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
========= ======= ======== =========
Allowance for redemption of extended
service warranty contracts:
January 31, 1999 1,270,378 -- (427,110)(B) 843,268
========= ======= ======== =========
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
========= ======= ======== =========
Allowance for inventory obsolescence:
January 31, 1999 700,000 -- -- 700,000
========= ======= ======== =========
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
========= ======= ======== =========
<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 FISCAL YEAR ENDED COMMISSION FILE NUMBER
JANUARY 31, 1999 0-15194
----------------------------------
SOUND ADVICE, INC.
-----------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO.
- -------
3.1 Articles of Incorporation, as amended, of the Registrant (incorporated
by reference from Registration Statement No. 33-5942, Exhibit 3.1,
filed May 23, 1986)
3.2 By-laws of the Registrant (incorporated by reference from Registration
Statement No. 33-5942, Exhibit 3.2, filed May 23, 1986)
4.1 Form of 1997 Common Stock Purchase Rights Agreement, dated as of May 5,
1997, between the Registrant and American Stock Transfer & Trust
Company (incorporated by reference from the Registrant's Registration
Statement on Form 8-A, Exhibit 4.1, filed on May 13, 1997)
9. Right of First Refusal and Voting Trust Agreement, dated June 30, 1986,
among Peter Beshouri, Gregory Sturgis, Michael Blumberg and Joseph
Piccirilli (incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1986, Exhibit 9,
File No. 33-5942)
10.1 Loan and Security Agreement (without schedules), dated as of April 11,
1996, between the Registrant and Foothill Capital Corporation
(incorporated by reference from the Registrant?s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996, Exhibit 10.2, File No.
0-15194)
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)
34
<PAGE>
EXHIBIT
NO.
- -------
Amendment Number Two to Loan and Security Agreement dated as of January
31, 1999 between Registrant and Foothill Capital Corporation. Filed
herewith.
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
xxxv
<PAGE>
EXHIBIT
NO.
- -------
Sound Advice, Inc. Employee Stock Ownership Plan and Trust, dated as of
July 9, 1993 (incorporated by 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.
xxxvi
<PAGE>
EXHIBIT
NO.
- -------
0-15194), Fourth Amendments to Employment Agreements, both dated as of
July 1, 1993, between the Registrant and each of Peter Beshouri and
Michael Blumberg (incorporated by reference from the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993,
Exhibit 10.16, File No. 0-15194), Fifth Amendments to Employment
Agreements, both effective as of July 1, 1994, between the Registrant
and each of Peter Beshouri and Michael Blumberg (incorporated by
reference from the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1994, Exhibit 10.2, File No. 0-15194), Sixth
Amendments to Employment Agreements, both effective as of July 1, 1995,
between the Registrant and each of Peter Beshouri and Michael Blumberg
(incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995, Exhibit 10.1, File
No. 0-15194), Seventh Amendments to Employment Agreements, both
effective as of July 1, 1996, between the Registrant and each of Peter
Beshouri and Michael Blumberg (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1996, Exhibit 10.8, File No. 0-15194), 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), Ninth Amendment(s) to Employment Agreements, both dated as of
March 18, 1998 between the
xxxvii
<PAGE>
EXHIBIT
NO.
- -------
Registrant and each of Peter Beshouri and Michael Blumberg. Filed
herewith.
10.6* Form of Agreement entered into as of May 1, 1997, between the
Registrant and each of two executive officers of the Registrant
(Kenneth L. Danielson and Christopher P. O'Neil) and twelve other
employees of the Registrant relating to the making of a severance
payment (two years gross wages for the executive officers and six
months gross wages for the other employees) under certain circumstances
upon a change of control (as defined) (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
xxxviii
<PAGE>
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 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, Exhibit 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.
xxxix
<PAGE>
EXHIBIT
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)
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 LLP (filed herewith)
xl
<PAGE>
EXHIBIT
NO.
- -------
27 Financial Data Schedule (filed herewith)
- ----------
* 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.
xli
EXHIBIT 10.1
AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT
This Amendment Number Two to Loan and Security Agreement ("Amendment")
is entered into as of January 31, 1999, 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 (as amended, the
"Agreement").
FACT TWO: Borrower and Foothill desire to further 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 3.5 of the Agreement is amended 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) 1.25% of the Maximum Amount,
if terminated before August 1, 1999; (b) 1.00% of the Maximum Amount,
if terminated on or after July 31, 1999 but before August 1, 2000; (c)
0.40% of the Maximum Amount, if terminated on or after July 31, 2000
but before July 31, 2001; and (d) $0 if terminated on or after the
Renewal Date."
(B) Section 6.13(a) of the Agreement is amended to read as
follows:
"6.13 FINANCIAL COVENANTS.
(a) Borrower shall maintain:
(i) Current Ratio. A ratio of
Consolidated Current Assets divided by Consolidated Current Liabilities
of at least 1.0 - 1.0, measured on the last day of each fiscal quarter;
and
(ii) Working Capital. Working
Capital of not less
1
<PAGE>
than $2,000,000, measured on the last day of each fiscal quarter."
(C) Section 7.10 of the Agreement is amended to read as
follows:
"7.10 CAPITAL EXPENDITURES. Make any capital
expenditure, or any commitment therefor, in excess of $1,750,000 for
any individual transaction or where the aggregate amount of such
capital expenditures, made or committed for in any fiscal year, is in
excess of $5,000,000, or in excess of $5,500,000 for the FYE 1/31/99."
(D) Attached hereto is an amendment to Schedule E-1 to the
Agreement listing additional Inventory and Equipment locations.
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 the receipt by each of the parties of a counterpart
of this Amendment, executed by the other party.
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
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.
2
<PAGE>
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ RENEE D. LEFEBURE
---------------------------------
Title: Assistant Vice President
SOUND ADVICE, INC.,
a Florida corporation
By: /s/ KENNETH L. DANIELSON
---------------------------------
Title: CFO and Treasurer
3
<PAGE>
AMENDMENT TO SCHEDULE E-1
LOCATIONS OF INVENTORY AND EQUIPMENT
The following additional retail showrooms are added to Schedule E-1:
1. 12989 US Highway One, North Palm Beach, FL 33408
2. 2415 North Monroe St., Tallahassee, FL 32303
3. 339 Plaza Real, Boca Raton, FL 33432
SCHEDULE E-1
4
NINTH AMENDMENT TO EMPLOYMENT AGREEMENT
NINTH AMENDMENT, dated as of the 18th day of March, 1998, to the
Employment Agreement, dated as of June 30, 1986, by and between SOUND ADVICE,
INC., a Florida corporation (the "Employer"), and PETER BESHOURI, (the
"Employee"), as previously amended by that First Amendment to Employment
Agreement, dated as of May 15, 1989, that Second Amendment to Employment
Agreement, dated as of October 27, 1989, that Third Amendment to Employment
Agreement, dated as of July 1, 1992, that Fourth Amendment to Employment
Agreement, dated as of July 1, 1993, that Fifth Amendment to Employment
Agreement, dated as of July 1, 1994, that Sixth Amendment to Employment
Agreement, dated as of July 1, 1995, that Seventh Amendment to Employment
Agreement, dated as of July 1, 1996, and that Eighth Amendment to Employment
Agreement, dated as of March 24, 1997 (collectively, the "Agreement").
W I T N E S S E T H :
WHEREAS, the Employee and the Employer mutually desire and each of them
is willing, in accordance with the terms and conditions specifically set forth
below, to amend the Agreement, it being understood by the Employee and the
Employer that all terms and conditions of the Agreement not otherwise modified
by this Ninth Amendment thereto shall remain effective and continue operating in
full force throughout the entire term of the Agreement, as amended.
NOW, THEREFORE, for and in consideration of the covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
<PAGE>
1. TERM. Section 2 of the Agreement is hereby amended to provide that
the term of the Agreement is hereby extended for another year or until June 30,
1999.
2. EFFECT. Except as otherwise modified by this Ninth Amendment, all
terms, conditions and provisions of the Agreement shall remain effective and
continue operating in full force throughout the entire term of the Agreement as
amended.
3. CAPTIONS. Paragraph titles or captions contained in this Ninth
Amendment are inserted only as a matter of convenience and for reference and in
no way define, limit, extend or describe the scope of this Ninth Amendment or
the intent of any provision hereof.
IN WITNESS WHEREOF, the Employee has hereunto set his hand and the
Employer has caused this Amendment to be executed by its duly authorized officer
effective as of the day and year first above written.
SOUND ADVICE, INC.
By: /s/ MICHAEL BLUMBERG
---------------------------------------
MICHAEL BLUMBERG, Senior Vice President
EMPLOYEE:
/s/ PETER BESHOURI
---------------------------------------
PETER BESHOURI
2
<PAGE>
NINTH AMENDMENT TO EMPLOYMENT AGREEMENT
NINTH AMENDMENT, dated as of the 18th day of March, 1998, to the
Employment Agreement, dated as of June 30, 1986, by and between SOUND ADVICE,
INC., a Florida corporation (the "Employer"), and MICHAEL BLUMBERG, (the
"Employee"), as previously amended by that First Amendment to Employment
Agreement, dated as of May 15, 1989, that Second Amendment to Employment
Agreement, dated as of October 27, 1989, that Third Amendment to Employment
Agreement, dated as of July 1, 1992, that Fourth Amendment to Employment
Agreement, dated as of July 1, 1993, that Fifth Amendment to Employment
Agreement, dated as of July 1, 1994, that Sixth Amendment to Employment
Agreement, dated as of July 1, 1995, that Seventh Amendment to Employment
Agreement, dated as of July 1, 1996, and that Eighth Amendment to Employment
Agreement, dated as of March 24, 1997 (collectively, the "Agreement").
W I T N E S S E T H :
WHEREAS, the Employee and the Employer mutually desire and each of them
is willing, in accordance with the terms and conditions specifically set forth
below, to amend the Agreement, it being understood by the Employee and the
Employer that all terms and conditions of the Agreement not otherwise modified
by this Ninth Amendment thereto shall remain effective and continue operating in
full force throughout the entire term of the Agreement, as amended.
NOW, THEREFORE, for and in consideration of the covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
<PAGE>
1. TERM. Section 2 of the Agreement is hereby amended to provide that
the term of the Agreement is hereby extended for another year or until June 30,
1999.
2. EFFECT. Except as otherwise modified by this Ninth Amendment, all
terms, conditions and provisions of the Agreement shall remain effective and
continue operating in full force throughout the entire term of the Agreement as
amended.
3. CAPTIONS. Paragraph titles or captions contained in this Ninth
Amendment are inserted only as a matter of convenience and for reference and in
no way define, limit, extend or describe the scope of this Ninth Amendment or
the intent of any provision hereof.
IN WITNESS WHEREOF, the Employee has hereunto set his hand and the
Employer has caused this Amendment to be executed by its duly authorized officer
effective as of the day and year first above written.
SOUND ADVICE, INC.
/s/ PETER BESHOURI
---------------------------------------
PETER BESHOURI, President
and Chief Executive Officer
EMPLOYEE:
By: /s/ MICHAEL BLUMBERG
---------------------------------------
MICHAEL BLUMBERG
2
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY'S NAME STATE OF INCORPORATION
- ----------------- ----------------------
SAI Distributors, Inc. Florida
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
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 23, 1999, relating to the
consolidated balance sheets of Sound Advice, Inc. and subsidiary (the "Company")
as of January 31, 1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' equity, and cah flows for the year ended
January 31, 1999, the seven-month period ended January 31, 1998 report on Form
10-K of Sound Advice, Inc. and subsidiary.
/s/ KPMG LLP
Fort Lauderdale, Florida
April 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL YEAR ENDED JANUARY 31, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 1,384,051
<SECURITIES> 0
<RECEIVABLES> 6,584,470
<ALLOWANCES> 440,900
<INVENTORY> 30,987,826
<CURRENT-ASSETS> 38,987,569
<PP&E> 38,687,162
<DEPRECIATION> 22,680,458
<TOTAL-ASSETS> 55,217,042
<CURRENT-LIABILITIES> 34,225,150
<BONDS> 797,180
0
0
<COMMON> 37,339
<OTHER-SE> 16,020,597
<TOTAL-LIABILITY-AND-EQUITY> 55,217,042
<SALES> 154,590,933
<TOTAL-REVENUES> 154,590,933
<CGS> 101,360,424
<TOTAL-COSTS> 101,360,424
<OTHER-EXPENSES> 49,892,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,417,017
<INCOME-PRETAX> 2,017,008
<INCOME-TAX> 1,310,000
<INCOME-CONTINUING> 707,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 707,008
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
</TABLE>
