<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 2000
REGISTRATION NO. 333-36552
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
SOUND ADVICE, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
FLORIDA 5731
(State or Other Jurisdiction (Primary Standard Industrial
of Incorporation) Classification Code Number)
<S> <C>
FLORIDA 59-1520531
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
</TABLE>
1901 TIGERTAIL BOULEVARD
DANIA BEACH, FLORIDA 33004
(954) 922-4434
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------------
PETER BESHOURI, PRESIDENT
SOUND ADVICE, INC.
1901 TIGERTAIL BOULEVARD
DANIA BEACH, FLORIDA 33004
(954) 922-4434
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------------
Copies of Communications to:
<TABLE>
<S> <C>
GARY M. EPSTEIN, ESQ. JOHN S. FLETCHER, ESQ.
SHEIDA R. SAHANDY, ESQ. RACHEL A. GONZALEZ, ESQ.
GREENBERG TRAURIG, P.A. MORGAN, LEWIS & BOCKIUS LLP
1221 BRICKELL AVENUE 5300 FIRST UNION FINANCIAL CENTER
MIAMI, FLORIDA 33131 200 SOUTH BISCAYNE BOULEVARD
(305) 579-0500 MIAMI, FLORIDA 33131
(305) 579-0300
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
---------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
SOUND ADVICE AND THE UNDERWRITERS MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
SEPTEMBER 14, 2000
2,150,000 SHARES
(WE GIVE SOUND ADVICE LOGO)
COMMON STOCK
This is a public offering of 2,150,000 shares of common stock of Sound
Advice, Inc. Sound Advice is a full service specialty retailer of upscale
entertainment and consumer electronic products. Sound Advice is selling
1,800,000 shares in this offering, and the selling shareholders identified in
this prospectus are selling 350,000 shares in this offering. Some of the selling
shareholders have also granted the underwriters the right to purchase up to
322,500 additional shares to cover any over-allotments.
Sound Advice's common stock is quoted on the Nasdaq National Market under
the symbol "SUND." On September 12, 2000, the last reported sale price of the
common stock was $9.31 per share.
INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Offering price.............................................. $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Sound Advice.................. $ $
Proceeds, before expenses, to the selling shareholders...... $ $
</TABLE>
The representatives of the underwriters will also receive warrants to
purchase 200,000 shares of our common stock at an exercise price per share equal
to 120% of the offering price per share set forth above.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
FAHNESTOCK & CO. INC. RYAN, BECK & CO.
, 2000
<PAGE> 3
[INSIDE COVER]
[PICTURE OF SOUND ADVICE STORE]
[PICTURE OF BANG & OLUFSEN STORE]
[PICTURES OF PRODUCTS]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Cautionary Note Regarding Forward-Looking Statements........ 11
Price Range of Common Stock................................. 12
Use of Proceeds............................................. 12
Dividend Policy............................................. 12
Capitalization.............................................. 13
Selected Consolidated Financial and Operating Data.......... 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 23
Management.................................................. 35
Principal and Selling Shareholders.......................... 42
Certain Transactions........................................ 43
Description of Capital Stock................................ 43
Underwriting................................................ 45
Legal Matters............................................... 46
Experts..................................................... 46
Available Information....................................... 47
Index to Financial Statements............................... F-1
</TABLE>
i
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this prospectus before making an investment decision. Unless we
indicate otherwise, all information in this prospectus assumes no exercise of
the over-allotment option granted to the underwriters. References to fiscal 1996
and fiscal 1997 refer to the twelve month periods ended June 30, 1996 and June
30, 1997, respectively. In February 1998, we changed our fiscal year end from
June 30 to January 31. References to the transition period refer to the seven
month period beginning July 1, 1997 and ended January 31, 1998, which precedes
the start of the new fiscal year and bridges the gap between our previous and
new fiscal year ends. References to fiscal 1999, fiscal 2000 and fiscal 2001
refer to the twelve month periods ended January 31, 1999, 2000 and 2001,
respectively.
This prospectus contains forward-looking statements regarding our
performance, strategy, plans, objectives, expectations, beliefs and intentions.
The actual outcome of the events described in these forward-looking statements
could differ materially. This prospectus, and especially the sections entitled
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contain discussions of some of the
factors and risks that could contribute to those differences.
SOUND ADVICE
OVERVIEW
Sound Advice is a specialty retailer of high-end audio and video
entertainment products and systems and mobile electronics. We provide our
customers knowledgeable advice concerning product selection and system
integration in conjunction with products incorporating the latest technology. We
operate 28 stores in the State of Florida, the fourth largest state with the
fastest growing population in the United States. We distinguish ourselves from
most large retailers of consumer electronics by:
- focusing on high-end audio, video, television and mobile electronics
product categories produced by manufacturers whose premium products are
not readily available in the general consumer marketplace;
- offering the most innovative and technologically advanced products
currently available;
- featuring audition rooms, home theaters and demonstration areas in our
stores to allow our customers to experience our products and systems;
- enabling our customers to integrate these products into multi-room,
multi-functional residential entertainment systems;
- supporting our customers through every stage of product and system
selection, purchase, installation, service and, in some cases, upgrades;
- ensuring that our sales associates are well trained, highly knowledgeable
and able to add value to our customers' experience; and
- facilitating the design, installation and repair process through our
at-home service support team.
We currently operate 24 full-size stores, most of which are between 15,000
and 17,000 square feet. We offer over 2,100 products from approximately 150
high-end manufacturers. These products include home and car audio systems, large
screen projection and conventional televisions, video products, mobile
electronics, car security systems, home entertainment furniture and related
customized services and accessories. Our full-size stores contain audition and
demonstration areas in which customers are encouraged to experience and compare
our products. We also operate four Bang & Olufsen stores, which are smaller,
specialty boutiques featuring Bang & Olufsen products. Our Bang & Olufsen stores
are typically 1,500 square feet. We plan to open our first Electronic Interiors
concept store in October 2000 in Palm Beach. Our concept stores will be entirely
demonstration oriented, built to simulate a residential environment showcasing
some of our integrated entertainment systems.
1
<PAGE> 6
In fiscal 2000, our sales increased to $177,349,000, a 16.6% increase from
the prior year. Comparable store sales in fiscal 2000 increased 13.1%. Average
net sales were $7,161,000 per full-size store and $2,053,000 per Bang & Olufsen
store. Our gross margin improved slightly to 35.1% from the prior fiscal year,
while our income from operations increased to $6,782,000, a 103.2% increase from
the prior year. Inventory turned 3.7 times in fiscal 2000.
During the first six months of fiscal 2001, our sales were $84,491,000, a
6.7% increase over the first six months of fiscal 2000. Comparable store sales
increased 6.0%. Our gross margin increased to 35.5% of sales compared to 34.8%
in the first six months of fiscal 2000, while our income from operations
increased to $3,102,000, a 41.8% increase over the first six months of fiscal
2000.
THE CONSUMER ELECTRONICS INDUSTRY
The consumer electronics industry is defined to include audio, video,
mobile electronics, communications, information technology, multimedia and
accessory products, as well as related services. According to the Consumer
Electronics Association, total sales of consumer electronics in the United
States were estimated to be $80 billion in 1999, a 5% increase from $76 billion
in 1998, and are projected to increase to $84 billion in 2000.
Growth in the consumer electronics market has historically been driven by
the introduction of new products based on technological innovations. For
example, the proliferation of video cassette recorders and compact disc players
helped to accelerate growth in the 1980s. We believe that a new generation of
technology offers the prospect of increased industry sales with the introduction
of digital delivery systems such as high definition televisions (HDTV), digital
audio players such as MP3 players, digital versatile discs players (DVD) and
direct broadcast satellite systems. The Consumer Electronics Association
estimates that digital video products will average 35% annual growth from 1999
to 2002. We believe that specialty retailers with sales personnel capable of
understanding and communicating the benefits of technologically advanced
products to consumers are well positioned to capture the anticipated increased
sales.
GROWTH STRATEGY
We have become the largest specialty consumer electronics retailer in
Florida by delivering to consumers a total system solution for home
entertainment and mobile electronics. Our solution integrates outstanding
product selection, concept design, professional installation and after-market
service and support. We intend to grow our business through the following
strategies:
Increase Same Store Sales
We expect to increase our same store sales by continuing to focus on
products incorporating the latest technology, since higher sales prices are
typically associated with these products. For example, we believe that by
offering an increasing number of digitally based products as they become
available to the market, we can benefit from the higher prices at which these
products are sold. In addition, we intend to increase our same store sales by
expanding the capabilities that can be incorporated into our integrated systems.
We recently began offering lighting and security systems as additional features
to our integrated solutions.
Open New Stores
We opened two new full-size stores, one in Tallahassee and one in North
Palm Beach, in November 1998 and four mall based Bang & Olufsen stores in
February and December 1998, June 1999 and March 2000. We expect to continue to
explore the opening of new stores in geographic areas within our existing
Florida distribution network and advertising radius in order to realize
efficiencies and cost benefits as a result of our clustering of stores. Our
current plans are to open two new Bang & Olufsen stores in the next 18 months,
one of which will be located adjacent to our first Electronic Interiors
location, which we expect to open in October 2000. The Electronic Interiors
stores will allow customers to experience our products and the integration of
our systems in aesthetically pleasing environments. We expect to open
approximately eight additional Electronic Interiors stores during the next two
years.
2
<PAGE> 7
Upgrade and Relocate Existing Stores
We continually improve our existing stores by upgrading and rotating
product displays and remodeling the stores' interiors. At times, we may choose
to relocate our stores in connection with the need for expansion. In November
1999, we relocated and upgraded our Tampa-Dale Mabry location from a 7,400
square foot facility to a 15,000 square foot facility. In Fall 2000, we plan to
relocate one of our Miami stores, which is currently housed in a 11,000 square
foot facility, to a 15,700 square foot facility located in Miami. We also plan
to relocate our Altamonte Springs store in Spring 2001 from a 10,800 square foot
facility to a 15,000 square foot facility located in Altamonte Springs. We
believe these relocations will improve store visibility and increase customer
traffic for these stores.
Pursue Acquisitions
We believe that we may gain significant benefits through strategic
acquisitions of local and regional specialty retailers. Due to the fragmentation
of the retail consumer electronics market, many opportunities exist for the
acquisition of high-end stores. We have identified geographic markets with
favorable demographics and intend to pursue acquisitions of local and regional
stores with brand name recognition as a platform for expansion into those
markets. We have executed a letter of intent and are engaged in the process of
negotiating a definitive agreement for the acquisition of the assets of Showcase
Home Entertainment of the Southwest, LLC, a privately held retailer of upscale
home entertainment products and custom design services with stores located in
Scottsdale and Chandler, Arizona.
* * *
Sound Advice is a Florida corporation incorporated on March 12, 1974. In
this prospectus, the terms "Sound Advice," "we," "us" and "our" mean Sound
Advice, Inc. and our subsidiaries, unless otherwise required by the context.
WHERE TO CONTACT US
Our principal executive offices are located at 1901 Tigertail Boulevard,
Dania Beach, Florida 33004 and our telephone number is (954) 922-4434. Our Web
site is www.wegivesoundadvice.com. The information on our Web site is not part
of this prospectus.
3
<PAGE> 8
THIS OFFERING
Shares offered by Sound Advice...... 1,800,000 shares
Shares offered by the selling
shareholders........................ 350,000 shares
Shares to be outstanding after this
offering............................ 5,588,394 shares
Use of proceeds..................... We intend to use the net proceeds from
this offering to pursue potential
acquisitions, retire some of our
indebtedness, open new stores, upgrade
and relocate some existing stores and
for general corporate purposes.
Nasdaq National Market symbol....... SUND
The number of shares to be outstanding after this offering does not include
838,500 shares reserved for issuance upon exercise of outstanding options and
warrants and 200,000 shares issuable upon the exercise of the warrants to be
issued to the representatives of the underwriters.
4
<PAGE> 9
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
The following table contains our summary consolidated financial and
operating information. Information for the fiscal years ended June 30, 1996 and
1997, the seven month transition period ended January 31, 1998 and the fiscal
years ended January 31, 1999 and 2000 have been derived from our consolidated
financial statements, which have been audited by KPMG LLP, our independent
certified public accountants. Information for the seven months ended January 31,
1997, the twelve months ended January 31, 1998 and the six months ended July 31,
1999 and 2000 have been derived from our consolidated financial statements and
are unaudited. The information presented below under the caption "Store Data,"
"Selected Consolidated Operating Data" and "Balance Sheet Data" is unaudited.
The results of operations for the six months ended July 31, 2000 are not
necessarily indicative of the results to be expected for the full year. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements and the Notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
SEVEN
SEVEN MONTH TWELVE
FISCAL YEARS ENDED MONTHS TRANSITION MONTHS FISCAL YEARS ENDED
JUNE 30, ENDED PERIOD ENDED ENDED JANUARY 31,
---------------------- JANUARY 31, JANUARY 31, JANUARY 31, -------------------
1996 1997 1997 1998 1998 1999 2000
-------- ----------- ------------ ------------ ----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales......................... $165,384 $152,316 $98,558 $95,205 $148,963 $152,124 $177,349
Cost of goods sold................ 116,174 102,298 67,005 64,234 99,527 98,893 115,057
-------- -------- ------- ------- -------- -------- --------
Gross profit.................... 49,210 50,018 31,553 30,971 49,436 53,231 62,292
Selling, general and
administrative expenses......... 52,393 49,045 29,827 29,903 49,122 49,893 55,510
-------- -------- ------- ------- -------- -------- --------
Income (loss) from operations..... (3,183) 973 1,726 1,068 314 3,338 6,782
Other income (expense):
Interest expense................ (1,526) (1,556) (891) (897) (1,562) (1,417) (1,367)
Other income (expense).......... (4) 101 31 48 120 96 (107)
-------- -------- ------- ------- -------- -------- --------
Income (loss) before income taxes
(benefit)....................... (4,713) (482) 866 219 (1,128) 2,017 5,308
Income taxes (benefit)............ (486) 389 475 1,175 1,089 1,310 (1,218)
-------- -------- ------- ------- -------- -------- --------
Net income (loss)............... $ (4,227) $ (871) $ 391 $ (956) $ (2,217) $ 707 $ 6,526
======== ======== ======= ======= ======== ======== ========
Common and common equivalent per
share amounts:
Basic earnings (loss) per
share(2)...................... $ (1.13) $ (.23) $ .10 $ (.26) $ (.59) $ .19 $ 1.74
Diluted earnings (loss) per
share(2)...................... $ (1.13) $ (.23) $ .10 $ (.26) $ (.59) $ .18 $ 1.55
Weighted average number of shares
outstanding -- basic............ 3,729 3,729 3,729 3,729 3,729 3,730 3,746
Weighted average number of shares
outstanding -- diluted.......... 3,729 3,729 3,729 3,729 3,729 3,965 4,223
STORE DATA:
Number of stores open at end of
period:
Full-size stores................ 21 21 22 24 24
Bang & Olufsen stores........... -- -- -- 2 3
Weighted average net sales per
store(3):
Full-size stores................ $ 7,875 $ 7,253 $ 7,038 $ 6,669 $ 7,161
Bang & Olufsen Stores........... -- -- -- 1,770 2,053
<CAPTION>
SIX MONTHS ENDED
JULY 31,
---------------------
1999 2000
------- -----------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales......................... $79,151 $84,491
Cost of goods sold................ 51,599 54,508
------- -------
Gross profit.................... 27,552 29,983
Selling, general and
administrative expenses......... 25,364 26,881
------- -------
Income (loss) from operations..... 2,188 3,102
Other income (expense):
Interest expense................ (706) (902)
Other income (expense).......... 20 38
------- -------
Income (loss) before income taxes
(benefit)....................... 1,502 2,238
Income taxes (benefit)............ -- 873
------- -------
Net income (loss)............... $ 1,502 $ 1,365
======= =======
Common and common equivalent per
share amounts:
Basic earnings (loss) per
share(2)...................... $ .40 $ .36
Diluted earnings (loss) per
share(2)...................... $ .36 $ .32
Weighted average number of shares
outstanding -- basic............ 3,734 3,771
Weighted average number of shares
outstanding -- diluted.......... 4,121 4,316
STORE DATA:
Number of stores open at end of
period:
Full-size stores................ 24 24
Bang & Olufsen stores........... 3 4
Weighted average net sales per
store(3):
Full-size stores................ $ 3,212 $ 3,400
Bang & Olufsen Stores........... 886 751
</TABLE>
5
<PAGE> 10
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
-------------------- ------------------------
1999 2000 1999 2000
------- ------- ------- -----------
<S> <C> <C> <C> <C>
SELECTED CONSOLIDATED OPERATING DATA:
Gross profit margin....................................... 35.0% 35.1% 34.8% 35.5%
Operating income margin................................... 2.2% 3.8% 2.8% 3.7%
Store contribution to profit and corporate expenses(4).... $22,087 $28,616 $12,484 $14,401
Comparable store sales increase (decrease)(5)............. (3.2)% 13.1% 13.0% 6.0%
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 2000 JULY 31, 2000
-------------------- ------------------------
AS
ACTUAL ACTUAL ADJUSTED(6)
------ ------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $13,020 $13,917 $26,690
Total assets.............................................. 60,932 59,092 64,089
Revolving line of credit.................................. 7,310 9,776 --
Total debt, excluding revolving line of credit and cash
overdraft............................................... 5,679 5,642 5,642
Shareholders' equity...................................... 22,692 24,127 38,901
</TABLE>
---------------
(1) We eliminated personal computers from our product mix in January 1996.
(2) In December 1997, we 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, and their
related income tax effects, if any. Earnings per share for all periods have
been restated to reflect the adoption of this statement.
(3) Weighted average net sales per store represents the net sales of our
full-size and Bang & Olufsen stores for the period divided by the number of
full-size and Bang & Olufsen stores open during the period, weighted to
account for stores open for only a portion of the period.
(4) Refers to gross profit after deducting selling expenses including labor,
advertising, store level operations and pre-opening expenses. Store
contribution is presented to provide additional information about us and is
commonly used as a performance measurement by retail companies. Store
contribution should not be considered in isolation or as a substitute for
operating income, cash flow from operating activities and other income or
cash flow data prepared in accordance with generally accepted accounting
principles, or as a measure of our profitability or liquidity. Our
calculation of store contribution may not be comparable to similarly titled
items reported by other companies.
(5) Refers to the percentage change in sales for stores open for at least one
year.
(6) Adjusted to reflect the application of the estimated net proceeds of the
sale of 1,800,000 shares of common stock offered by us at an assumed public
offering price of $9.31 (the closing price on September 12, 2000), after
deducting the estimated underwriting discount and offering expenses payable
by us.
6
<PAGE> 11
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and all the other information included in this prospectus before you decide
whether to purchase shares of our common stock. Any of the following risks could
have a material adverse effect on our business, financial condition or operating
results and could result in a partial or complete loss of your investment.
IF NEW PRODUCTS ARE NOT INTRODUCED OR ACCEPTED BY CONSUMERS, OR IF WE DO NOT
ACCURATELY PREDICT AND RESPOND TO CONSUMER DEMANDS FOR NEW PRODUCTS, OUR
BUSINESS WILL BE NEGATIVELY AFFECTED.
The demand for our products depends to a large extent on the periodic
introduction and availability of new products and technologies by third parties.
Many products that incorporate the newest technologies, such as DVD and HDTV,
are subject to significant technological changes and pricing limitations. They
are also subject to the actions and cooperation of third parties such as cable
and satellite television broadcasters and movie distributors. These products or
other new products, including new digital formats, may never achieve widespread
consumer acceptance. Furthermore, the introduction or expected introduction of
new products or technologies may depress sales of existing products and
technologies, without a comparable increase in sales of new products in the same
period due to uncertainty regarding consumer acceptance of the new products.
Significant deviation from the projected demand for products we sell may have a
material adverse effect on our results of operations and financial condition,
either from lost sales or lower margins due to the need to mark down excess
inventory. Any sustained failure by us to identify and respond to changes in
consumer demand and preferences would have a material adverse effect on our
results of operations and financial condition.
WE OPERATE IN A HIGHLY COMPETITIVE BUSINESS ENVIRONMENT AND MAY NOT BE ABLE TO
SUSTAIN OUR PROFITABILITY.
The retail consumer electronics industry is highly competitive. We
primarily compete against retailers that specialize in one or more types of
consumer electronics. We also compete against national and regional large format
merchandisers and superstores, such as Circuit City and Best Buy, which sell,
among other products, audio and video consumer electronics similar and in some
cases identical to those we sell. The large format stores continually expand
their geographic markets, and that expansion may increase competition within our
markets. To a lesser extent, we compete with Internet retailers of electronic
goods. Some of our competitors have substantially greater financial resources
than we do, which may increase their ability to purchase inventory at lower
costs or to initiate and sustain predatory price competition.
A number of different competitive factors could have a material adverse
effect on our results of operations and financial condition, including:
- adoption by existing competitors of a merchandising strategy of upscale
products within innovative store formats;
- pricing strategies on identical products;
- expansion by existing competitors;
- entry by new competitors into markets in which we currently operate; and
- increased operational efficiencies of competitors.
IF WE DO NOT MANAGE OUR GROWTH WELL, OUR BUSINESS WILL BE NEGATIVELY AFFECTED.
Our future growth depends on our ability to open new stores in both
existing and new geographic markets and to operate those stores profitably. We
may not be able to achieve successful expansion or to integrate effectively any
new stores into our existing operations. If we open additional stores in new
geographic markets, we may face competitive and merchandising challenges
different from those we currently face or previously faced within our existing
geographic markets. In addition, we may incur higher costs related to
advertising, administration and distribution as we enter new markets. There are
a number of factors which could affect our ability to open new stores. Some of
these factors also affect the ability of our newly opened stores to achieve
7
<PAGE> 12
sales and profitability levels comparable with our existing stores, or to become
profitable at all. These factors include:
- our identification and acquisition of suitable sites and the negotiation
of acceptable leases for our stores;
- our ability to hire, train and retain skilled personnel;
- the availability of adequate management and financial resources;
- our ability to adapt our distribution and other operational and
management systems to an expanded network of stores;
- the ability and willingness of vendors to supply products to us on a
timely basis at competitive prices;
- continued consumer demand for our products at levels that can support
acceptable profit margins;
- our ability to effectively compete in new markets; and
- our ability to achieve cost effective print and radio advertising.
SINCE ALL OF OUR STORES ARE LOCATED IN THE STATE OF FLORIDA, OUR BUSINESS
COULD BE MATERIALLY HARMED BY CONDITIONS AFFECTING THE STATE OF FLORIDA.
All of the 28 stores we operate are located in the State of Florida. The
geographical concentration of our stores makes us particularly vulnerable to
adverse events in these markets, including regional competition, unfavorable
regional economic conditions or adverse weather events such as hurricanes. Even
if we consummate the proposed acquisition in the State of Arizona, most of our
stores will be in the State of Florida.
WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR SALES WHICH RESULT IN FLUCTUATIONS
IN OUR QUARTERLY RESULTS.
Seasonal shopping patterns affect our business. The fourth quarter, which
includes the holiday shopping season, generates a substantial portion of our
operating income. As a result, any factors negatively affecting us during the
fourth calendar quarter, including insufficient quantities of products from
vendors or adverse weather, could have a material adverse effect on our results
of operations for the entire year.
OUR OPERATING RESULTS AND COMPARABLE STORE SALES MAY FLUCTUATE SIGNIFICANTLY
IN THE FUTURE, WHICH COULD CAUSE OUR STOCK PRICE TO DROP.
Our quarterly results of operations and comparable store sales may
fluctuate based upon the following factors:
- timing of new store openings and new store acquisitions;
- the amount of net sales contributed by new and existing stores;
- our sales mix;
- profitability of sales of particular products;
- consumer trends;
- changes in our product offering;
- timing of promotional events;
- adverse weather conditions;
- opening of new stores within geographic areas where we have existing
stores; and
- the amount of store pre-opening expenses.
Fluctuations in our net income, quarterly operating results or comparable
store results could cause the price of our common stock to decline.
8
<PAGE> 13
A DECLINE IN GENERAL ECONOMIC CONDITIONS COULD RESULT IN REDUCED CONSUMER
DEMAND FOR THE PRODUCTS WE SELL AND COULD NEGATIVELY AFFECT OUR BUSINESS.
When general economic conditions are uncertain or negative, consumers may
choose to spend less on luxury items. As such, a downturn in the U.S. economy or
an uncertain economic outlook could cause a decrease in the consumer demand for
many of the products that we market.
OUR EXECUTIVE OFFICERS ARE IMPORTANT TO OUR BUSINESS AND THEIR LOSS WOULD
NEGATIVELY AFFECT US.
Our success depends upon the active involvement of senior management
personnel, particularly Peter Beshouri, our Chairman of the Board, Chief
Executive Officer and President, and Michael Blumberg, our Senior Vice
President. The loss of the full-time services of Messrs. Beshouri or Blumberg or
other members of senior management could have a material adverse effect on our
results of operations and financial condition. We carry key man life insurance
for Mr. Beshouri in the amount of $5,000,000 and are the sole beneficiary of
this policy. We have entered into employment agreements with Messrs. Beshouri,
Blumberg, Christopher O'Neil, our Executive Vice President, Chief Operating
Officer and Secretary, and Kenneth L. Danielson, our Chief Financial Officer and
Treasurer.
OUR GROWTH STRATEGY PARTIALLY DEPENDS ON ACQUISITIONS. IF WE ARE UNABLE TO
ACQUIRE BUSINESSES ON FAVORABLE TERMS OR SUCCESSFULLY INTEGRATE AND MANAGE THE
BUSINESSES ACQUIRED, OUR BUSINESS AND FINANCIAL RESULTS MAY BE ADVERSELY
AFFECTED.
While we have made no material acquisitions recently, we plan to evaluate
opportunities to acquire additional stores and operations in Florida and
nationally as opportunities arise. Acquisitions may result in greater
administrative burdens and in additional operating costs and, if financed with
debt, additional interest costs. Acquisitions may involve the following risks:
- diversion of management's attention to the assimilation of operations and
personnel of the acquired companies;
- the difficulty of integrating acquired companies into our management
information and financial reporting systems;
- possible adverse short-term effects on our operating results and an
adverse impact on earnings from the amortization of acquired intangible
assets or other costs;
- if financed with equity, potential per share dilution to existing
shareholders; and
- facing different competitive and merchandising challenges than those we
currently face.
There can be no assurance that we will be able to find, finance and
complete suitable acquisitions on terms acceptable to us, that we will be able
to integrate effectively any acquisitions made, that the businesses acquired can
be operated profitably, or that we can assimilate the operations of those
businesses into our own operations.
We are currently negotiating a definitive agreement for the acquisition of
the assets of Showcase Home Entertainment of the Southwest, LLC. We may not be
able to reach a definitive agreement or consummate the proposed transaction.
Even if we consummate the proposed Showcase acquisition, we cannot assure you
that the acquisition will be successful or profitable.
WE RELY ON A LIMITED NUMBER OF SUPPLIERS AND ARE DEPENDENT ON CONTINUED
RELATIONSHIPS WITH THEM.
The success of our business depends to a significant degree upon our
ability to obtain merchandise from our suppliers, particularly our brand-name
suppliers of stereo and video equipment such as Sony, Mitsubishi, Panasonic,
Yamaha, B&W, Alpine and Bang & Olufsen. We do not have any long term merchandise
purchase contracts with any manufacturers or other vendors and typically order
our inventory through purchase orders. Of the approximately 150 manufacturers
from whom we purchase products, five accounted for approximately 53% of our
purchases during fiscal 1999 and fiscal 2000. The loss of any of these key
vendors or our failure to
9
<PAGE> 14
establish and maintain relationships with these or other vendors could have a
material adverse effect on our results of operations and financial condition. It
is possible that we will be unable to acquire sufficient quantities or an
appropriate mix of consumer electronics at acceptable prices.
COSTS AND AVAILABILITY OF THE INVENTORY WE PURCHASE FROM FOREIGN VENDORS OR
THEIR DOMESTIC AFFILIATES MAY BE SUBJECT TO GREATER UNPREDICTABILITY THAN
DOMESTICALLY PURCHASED INVENTORY.
We purchase a portion of our inventory from overseas vendors, particularly
vendors headquartered in Japan or their domestic affiliates. While all of our
purchases are made in U.S. dollars, changes in trade regulations, currency
fluctuations or other factors may increase the cost of items we purchase from
foreign vendors or create shortages of these items, which could in turn have a
material adverse effect on our results of operations and financial condition.
FUTURE SALES OF OUR COMMON STOCK COULD DEPRESS OUR STOCK PRICE.
Following this offering, we will have 5,588,394 shares of common stock
outstanding. The 2,150,000 shares offered in this offering will be freely
tradable. After this offering, approximately 1,464,453 shares beneficially owned
by our directors, executive officers and significant shareholders will be
subject to lock-up agreements with the underwriters, under which the holders of
those shares have agreed, with some exceptions, not to sell, offer or contract
to sell, sell short, engage in some hedging transactions with respect to, or
otherwise dispose of any shares of common stock for a period of 90 days after
the date of this prospectus, without the prior written consent of the
underwriters. Upon expiration of the lock-up period, these shares will be
available for sale in the public market, subject in some circumstances to the
provisions of Rule 144 under the Securities Act of 1933.
As of the date of this prospectus, approximately 838,500 shares of common
stock are issuable pursuant to currently exercisable options and warrants. Of
these 838,500 shares, 643,000 shares will be subject to lock-up agreements. In
addition, 200,000 shares of common stock are issuable upon exercise of the
warrants to be issued to the representatives of the underwriters. Sales of
substantial amounts of common stock in the public market, or the perception that
those sales could occur, could have a material adverse effect on the market
price of the common stock.
WE HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF
OUR COMPANY.
Some provisions of our articles of incorporation, bylaws and Florida law
could have the effect of delaying, deferring or preventing an acquisition of our
company. For example, we have a staggered board of directors and cumulative
voting can be used if so elected by a holder of 15% or more of our common stock.
In May 1997, our board of directors adopted a common stock purchase rights
plan and subsequently declared a dividend distribution of one common stock
purchase right on each outstanding share of common stock. As amended, each right
has an initial exercise price of $50.00 for one share of common stock.
Generally, the rights will be exercisable only if a person or group acquires 15%
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% or more of the
common stock. Upon that occurrence, each right, other than rights owned by the
person or group making that acquisition or announcing that tender offer, will
entitle the holder to purchase from us 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% or
more of the common stock, the rights are redeemable for $.001 per right at the
option of the board of directors. The rights plan could have the effect of
making it more difficult for a third party to acquire, or discourage a third
party from attempting to acquire, control of us without negotiating with our
board of directors.
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL BE ABLE TO CONTROL AND GENERALLY
DIRECT THE AFFAIRS OF OUR COMPANY.
Upon completion of this offering, our executive officers and directors will
beneficially own approximately 18.3% of our outstanding common stock, assuming
the over-allotment option is exercised. If the over-allotment option is not
exercised, they will, as a group, own approximately 23.3% of our outstanding
common stock. As a result, those parties would be able to significantly
influence our affairs if they were to act together.
10
<PAGE> 15
OUR STOCK PRICE MAY BE VOLATILE, WHICH MIGHT MAKE IT HARDER FOR YOU TO SELL
YOUR SHARES AT A PREDICTABLE PRICE, IF AT ALL, AND MAY ALSO RESULT IN
LITIGATION AGAINST US THAT COULD NEGATIVELY IMPACT OUR BUSINESS.
The trading price of our common stock has been and is likely to continue to
be highly volatile and could be subject to wide fluctuations in response to a
variety of internal and external factors. The stock market in general, and the
Nasdaq National Market in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of particular companies. These broad market factors may have a
material adverse effect on the market price of our common stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been instituted against the company. This type of
litigation, if instituted against us, could result in substantial costs and a
diversion of management's attention and our resources, which would materially
adversely affect our results of operations and financial condition.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements that reflect our
current expectations and projections about our future results, performance,
prospects and opportunities. We have tried to identify these forward-looking
statements by using words including "may," "will," "expect," "anticipate,"
"believe," "intend," "estimate" and "continue" and similar expressions. These
forward-looking statements are based on information currently available to us
and are subject to a number of risks and uncertainties and other factors that
could cause our actual results, performance, prospects or opportunities beyond
fiscal 2000 to differ materially from those expressed in, or implied by, these
forward-looking statements. These risks, uncertainties and other factors
include:
- the presence or absence of new products or new product features in our
merchandise categories;
- risks related to our ability to open and profitably operate new stores;
- our ability to profitably relocate and expand existing stores;
- fluctuations in consumer demands and preferences;
- significant competition, including competition from Internet retailers;
- seasonal fluctuations;
- general economic conditions; and
- changes in trade regulations and currency fluctuations.
You should not place any undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason after the date of this prospectus.
11
<PAGE> 16
PRICE RANGE OF COMMON STOCK
Our common stock is quoted under the symbol "SUND" on the Nasdaq National
Market.
The following table sets forth, for the fiscal quarters indicated, the high
and low sales prices for our common stock on the Nasdaq National Market. Nasdaq
National Market quotations are based on actual transactions and not bid prices.
<TABLE>
<CAPTION>
PRICES
------------------
QUARTER ENDED HIGH LOW
------------- ------ ------
<S> <C> <C>
April 30, 1998....................................... $3.56 $1.13
July 31, 1998........................................ 4.38 2.25
October 31, 1998..................................... 3.69 1.94
January 31, 1999..................................... 4.84 2.00
</TABLE>
<TABLE>
<CAPTION>
PRICES
------------------
QUARTER ENDED HIGH LOW
------------- ------ ------
<S> <C> <C>
April 30, 1999....................................... 4.63 2.25
July 31, 1999........................................ 8.38 3.06
October 31, 1999..................................... 10.00 6.34
January 31, 2000..................................... 12.75 7.88
</TABLE>
<TABLE>
<CAPTION>
PRICES
------------------
QUARTER ENDED HIGH LOW
------------- ------ ------
<S> <C> <C>
April 30, 2000....................................... 12.50 7.00
July 31, 2000........................................ 11.38 7.00
</TABLE>
The last sale price of our common stock on September 12, 2000 was $9.31 per
share. As of September 12, 2000, there were 137 holders of record of our common
stock. Based upon information previously provided to us by depositories and
brokers, we believe that we have in excess of 1,000 beneficial owners.
USE OF PROCEEDS
We estimate that we will receive net proceeds of $14,773,000 from the sale
of the 1,800,000 shares of common stock offered by us, based upon an assumed
public offering price of $9.31 per share, the closing price on September 12,
2000 and after deducting the estimated underwriting discounts and expenses
payable by us. We will not receive any proceeds from the sale of common stock by
the selling shareholders. We expect to use the net proceeds received by us from
this offering to:
- fund potential acquisitions, including the proposed acquisition of the
assets of Showcase Home Entertainment of the Southwest, LLC, if we
consummate that transaction;
- pay the outstanding balance on our revolving credit facility, which was
$9,776,000 as of July 31, 2000, but which will increase to $14,276,000 if
we consummate our proposed Showcase acquisition;
- open new stores;
- relocate and upgrade some existing stores; and
- fund working capital.
Our revolving credit facility with Foothill Capital Corporation bears
interest on the outstanding balance at prime rate plus 1.0% and allows for a
LIBOR pricing option for one, two, three or six month periods at 2.0% over the
corresponding LIBOR rate of the respective period. We pay a monthly fee based
upon the unused portion of the commitment less $5,000,000 at a rate of .375% per
annum. We are also obligated to pay an annual facility fee of $50,000. The
revolving credit facility matures on July 31, 2001. The fixed rate term loan
bears interest at a rate of 9.96%, matures in January 2003 and has a prepayment
fee which is not material.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not plan to
pay cash dividends in the foreseeable future. Our revolving credit facility
prohibits us from paying cash dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources."
12
<PAGE> 17
CAPITALIZATION
The table below shows our capitalization as of July 31, 2000: (1) on an
actual basis and (2) as adjusted to reflect the application of the estimated net
proceeds from the sale of 1,800,000 shares of common stock offered by us in this
offering, based upon an assumed public offering price of $9.31 per share (the
closing price on September 12, 2000) and after deducting the estimated
underwriting discounts and expenses payable by us. This table should be read in
conjunction with our consolidated financial statements and the notes thereto
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JULY 31, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 297 $ 5,294
======= =======
Debt:
Revolving line of credit.................................... 9,776 --
Long-term debt, including current portion................... 4,141 4,141
Capital lease obligations, including current portion........ 1,501 1,501
------- -------
Total debt........................................ 15,418 5,642
Shareholders' equity:
Common stock, $.01 par value; authorized 10,000,000 shares;
3,787,394 shares issued and outstanding, actual; 5,587,394
shares issued and outstanding, as adjusted................ 38 56
Additional paid-in capital.................................. 11,245 26,001
Retained earnings........................................... 12,844 12,844
------- -------
Total shareholders' equity........................ 24,127 38,901
------- -------
Total capitalization.............................. $39,545 $44,543
======= =======
</TABLE>
13
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
The selected consolidated statement of operations and balance sheet data set
forth below for the fiscal years ended June 30, 1996 and 1997, the seven month
transition period ended January 31, 1998 and the fiscal years ended January 31,
1999 and 2000 have been derived from our consolidated financial statements,
which have been audited by KPMG LLP, our independent certified public
accountants. The selected consolidated statement of operations data for the
seven months ended January 31, 1997, the twelve months ended January 31, 1998
and the six months ended July 31, 1999 and 2000 have been derived from our
consolidated financial statements and are unaudited. The information presented
below under the caption "Store Data," "Balance Sheet Data," "Selected
Consolidated Operating Data" and "Bang & Olufsen Data" are unaudited. The
results of operations for the six months ended July 31, 2000 are not necessarily
indicative of the results to be expected for the full year. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our Consolidated
Financial Statements and the Notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SEVEN MONTH TWELVE
FISCAL YEARS ENDED SEVEN MONTHS TRANSITION MONTHS FISCAL YEARS ENDED
JUNE 30, ENDED PERIOD ENDED ENDED JANUARY 31,
------------------- JANUARY 31, JANUARY 31, JANUARY 31, -------------------
1996 1997 1997 1998 1998 1999 2000
-------- -------- ------------ ------------ ----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales........................... $165,384 $152,316 $98,558 $95,205 $148,963 $152,124 $177,349
Cost of goods sold.................. 116,174 102,298 67,005 64,234 99,527 98,893 115,057
-------- -------- ------- ------- -------- -------- --------
Gross profit...................... 49,210 50,018 31,553 30,971 49,436 53,231 62,292
Selling, general and administrative
expenses.......................... 52,393 49,045 29,827 29,903 49,122 49,893 55,510
-------- -------- ------- ------- -------- -------- --------
Income (loss) from operations....... (3,183) 973 1,726 1,068 314 3,338 6,782
Other income (expense):
Interest expense.................. (1,526) (1,556) (891) (897) (1,562) (1,417) (1,367)
Other income (expense)............ (4) 101 31 48 120 96 (107)
-------- -------- ------- ------- -------- -------- --------
Income before income taxes
(benefit)......................... (4,713) (482) 866 219 (1,128) 2,017 5,308
Income taxes (benefit).............. (486) 389 475 1,175 1,089 1,310 (1,218)
-------- -------- ------- ------- -------- -------- --------
Net income (loss)................. $ (4,227) $ (871) $ 391 $ (956) $ (2,217) $ 707 $ 6,526
======== ======== ======= ======= ======== ======== ========
Common and common equivalent per
share amounts:
Basic earnings (loss) per
share(2)........................ $ (1.13) $ (.23) $ .10 $ (.26) $ (.59) $ .19 $ 1.74
Diluted earnings (loss) per
share(2)........................ $ (1.13) $ (.23) $ .10 $ (.26) $ (.59) $ .18 $ 1.55
Weighted average number of shares
outstanding -- basic.............. 3,729 3,729 3,729 3,729 3,729 3,730 3,746
Weighted average number of shares
outstanding -- diluted............ 3,729 3,729 3,729 3,729 3,729 3,965 4,223
STORE DATA:
Number of stores open at end of
period:
Full-size stores.................. 21 21 22 24 24
Bang & Olufsen stores............. -- -- -- 2 3
Weighted average net sales per
store(3):
Full-size stores.................. $ 7,875 $ 7,253 $ 7,038 $ 6,669 $ 7,161
Bang & Olufsen stores............. -- -- -- 1,770 2,053
BALANCE SHEET DATA:
Working capital..................... $ 8,625 $ 7,791 $ 5,586 $ 4,762 $ 13,020
Total assets........................ 49,056 46,550 51,789 55,217 60,932
Revolving line of credit............ 9,100 11,875 10,700 13,776 7,310
Total debt, excluding revolving line
of credit and cash overdraft...... 1,728 1,562 1,459 1,273 5,677
Shareholders' equity................ 17,169 16,298 15,342 16,058 22,692
<CAPTION>
SIX MONTHS ENDED
JULY 31,
----------------------
1999 2000
-------- -----------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales........................... $ 79,151 $84,491
Cost of goods sold.................. 51,599 54,508
-------- -------
Gross profit...................... 27,552 29,983
Selling, general and administrative
expenses.......................... 25,364 26,881
-------- -------
Income (loss) from operations....... 2,187 3,102
Other income (expense):
Interest expense.................. (706) (902)
Other income (expense)............ 20 38
-------- -------
Income before income taxes
(benefit)......................... 1,502 2,238
Income taxes (benefit).............. -- 873
-------- -------
Net income (loss)................. $ 1,502 $ 1,365
======== =======
Common and common equivalent per
share amounts:
Basic earnings (loss) per
share(2)........................ $ .40 $ .36
Diluted earnings (loss) per
share(2)........................ $ .36 $ .32
Weighted average number of shares
outstanding -- basic.............. 3,734 3,771
Weighted average number of shares
outstanding -- diluted............ 4,121 4,316
STORE DATA:
Number of stores open at end of
period:
Full-size stores.................. 24 24
Bang & Olufsen stores............. 3 4
Weighted average net sales per
store(3):
Full-size stores.................. $ 3,212 $ 3,400
Bang & Olufsen stores............. 886 751
BALANCE SHEET DATA:
Working capital..................... $ 6,848 $13,917
Total assets........................ 51,204 59,092
Revolving line of credit............ 12,324 9,776
Total debt, excluding revolving line
of credit and cash overdraft...... 801 5,642
Shareholders' equity................ 17,569 24,127
</TABLE>
14
<PAGE> 19
<TABLE>
<CAPTION>
OTHER OPERATING DATA
(IN THOUSANDS)
FISCAL YEARS ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
-------------------- --------------------
1999 2000 1999 2000
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED OPERATING DATA:
Gross profit margin................. 35.0% 35.1% 34.8% 35.5%
Operating income margin............. 2.2% 3.8% 2.8% 3.7%
Store contribution to profit and
corporate expenses(4)............. $22,087 $28,616 $12,484 $14,401
Comparable store sales increase
(decrease)(5)..................... (3.2)% 13.1% 13.0% 6.0%
BANG & OLUFSEN DATA:
Total sales......................... $ 2,065 $ 5,457 $ 2,068 $ 2,880
Store margin........................ 41.4% 40.6% 41.1% 40.0%
Store contribution to profit and
corporate expenses(4)............. $ 515 $ 1,089 $ 396 $ 436
</TABLE>
---------------
(1) We eliminated personal computers from our product mix in January 1996.
(2) In December 1997, we 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, and their
related income tax effects, if any. Earnings per share for all periods have
been restated to reflect the adoption of this statement.
(3) Weighted average net sales per store represents the net sales of our
full-size and Bang & Olufsen stores for the period divided by the number of
full-size and Bang & Olufsen stores open during the period, weighted to
account for stores open for only a portion of the period.
(4) Refers to gross profit after deducting selling expenses including labor,
advertising, store level operations and pre-opening expenses. Store
contribution is presented to provide additional information about us and is
commonly used as a performance measurement by retail companies. Store
contribution should not be considered in isolation or as a substitute for
operating income, cash flow from operating activities and other income or
cash flow data prepared in accordance with generally accepted accounting
principles, or as a measure of our profitability or liquidity. Our
calculation of store contribution may not be comparable to similarly titled
items reported by other companies.
(5) Refers to the percentage change in sales for stores open for at least one
year.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion along with our consolidated
financial statements and the related notes included in this prospectus. The
following discussion contains forward-looking statements that are subject to
risks, uncertainties and assumptions, including those discussed under "Risk
Factors." Our actual results, performance and achievements beyond fiscal 2000
may differ materially from those expressed in, or implied by, these
forward-looking statements. See "Cautionary Note Regarding Forward-Looking
Statements."
OVERVIEW
We are a specialty retailer of high-end audio and visual entertainment
products and integrated systems, many of which incorporate recent technology. We
were formed on March 12, 1974 and opened our first store in October 1974. Since
our founding, we have continually refined our merchandising strategy. In January
1996, we reviewed our product categories and their performance in terms of
margin contribution, importance to our high-end market niche strategy and
availability from other retailers in our markets. Based on this review, in
January 1996 we discontinued the sales of personal computers which had been
added to the product mix in Fall 1994, reduced or eliminated products with
minimal margin contribution and reduced the overall number of product offerings
in non-core product categories.
As a result of this process, our merchandising became focused on high-end
products in the core categories of audio, video and mobile electronics. These
changes reduced sales by $13,068,000, or 7.9%, and increased gross profit by
$808,000, or 1.6%, from fiscal 1996 to fiscal 1997. These changes also resulted
in a significant improvement in our gross profit margin, from 29.7% in fiscal
1996 to 35.1% in fiscal 2000. Income from operations improved from a loss of
$3,183,000 in fiscal 1996 to income of $6,782,000 in fiscal 2000. During the
fiscal periods from 1996 to 2000, the percentage of net sales in the core
categories of premium audio, video and mobile electronics increased from 76% of
net sales to 89% of net sales. This strategy also positioned us to take
advantage of the proliferation of products driven by the growth of digitally
based technology. As a result of the cash flow generated from our operations, we
were able to begin a store expansion and relocation program and embrace a new
store format in the Bang & Olufsen stores. For the period from July 1, 1997 to
January 31, 2000, we spent over $10,800,000 on capital expenditures primarily
for new stores and revitalization of existing stores. This was funded through
internally generated funds and borrowings available under our revolving credit
facility. We currently operate 24 full-size stores and four Bang & Olufsen
stores.
RESULTS OF OPERATIONS
The following table sets forth for the seven month periods ended January
31, 1997 and 1998 and the twelve month periods ended January 31, 1998, 1999 and
2000 (i) certain items in our statements of operations expressed as a percentage
of net sales and (ii) the percentage change in dollar amounts of these items as
compared to the indicated period in the prior year.
16
<PAGE> 21
<TABLE>
<CAPTION>
PERCENTAGE OF
NET SALES
------------------------------------------------------------------------
SIX MONTH
SEVEN MONTH PERIODS TWELVE MONTH PERIODS ENDED PERIODS ENDED
ENDED JANUARY 31, JANUARY 31, JULY 31,
---------------------- ----------------------------- --------------
1997 1998 1998 1999 2000 1999 2000
----------- ------- ----------- ----- ----- ----- -----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 68.0 67.5 66.8 65.0 64.9 65.2 64.5
-------- ------ -------- ----- ----- ----- -----
Gross profit........................... 32.0 32.5 33.2 35.0 35.1 34.8 35.5
Selling, general and administrative
expenses.............................. 30.3 31.4 33.0 32.8 31.3 32.0 31.8
-------- ------ -------- ----- ----- ----- -----
Income from operations................. 1.7 1.1 0.2 2.2 3.8 2.8 3.7
Other income (expenses):
Interest expense....................... (0.9) (0.9) (1.0) (0.9) (0.8) (0.9) (1.1)
Other expenses, net.................... + + 0.1 + + + +
-------- ------ -------- ----- ----- ----- -----
Income before income taxes (benefit)... 0.8 0.2 (0.7) 1.3 3.0 1.9 2.6
-------- ------ -------- ----- ----- ----- -----
Net income (loss)...................... 0.4% (1.0)% (1.5)% 0.5% 3.7% 1.9% 1.6%
-------- ------ -------- ----- ----- ----- -----
-------- ------ -------- ----- ----- ----- -----
<CAPTION>
PERIOD-TO-PERIOD
PERCENTAGE CHANGE
-----------------------------
TWELVE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
JANUARY 31, JULY 31,
------------- -------------
2000 2000
COMPARED TO COMPARED TO
1999 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Net sales.............................. 16.6% 6.7%
Cost of goods sold..................... 16.3 5.6
Gross profit........................... 17.0 8.8
Selling, general and administrative
expenses.............................. 11.3 6.0
Income from operations................. 103.2 41.8
Other income (expenses):
Interest expense....................... (3.5) 27.8
Other expenses, net.................... * *
Income before income taxes (benefit)... 163.2 49.0
Net income (loss)...................... 823.1% (9.1)%
</TABLE>
---------------
* Percentages not meaningful as the actual dollar amounts are not material
+ Less than 0.1%
Six Months Ended July 31, 2000 Compared to Six Months Ended July 31, 1999
Net sales for the six months ended July 31, 2000 were $84,491,000, an
increase of $5,340,000, or 6.7%, over the six months ended July 31, 1999. The
increase in sales was primarily attributable to the relocation of a Sound Advice
store in November 1999 and the inclusion of results from our new Bang & Olufsen
store that we opened in February 2000. Sales increased in each of the major
sales categories of audio, video, mobile electronics and furniture. Comparable
store net sales increased 6.0% in the six months ended July 31, 2000 over the
six months ended July 31, 1999.
Cost of goods sold includes the cost of merchandise net of vendor rebates
and discounts and allowances for product shrinkage and obsolescence. Gross
profit was $29,983,000, an increase of $2,430,000, or 8.8%, in the six months
ended July 31, 2000 compared to the six months ended July 31, 1999. The increase
in gross profit was directly related to increased sales of projection
televisions, home theater systems and custom installation services. The gross
margin was 35.5% in the six months ended July 31, 2000 as compared to 34.8% in
the six months ended July 31, 1999.
Selling, general and administrative expenses, which we refer to as SG&A
expenses, include costs related to sales commissions, salaries, advertising,
warehouse and distribution, corporate expenses, store operations, including rent
and utilities and depreciation. SG&A expenses for the six months ended July 31,
2000 were $26,881,000, an increase of $1,516,000, or 6.0%, over the six months
ended July 31, 1999. The reason for the increase in SG&A expenses was increased
sales commissions, which are based on the gross margin of products and services,
increased salaries, net of a reduction in advertising. SG&A expenses as a
percentage of net sales decreased to 31.8% in the six months ended July 31, 2000
from 32.0% in the six months ended July 31, 1999. The decrease was partially
attributable to a lower rate of growth in SG&A expenses due to the amount of
fixed expenses during a period of increased sales from existing and new stores.
Income from operations in the six months ended July 31, 2000 was
$3,102,000, an increase of $914,000, or 41.8%, over the six months ended July
31, 1999. Income from operations as a percentage of net sales increased to 3.7%
in the six months ended July 31, 2000 from 2.8% in the six months ended July 31,
1999.
Interest expense for the six months ended July 31, 2000 was $902,000, an
increase of $196,000 from the six months ended July 31, 1999. The increase in
interest expense resulted primarily from an increase in the effective interest
rate.
We recorded income taxes of $873,000, at an effective tax rate of 39.0%,
for the six months ended July 31, 2000. In the six months ended July 31, 1999,
no provision was recorded for income taxes due to a $585,000 reduction in the
valuation reserve on deferred tax assets.
17
<PAGE> 22
Net income for the six months ended July 31, 2000 was $1,365,000, or $.36
per share basic and $.32 per share diluted, compared to net income of
$1,502,000, or $.40 per share basic and $.36 per share diluted, for the same six
months ended July 31, 1999. The decrease in net income was primarily a result of
the recognition of a provision for income taxes, compared to a reduction in
valuation allowance for the defined tax assets for the comparable prior period.
Fiscal 2000 Compared to Fiscal 1999
Net sales for fiscal 2000 were approximately $177,349,000, an increase of
$25,225,000, or 16.6%, over the prior fiscal year. The increase in sales is
primarily attributable to an increase in same store sales along with a full
year's operation of the two new full-size stores and two Bang & Olufsen stores
opened in the prior fiscal year and one additional Bang & Olufsen store acquired
in June 1999. Sales increased in the core categories of audio, video, and mobile
electronics and were partially offset by a decrease in sales of cellular phones,
which have been de-emphasized in our product mix. Comparable store sales
increased 13.1% during fiscal 2000.
Our gross profit was approximately $62,292,000, an increase of $9,061,000,
or 17.0%, in fiscal 2000 over the prior year. The increase in gross profit was
directly related to our increase in sales resulting from greater demand for
customized systems, home theater systems, digital audio and video equipment,
along with a greater sales mix of higher margin products. Our gross margin was
35.1% in fiscal 2000 compared to 35.0% in fiscal 1999.
SG&A expenses for fiscal 2000 were approximately $55,510,000, an increase
of $5,617,000, or 11.3%, over the prior year. The reason for the increase in
SG&A expenses was due to increased sales commissions, which are based on the
gross margin of products and services sold, increased costs associated with new
stores opened in late fiscal 1999 and in fiscal 2000, net of a reduction in
advertising costs. SG&A expenses as a percentage of net sales decreased to 31.3%
in fiscal 2000 from 32.8% in the prior fiscal year. The decrease was partially
attributable to a lower rate of growth in SG&A expenses due to some fixed
expenses, during a period of increased sales from existing and new stores.
Income from operations in fiscal 2000 was $6,782,000, an increase of
$3,444,000, or 103.0%, over the prior fiscal year. Income from operations as a
percentage of net sales increased to 3.8% in fiscal 2000 from 2.2% in fiscal
1999.
Interest expense for fiscal 2000 was $1,367,000, a reduction of $50,000
from the prior fiscal year. The reduction in interest expense was primarily
reflective of a decreased level of borrowings net of an increase in the
effective interest rate, in relation to the prior fiscal year.
In fiscal 2000, we recorded a net tax benefit of $1,218,000, which included
a provision for income taxes payable based on pretax operating income, net of a
reduction in the valuation reserve on deferred tax assets of $3,259,000. The
valuation reserve was recorded because of our return to sustained profitability.
The increase in the valuation reserve in the earlier periods resulted in an
increase in the effective tax rate as a percent of pretax operating income. At
January 31, 2000, there was no valuation allowance for deferred tax assets, and
our effective tax rate is expected to be approximately 39% in fiscal 2001.
Net income for fiscal 2000 was approximately $6,526,000, or $1.74 per share
basic and $1.55 per share diluted, as compared to a net income of approximately
$707,000, or $.19 per share basic and $.18 per share diluted, in fiscal 1999.
The improvement in net income for fiscal 2000 was primarily a result of
increased gross profit resulting from increased same store sales, new stores and
the reduction of the valuation reserve for deferred tax assets.
Fiscal 1999 Compared to the Twelve Month Period Ended January 31, 1998
Net sales for fiscal 1999 were approximately $152,124,000, an increase of
$3,161,000, or 2.1%, over the twelve month period ended January 31, 1998. The
increase in sales was primarily attributable to the addition of two new
full-size stores in November 1998 and two Bang & Olufsen stores in February 1998
and December 1998. Sales increased in the categories of audio and video and were
partially offset by decreases in sales of
18
<PAGE> 23
cellular phones, personal electronics, extended warranties and mobile
electronics. Comparable store sales, as adjusted for the new stores opened,
decreased 3.2% in fiscal 1999.
Gross profit for fiscal 1999 was approximately $53,231,000, an increase of
$3,795,000, or 7.7%, over the twelve month period ended January 31, 1998. The
increase in gross profit was attributable to our sales mix of higher margin
products, which include the introduction of new digital audio and video
products, and the increase in sales. Our gross profit margin was 35.0% in fiscal
1999 and 33.2% in the twelve month period ended January 31, 1998. The increase
in gross profit margin was directly related to our improved sales mix.
SG&A expenses for fiscal 1999 were approximately $49,893,000, an increase
of $771,000, or 1.6%, over the twelve month period ended January 31, 1998. The
primary reason for the increase in SG&A expenses was increased sales
commissions. SG&A expenses as a percentage of net sales decreased to 32.8% in
fiscal 1999 from 33.0% in the twelve month period ended January 31, 1998. The
percentage decrease was attributable to SG&A expenses which increased at a lower
rate as compared to the growth in sales.
Income from operations in fiscal 1999 was approximately $3,338,000, an
increase of $3,024,000, compared to the twelve months ended January 31, 1998.
Income from operations as a percentage of net sales increased to 2.2% in fiscal
1999 from 0.2% in the twelve month period ended January 31, 1998.
Interest expense for fiscal 1999 was $1,417,000, a reduction of $145,000
from the twelve month period ended January 31, 1998. The reduction was primarily
reflective of a lower effective interest rate on our revolving credit facility
on an increased level of borrowings in relation to the prior period.
In fiscal 1999, we 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 of
$818,000. The valuation reserve was increased until such time as we were able to
achieve sustained profitability. As a result, we had an effective income tax
rate of approximately 64.9% for fiscal 1999.
Net income for fiscal 1999 was approximately $707,000, or $.19 per basic
share, as compared to a net loss of approximately $2,217,000, or $.59 per basic
share, in the twelve month period ended January 31, 1998.
Seven Month Transition Period Ended January 31, 1998 Compared to Seven Month
Period Ended January 31, 1997
Net sales for the 1998 transition period were approximately $95,205,000, a
decrease of approximately $3,353,000, or 3.4%, over the seven month period ended
January 31, 1997. The net decrease in sales was primarily attributable to
reduced video sales. Audio sales increased for the transition period but were
more than offset by reduced sales of extended warranties, mobile electronics and
personal and portable electronics. Comparable store net sales as adjusted for a
new store and a relocated store decreased 5.3% in the 1998 transition period as
compared to the seven month period ended January 31, 1997.
Gross profit decreased by approximately $582,000, or 1.8%, in the 1998
transition period compared to the seven month period ended January 31, 1997. The
reduction in gross profit was primarily related to the reduction in net sales.
The gross profit margin was 32.5% in the 1998 transition period and 32.0% in the
seven month period ended January 31, 1997. However, the increase in gross profit
margin was directly related to our sales mix of higher margin product
categories.
SG&A expenses for the 1998 transition period were approximately
$29,903,000, an increase of approximately $76,000, or 0.3%, over the seven month
period ended January 31, 1997. SG&A expenses as a percentage of net sales
increased to 31.4% in the 1998 transition period from 30.3% in the seven month
period ended January 31, 1997. The percentage increase is directly attributable
to the reduction in net sales from the previous comparable period.
Income from operations was approximately $1,068,000, a decrease of
$658,000, or 38.1%, compared to the seven month period ended January 31, 1997.
Income from operations as a percentage of net sales decreased to 1.1% in the
1998 transition period from 1.7% in the seven month period ended January 31,
1997.
19
<PAGE> 24
Interest expense for the 1998 transition period was $897,000, an increase
of $6,000 from the seven month period ended January 31, 1997.
In the 1998 transition period, we recorded a tax provision of $1,175,000,
which included a provision for income taxes payable based on pretax operating
income and an increase in the valuation reserve on deferred tax assets of
$804,000. This valuation reserve was increased until such time as we were able
to achieve profitability. In previous fiscal periods, the valuation reserve on
deferred tax assets had been increased based on the estimated realization of the
deferred tax assets.
Net loss for the 1998 transition period was approximately $956,000, or $.26
per share, compared to net income of approximately $391,000, or $.10 per share,
in the seven month period ended January 31, 1997. The net loss in the 1998
transition 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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of capital for working capital, expansion
and growth have been our revolving line of credit, net cash from operations and
vendor credit. Our primary cash requirements are for new store openings,
relocations and upgrades of existing stores, as well as working capital to
support our inventory requirements and SG&A expenses.
In fiscal 2000, net cash provided by operating activities was approximately
$2,236,000 resulting primarily from cash flows from net income of $6,526,000, a
decrease in receivables of $1,217,000, an increase in accrued liabilities of
$2,496,000, additional inventory of $4,400,000, a reduction in the allowance for
deferred tax assets of $3,404,000 and a reduction in accounts payable of
$2,426,000. In connection with our store expansion program, $3,237,000 of
capital expenditures were incurred and funded from the $2,236,000 in net cash
flows generated from operations, proceeds from the sale of assets and increased
borrowings. Net cash provided by operating activities was $54,000 for the six
months ended July 31, 2000 primarily due to decreases in inventory, accounts
payable and accrued liabilities and an increase in prepaid and other current
assets since January 31, 2000. The major item contributing to the reduction in
current assets of $2,217,000 during the six month period was primarily related
to the $2,431,000 decrease in inventory and a decrease in prepaid and other
current assets of $334,000. There was a corresponding decrease of $3,114,000 in
current liabilities. The net decrease in current liabilities resulted primarily
from decreases in accounts payable of $3,722,000.
Our amended revolving credit facility expires on July 31, 2001. The terms
of the facility allow us to borrow, repay and reborrow up to $25,000,000 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 the prime
rate plus 1.0% and allows for a LIBOR pricing option for one, two, three or six
month periods at 2.0% over the corresponding LIBOR rate for the respective
period. We are eligible for a .25% basis point reduction in interest in calendar
2000 or 2001 if we meet certain working capital requirements. We pay a monthly
fee based upon the unused portion of the commitment less $5,000,000 at .375% per
annum. We are 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 us 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. We are
in compliance with all of our loan covenants through July 31, 2000.
Borrowings under the revolving credit facility are collateralized by our
assets, including our cash depository accounts, trade receivables, inventory,
selected fixed assets and intangible assets.
The interest rate under our revolving credit facility ranged between 7.15%
and 10.25% during fiscal 2000. The 7.15% rate is a result of the LIBOR pricing
option included as part of the amendment of the revolving credit facility. As of
July 31, 2000, the outstanding borrowings under our revolving credit facility
were
20
<PAGE> 25
approximately $9,776,000. The decrease of approximately $6,466,000 in
outstanding borrowings under our revolving credit facility in fiscal 2000 was
primarily attributable to proceeds from a $5,000,000 term loan.
In December 1999, we entered into a three year $5,000,000 term loan
agreement. Under the terms of the agreement, principal and interest is payable
in monthly installments at an effective annual interest rate of 9.96%. Proceeds
from the term loan were used to repay borrowings under the revolving credit
facility. The term loan is collateralized by the majority of our fixed assets.
The term loan agreement contains various affirmative and negative covenants
including those requiring us to maintain a quarterly ratio of current assets to
current liabilities of not less than 1.0 to 1.0 and 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 and, until January 31, 2001, we must
maintain a minimum interest coverage ratio, as defined, of no less than 3.5 to
1.0.
We intend to use portions of the net proceeds from this offering to pay the
outstanding balance on our revolving credit facility, which was $9,776,000 as of
July 31, 2000 but which will increase to $14,276,000 if we consummate our
proposed acquisition in Arizona. We will be subject to prepayment penalties in
amounts that are not material.
In June 1999, we sold our former Fort Lauderdale store property for
approximately $794,000 cash net of expenses. After repayment of the outstanding
mortgage, we received net proceeds of approximately $380,500.
We have executed a letter of intent and are engaged in the process of
negotiating a definitive agreement for the acquisition of the assets of Showcase
Home Entertainment of the Southwest, LLC, a privately held retailer of upscale
home entertainment products and custom design services with stores located in
the metropolitan Phoenix area. Showcase has two home electronic stores in
Scottsdale and Chandler, Arizona, and also operates a 600 square foot home
entertainment department in The Great Indoors, a Sears Roebuck specialty store
for home decorating and remodelling located in Scottsdale, Arizona. Assuming the
transaction is consummated, we have agreed to pay a total of $6,000,000 for
these assets, comprised of $4,500,000 in cash and $1,500,000 through the
issuance of our common stock.
We currently believe that funds from this offering, combined with funds
from our operations and borrowings available under our revolving credit facility
and vendor credit programs will be sufficient to satisfy our projected operating
cash requirements, and our store expansion and relocation plans during fiscal
2001. However, in order to continue store expansions and upgrades beyond 2001 or
to pursue acquisitions as a part of our expansion strategy, we may need to seek
additional sources of debt or equity financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101) and amended it in March
and June 2000. We are required to adopt the provisions of SAB 101 in the fourth
quarter of 2000. We are currently reviewing the provisions of SAB 101 and have
not fully assessed the impact of its adoption.
SEASONALITY AND QUARTERLY RESULTS
Historically, our business has been subject to seasonal variations, with
greater sales and profits being realized during the year-end holiday season. One
of the goals of our current marketing strategy is to minimize seasonal
fluctuations by increasing our promotional activity during the remainder of the
year from historical levels. These promotions are made by advertising through
newspapers, radio, catalogs, and direct mail, and include vendor specific
promotional sales in selected months. In addition to traditional consumer demand
cycles, our results of operations fluctuate based on a number of factors
including the timing of new store openings and relocations, changes in
volume-related rebates from manufacturers, merchandising costs, price
21
<PAGE> 26
changes or unfavorable local, regional or national economic developments that
result in reduced consumer spending.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1998 1998 1998 1999 1999 1999 1999
--------- -------- ----------- ----------- --------- -------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $33,152 $32,959 $33,795 $52,218 $38,468 $40,684 $39,263
Gross profit....................... 11,845 11,397 11,851 18,138 13,588 13,965 14,074
Income from operations............. 606 155 532 2,045 961 1,227 1,266
Income before income taxes
(benefit)......................... 245 (205) 252 1,725 621 881 958
<CAPTION>
QUARTER ENDED
----------------------------------
JANUARY 31, APRIL 30, JULY 31,
2000 2000 2000
----------- --------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Net sales.......................... $58,934 $42,676 $41,815
Gross profit....................... 20,665 15,077 14,906
Income from operations............. 3,328 1,516 1,586
Income before income taxes
(benefit)......................... 2,848 1,108 1,130
</TABLE>
INFLATION
We believe, because of competition among manufacturers and technological
changes in the consumer electronics industry, inflation has not had a
significant effect on the results of our operations during the last few years.
INTEREST RATES
Our exposure to market risk for changes in interest rates is limited to our
outstanding revolving credit borrowings. Based on our outstanding revolving
credit borrowings, a 1% change in the average effective interest rate would have
an effect on income before income taxes of approximately $73,000.
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<PAGE> 27
BUSINESS
OVERVIEW
We are a full service specialty retailer of a broad range of selected
high-quality, upscale entertainment and consumer electronics. We operate 24
full-size stores in the State of Florida, the fourth largest state with the
fastest growing population in the United States. In our full-size stores, we
sell home and car audio systems, large screen projection and conventional
televisions, video products, mobile electronics, car security systems, home
entertainment furniture and related customized services and accessories. We also
operate four stores featuring Bang & Olufsen audio products and accessories. Our
target customers seek informed advice concerning product selection and system
integration in conjunction with products incorporating the latest technology.
INDUSTRY
The consumer electronics industry is defined to include audio, video,
mobile electronics, communications, information technology, multimedia and
accessory products, as well as related services. According to the Consumer
Electronics Association, total sales of consumer electronics in the United
States were estimated to be $80 billion in 1999, a 5.0% increase from $76
billion in 1998, and are projected to increase to $84 billion in 2000. We
believe that the following trends in the consumer electronics industry create
significant opportunities for a specialty retailer of high-end audio and video
products.
Growth of Large Format, High Volume Retailers
In recent years, consumer electronics retailing has become increasingly
dominated by large format stores, including superstores and mass merchandisers.
These stores typically attempt to achieve high sales volumes by marketing a wide
variety of products to a broad segment of consumers, with an emphasis on
introductory level products and relatively low prices. Many of the major
department stores and catalog showroom companies have discontinued their sales
of consumer electronics as a result of their inability to compete with large
national superstores and discount merchandisers. Many national electronics
retailers have sought to capitalize on the growth of particular product
categories, such as personal computers, within the overall consumer electronics
industry. We believe this emphasis has contributed to a decreased focus by those
retailers on the higher-end audio and video products. We believe the emphasis of
the mass merchandisers on high volume, lower priced merchandising prevents these
stores from being able to provide the depth of product knowledge and the
consumer service that we are able to provide. This, combined with our focus on
high-end, high technology products, distinguishes us sufficiently so that we are
not targeting our sales to the same market as the mass merchandisers.
Consolidation of Consumer Electronics Retailers
The retail consumer electronics industry is highly fragmented, and we
estimate that the two largest superstore chains accounted for approximately 27%
of the total sales attributable to the 100 largest retailers in 1998. We believe
that the expansion of large format chains precipitated consolidation of the
industry during the 1990s by placing competitive pressure on regional broadline
consumer electronics retailers that had strategies that were undifferentiated
from consumer electronics superstores and mass merchandisers. There was also
increased pressure on smaller specialty retailers that were successfully
differentiated but which operated at a disadvantage due to limited scale, media
inefficiencies, reduced purchasing power and lack of management depth. We
believe that small specialty retailers will continue to face significant
competitive pressures. Therefore, regional specialty retailers with strong name
recognition represent attractive acquisition opportunities for retailers with
scale advantages to increase market share.
Development of New Technologies
Growth in the consumer electronics industry has historically been driven by
the introduction of new products based on technological innovations. For
example, in the 1980s, growth was accelerated by the
23
<PAGE> 28
proliferation of video cassette recorders and compact disc players. We believe
that a new generation of technology offers the prospect of increased industry
sales with the introduction of digital delivery systems, such as high definition
televisions (HDTV), digital audio players such as MP3 players, digital versatile
discs players (DVD) as well as direct broadcast satellite systems. The Consumer
Electronics Association estimates that:
- approximately 44,000 digital television units were sold in the first two
months of 2000 and that 10 million digital television units are expected
to be sold by 2003;
- approximately 1.4 million DVD players were sold in 1999;
- an additional six million DVD players will be sold in 2000; and
- sales of digital video products will average 35% annual growth from 1999
to 2002.
We believe that specialty retailers with sales personnel capable of
understanding and communicating the benefits of technologically advanced
products to consumers are well positioned to capture the increased sales that
may result should those products achieve market acceptance.
BUSINESS STRATEGY
Our business strategy is to capitalize on our position as the upscale, full
service consumer electronics alternative to our competitors. The following are
some of the key elements of our business strategy:
We Focus on Core Categories of Products
We seek to satisfy demand for consumer electronics and home entertainment
products, particularly in core product categories of audio, video, television
and mobile electronics. We carry products and systems made by high-end
manufacturers whose premium products are not readily available in the general
consumer marketplace.
We Offer High-End Products Incorporating the Most Advanced and Innovative
Technology
We offer our customers products and integrated entertainment systems that
incorporate the latest technologies and features. A significant portion of our
merchandise, such as products manufactured by Krell and Bang & Olufsen, is only
available through select specialty retailers. We also carry high-end lines of
products that are made by manufacturers whose lower-end lines are carried by
mass marketers. For example, we carry the Sony Video & TV XBR, Mitsubishi
Diamond, Pioneer Elite and Sony Audio ES product lines which are not broadly
available. Our focus on premium products that are not part of the general
consumer marketplace distinguishes us from most of the large retailers in our
industry and, we believe, appeals to our target consumers.
We Custom Design, Install and Service Integrated Multi-Room Systems
When requested, we visit our customers' homes and provide customized design
and consultation services to help them create integrated multi-room audio-visual
and entertainment environments. These integrated systems can include built-in
centralized audio systems for multiple areas, including swimming pools and other
outdoor areas, customized placement of flat-screen television sets, customized
and remote controlled lighting systems, including means of controlling the
degree of natural light in the environment, and other technologically advanced
systems. Once these systems are designed and installed, we will return to the
homes of our customers, as needed, in order to maintain and update these
systems.
We Showcase Products in Upscale Environments for our Customers to Experience
At each of our full-size stores we have segregated audition rooms, home
theaters and demonstration areas that enable sales personnel to demonstrate the
use of systems and products we offer. This format allows our customers to
compare and test the performance and features of similar products and systems.
Our Bang & Olufsen stores feature multiple product displays and a discrete
demonstration area which allows our customers to experience Bang & Olufsen
products. Our first Electronic Interiors store, which is scheduled to open in
24
<PAGE> 29
October 2000, is an entirely demonstration oriented environment, built to
simulate a residence and showcase some of our integrated systems. This new store
format is meant to allow visitors to experience the integration and synergy of
some of our systems in an architecturally and aesthetically appealing
environment.
We Maximize our Customers' Convenience in Every Stage of Product Purchase and
Use
We feel that it is important to participate in and provide premium customer
support in every stage of product selection and use. We endeavor to provide
useful product information and integration advice prior to purchases being made,
including visiting the homes of our customers in order to suggest customized
integrated systems. We permit our customers to audition purchased products at
their homes and, if a customer is not satisfied, we accept products returned
within 60 days for a refund or a credit toward the purchase of another product
or system. Car audio products, if installed by us, carry a one-year "defective
replacement guaranty" and, once we install car audio equipment, a customer will
not be charged for reinstallation into another car, installation of component
upgrades or reinstallation after repair service. We believe that being involved
with the customer in the full scope of the product life cycle helps to develop
customer loyalty.
We Train our Sales and Service Associates to Provide Premium Service and
Advice
In order to build and maintain customer satisfaction, we believe that it is
important to assure that the products purchased by each customer are those that
are best suited to their needs. We feel that having a knowledgeable sales force
is critical to achieving this goal. As such, our sales personnel receive
extensive technical product training in order to provide knowledgeable
assistance to our customers. We emphasize the need to provide personal attention
and assistance to each customer and seek to aid each customer's selection
process by demonstrating products and providing information with respect to
features, price, quality and system integration.
GROWTH STRATEGY
In addition to our business strategy, which integrates outstanding product
selection, concept design, professional installation and after-market service
and support, we intend to grow our business by doing the following:
Increase Same Store Sales
We expect to increase our same store sales by continuing our focus on
products incorporating the latest technology, since higher sales prices are
typically associated with these products. For example, we feel that by offering
an increasing number of digitally based products as they become available on the
market, we can benefit from the higher prices at which these products are sold.
We are also increasing our same store sales by expanding the capabilities that
can be incorporated into our integrated systems. For example, we recently began
to offer lighting and security solutions as additional features in our
integrated designs.
Open New Stores
We opened two new full-size stores, one in Tallahassee and one in North
Palm Beach, in November 1998 and four mall based Bang & Olufsen stores in
February and December 1998, June 1999 and March 2000. We expect to continue to
explore the opening of new stores in geographic areas within our existing
Florida distribution network and advertising radius in order to realize
efficiencies and cost benefits derived from the clustering of our stores. Our
current plans are to open two new shopping mall based Bang & Olufsen stores in
the next 18 months, one of which will be located adjacent to our new Electronic
Interiors location.
We expect to open our first Electronic Interiors store in October 2000,
which will be housed in a 4,200 square foot facility. The store will be entirely
demonstration oriented, built to simulate a residential environment showcasing
some of our integrated systems. These aesthetically pleasing environments will
allow visitors to experience our products and the integration of our systems. We
expect to open approximately eight additional Electronic Interiors stores in the
next two years.
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<PAGE> 30
Upgrade and Relocate Existing Stores
We continually improve our existing stores by upgrading and rotating
product displays and remodeling the interiors. At times we have chosen to
relocate our stores in connection with the need for expansion. In November 1999,
we relocated and upgraded our Tampa - Dale Mabry location from a 7,400 square
foot facility to a 15,000 square foot facility. In Fall 2000, we plan to move
one of our Miami stores, which is currently housed in a 11,000 square foot
facility, to a 15,700 square foot facility located in Miami. We also plan to
relocate our Altamonte Springs store in Spring 2001 from a 10,800 square foot
facility to a 15,000 square foot facility located in Altamonte Springs. We
believe these relocations will improve store visibility and increase customer
traffic for these stores.
Pursue Acquisitions
We believe that we may gain significant benefits through strategic
acquisitions of local and regional specialty retailers. Due to the fragmentation
of the retail consumer electronics market, many opportunities exist for the
acquisition of high-end stores. We have identified geographic markets with
favorable demographics and intend to pursue acquisitions of local and regional
stores with local brand-name recognition as a platform for expansion into those
markets.
We have executed a letter of intent and are engaged in the process of
negotiating a definitive agreement for the acquisition of the assets of Showcase
Home Entertainment of the Southwest, LLC, a privately held retailer of upscale
home entertainment products and custom design services with stores located in
the State of Arizona. Showcase has two home electronic stores in Scottsdale and
Chandler, Arizona, and also operates a 600 square foot home entertainment
department in The Great Indoors, a Sears Roebuck specialty store for home
decorating and remodelling located in Scottsdale, Arizona. Assuming the
transaction is consummated, we have agreed to pay a total of $6,000,000 for
these assets, comprised of $4,500,000 cash and $1,500,000 through the issuance
of our common stock.
STORE OPERATIONS
Stores
We operate 24 full-size Sound Advice stores and four Bang & Olufsen stores
in the State of Florida. Our full-size store format features multiple home audio
and video audition and demonstration areas, extensive portable electronics
displays and an area displaying large screen projection and conventional
televisions. While our stores vary in size, most of our full-size stores range
from 15,000 to 17,000 square feet.
Our Bang & Olufsen stores feature Bang & Olufsen audio products and
accessories. While our full-size stores allow our customers to sample any of our
merchandise, the Bang & Olufsen stores only have selected products displayed.
The Bang & Olufsen store format features multiple product displays and discrete
product demonstration areas. Our Bang & Olufsen stores are typically 1,500
square feet. During fiscal 2001, we plan to add two additional Bang & Olufsen
stores.
Site Selection
We typically locate our full-size stores in either freestanding buildings
or strip shopping centers close to high automobile traffic areas. We locate our
Bang & Olufsen stores in high pedestrian traffic shopping malls or retail areas.
New store sites are selected on the basis of several factors, including
location, relative competition, demographic characteristics of the local market
and proximity to highways or major roadways. When selecting a new store site, we
principally look for affluent markets with demographics that match our best
performing markets. Our stores are generally located in major metropolitan areas
and are close to regional malls or in other major shopping areas.
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<PAGE> 31
Store Economics
Our average investment for the 24 full-size stores we operate was
approximately $2,100,000, including leasehold improvements, fixtures and
equipment and inventory. The average net sales per full-size store was
approximately $7,161,000 for fiscal 2000.
Based on the cost of the last four full-size stores opened, we estimate
that the cost, other than initial inventory, of an additional full-size store or
relocation to a store built to suit for us to be between $1,150,000 and
$1,550,000. Based on the initial inventory cost for those stores, we estimate
the initial inventory cost for a new full-size store to be between $650,000 and
$950,000. Pre-opening expenses incurred in connection with an additional
full-size store are nominal.
Our average investment for each of the four Bang & Olufsen stores we
operate was approximately $405,000, including leasehold improvements, fixtures
and equipment and inventory. The average net sales per Bang & Olufsen store was
approximately $2,053,000 for fiscal 2000. Based on the cost of the four Bang &
Olufsen stores opened to date, we estimate the cost, other than initial
inventory, of opening a mall based Bang & Olufsen store to be between $150,000
and $210,000. Based on the initial inventory cost for those stores, we estimate
the initial inventory cost for a new Bang & Olufsen store to be between $50,000
and $150,000. Pre-opening expenses incurred in connection with an additional
Bang & Olufsen store are nominal.
Training
We provide our new employees with extensive training tailored to the skills
that are required for the employee to be a successful and effective part of our
team. We believe that proper employee training is an effective tool for hiring
and retaining our employees. We have the following employee training programs:
- Newly hired sales associates undergo a three week course that is taught
by our full time training personnel. This course includes two weeks of
classroom instruction at our corporate headquarters and one week of
training in one of our stores. The sales associates are also required to
receive a total of ten hours of product specific training per month and
to attend the four product seminars we conduct each year. Sales
associates generally receive their training in our Hollywood store
facility.
- Newly hired custom home installers generally join us in an apprentice
capacity, depending on their level of training, and will work with more
senior installers until their skill levels are sufficiently developed.
The custom home installers are required to receive an aggregate of ten
hours of technical training per month and to attend a mandatory product
seminar we conduct once a month. Some of our manufacturers, such as
Krell, Martin Logan, Bang & Olufsen and Boston Acoustics, offer training
sessions in various locations which our custom home installers attend as
frequently as necessitated by new product offerings. The cost of such
travel and training is typically shared between us and these
manufacturers.
- Newly hired custom mobile electronics installers as well as our newly
hired service technicians typically join us in an apprentice capacity and
are required to attend a minimum of six product seminars per year. To the
extent that any of our manufacturers require certification of our
automobile installers or service technicians to install or service their
products, we allow the manufacturers to provide the requisite training at
our locations to ensure that our custom mobile electronics installers and
service technicians are appropriately certified.
Store Management
Each full-size store has its own management structure consisting of a full
time general manager having overall responsibility at each location, a full time
operations manager and, in some stores, a sales manager. Each of our full-size
stores also has an individual in charge of the mobile electronics department.
Each Bang & Olufsen store has its own store manager.
Our sales management group consists of three regional sales vice
presidents, each overseeing several stores, one of which oversees the Bang &
Olufsen stores and custom sales, and all of whom report to our Chief
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<PAGE> 32
Executive Officer. In addition, we have one mobile electronics sales director.
We believe that this structure improves decision making and communication
throughout our organization. We believe that our turnover rates for our
employees are lower than industry averages. We have had minimal turnover at the
management level and, with respect to those sales associates who have been
employed by us for over one year, we estimate that we have a 12%-15% turnover in
our audio and video specialties and a 30% turnover rate in our mobile
electronics specialty. We regularly promote sales associates to positions of
greater responsibility.
Store Personnel Compensation
Our compensation plan is designed to provide greater incentives to our
sales associates to sell more than one product to a customer. Our sales
associates are compensated pursuant to a plan with commissions which vary
depending upon the type, price and gross margin of the product or service sold.
Sales managers are compensated through base pay and bonuses based in part on our
gross profit. Approximately 74% of our employees are compensated on a commission
basis.
PRODUCTS AND SERVICES
Products
In most of our full-size stores, a customer can choose from more than 2,100
products and approximately 150 manufacturers. Our products and services may be
grouped into the following categories:
<TABLE>
<CAPTION>
CATEGORY PRODUCTS SELECTED BRANDS
-------- -------- ---------------
<S> <C> <C>
Television.................... Conventional, projection, Sony TV, Mitsubishi, Pioneer,
plasma and LCD Panasonic, Toshiba, Loewe,
Sharp, Quasar, Runco and
Proton
Video......................... VCRs, camcorders, digital Sony, Panasonic, Hughes,
cameras, DVD players, digital Mitsubishi, Yamaha, Toshiba,
satellite systems and editing Canon, Aiwa Video, Philips
equipment Tivo, Pivoteli USA and Denon
Video
Audio......................... Audio systems and components, Yamaha, B&W, Bose, Monster
compact disc players and Cable, Bang & Olufsen,
recorders and speakers Klipsch, Sony, Boston Home,
Niles Audio, Philips, Pioneer,
Velodyne, Denon, Krell, B&K
and Martin Logan
Mobile Electronics............ Car and marine stereo Alpine, Kenwood, Boston
components and speakers, Acoustics, Sony, MTX, Eclipse,
wireless communications, Panasonic, Kicker, XTANT,
installation services and MBQuart, Magellan and Clifford
navigation equipment
Other......................... Audio and video furniture, N.E.W., Sony, Siemens,
telephone systems, personal Bell'ogetti, Panasonic, Tech-
electronics, extended service Craft, Laurier, JSP, Tova
contracts and repair services Design, Bush and Philips
</TABLE>
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<PAGE> 33
The table below shows the approximate percentage of our sales attributable
to each of our major product and service categories for fiscal 1996 and 1997,
the twelve month period ended January 31, 1998, fiscal 1999 and 2000 and the six
month periods ended July 31, 1999 and 2000. The personal computer product group,
which was added in fiscal 1995, was discontinued in January 1996.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED TWELVE MONTH FISCAL YEARS ENDED SIX MONTH PERIODS
JUNE 30, PERIOD ENDED JANUARY 31, ENDED JULY 31,
------------------ JANUARY 31, ------------------- -----------------
PRODUCT OR SERVICE CATEGORY 1996 1997 1998 1999 2000 1999 2000
--------------------------- ------- ------- ------------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Television and Video....................... 35% 37% 36% 39% 41% 38% 42%
Home Audio................................. 26 30 32 33 35 36 34
Mobile Electronics......................... 15 15 15 14 13 14 13
Service, Installation and Product
Warranty................................. 9 10 10 10 9 10 10
Miscellaneous Products..................... 10 8 7 4 2 2 1
Personal Computer.......................... 5 -- -- -- -- -- --
------- ------- ---------- ------- ------- ------ ------
Total............................. 100% 100% 100% 100% 100% 100% 100%
------- ------- ---------- ------- ------- ------ ------
------- ------- ---------- ------- ------- ------ ------
</TABLE>
In the following product categories, we have been advised by the following
manufacturers that we are the largest distributor of their products in the State
of Florida:
<TABLE>
<CAPTION>
CATEGORY BRANDS
-------- ------
<S> <C>
Television and Video......................... Mitsubishi, Pioneer Elite, Pioneer Plasma and
Loewe
Audio........................................ Yamaha, B&W, Bang & Olufsen, Klipsch, Boston
Acoustics, Niles Audio, Velodyne, Krell and
Martin Logan
Mobile Electronics........................... Eclipse, Kicker, XTANT and MBQuart
</TABLE>
Services
We support our product sales by providing many important customer services,
including the following:
- home delivery and setup;
- home audio installation and design;
- home theater installation and design;
- home lighting and security system installation;
- mobile electronics installation;
- in-home repair service; and
- in-store and in-home product instruction.
Our service and repair facility is located at our corporate headquarters in
South Florida. We are an authorized manufacturer's service representative for
substantially all of our products and are reimbursed by the manufacturer for the
service or repair we perform on products still covered by a manufacturer's
warranty. Products brought to the stores by customers for service or repair are
shipped to our service and repair facility through our warehouse distribution
system.
We offer, through an unrelated insurance company on a non-recourse basis,
an extended warranty contract for most of the audio, video and other merchandise
we sell, whereby a customer is provided coverage beyond the warranty period
covered by the manufacturer. We collect the retail sales price of the extended
warranty contract from the customer and remit the customer information and our
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, we may also perform the services required under the
extended warranty contracts for
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<PAGE> 34
which we are separately paid by the insurer. Revenues from the sale of extended
warranty contracts have historically been between 2% to 3% of net sales.
From time to time, in connection with the promotion of the sales of
extended warranty contracts, we have offered our customers the ability to apply
amounts paid for unused extended warranty contracts towards the purchase of
merchandise. We have recorded a liability for the use of this redemption feature
by our customers. This promotional program is no longer being offered.
Customer Financing
In addition to cash, we accept credit cards as a form of payment. Customers
who qualify can obtain longer term financing by obtaining a Sound Advice credit
card. We make this credit card available to our customers, without an annual
fee, through a private label credit card arrangement with an unrelated finance
company without recourse to us. We also periodically, as part of our promotional
activities, make special financing programs available to our customers. Some of
these programs may utilize a vendor issued credit card. We typically bear the
cost of these special financing programs. However, some of our vendors
periodically participate with and support us in the cost of financing
promotions.
Pricing
Most of our manufacturers will provide us with a recommended selling price
as well as a minimum allowed advertised price. We generally price our items
based on the minimum allowed advertised price but may thereafter offer in-store
promotions. We also offer a 60 day price guarantee which allows our customers to
receive from us 100% of the difference between the amount paid by them and any
lower price advertised for the identical product within 60 days of their
purchase.
ADVERTISING AND MARKETING
Our advertising strategy is to build name recognition as the premier
retailer of high-end consumer electronics. We promote ourselves through an
advertising program that emphasizes the print media and, to a lesser extent,
radio advertising. While we use newspaper advertisements as a means of
attracting new customers, we focus on direct mailings to our extensive customer
database to promote repeat business. Direct mailings of catalogs or special
invitations are made 8 to 12 times a year to those customers who are in our
database. We also use radio advertising as a means to promote special sale
events and promotions as well as to reach the younger segment of our targeted
demographics.
The following table shows our net advertising expense as a percentage of
net sales for fiscal 1997, the twelve month period ended January 31, 1998,
fiscal 1999 and 2000 and the six month periods ended July 31, 1999 and 2000. 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 YEAR TWELVE MONTH FISCAL YEARS ENDED SIX MONTH PERIODS
ENDED PERIOD ENDED JANUARY 31, ENDED JULY 31,
JUNE 30, JANUARY 31, ------------------- -----------------
1997 1998 1999 2000 1999 2000
(DOLLARS IN THOUSANDS) ------------ ------------- ------- ------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Advertising Expense........................ $4,086 $4,371 $3,640 $2,881 $505 $266
Percentage of Net Sales........................ 2.7% 2.9% 2.4% 1.6% 0.6% 0.3%
</TABLE>
We also have a website at www.wegivesoundadvice.com. This website is
designed to provide product information and support our advertising strategy.
Our website is not designed to enable, nor do we plan to, conduct direct
retailing through our website. This decision is based on the fact that we
believe our products are best promoted in a demonstration based environment.
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<PAGE> 35
INFORMATION SYSTEMS
We use a Tyler point-of-sale management information system that runs on
UNIX-based Hewlett-Packard computer hardware that can be upgraded to accommodate
future growth. This system tracks sales, inventory, purchasing and other key
information on a real-time basis. We use the data generated by the system in
order to:
- maintain and compile a customer information database reflecting products
and services historically purchased and used by our customers, which
enables us to more effectively direct advertising and product information
to selected customers;
- monitor and analyze inventory levels, gross margin, product mix, and
sales volume by categories, by sales personnel or on a per store basis;
- replenish inventory from our warehouse based on minimum and maximum
target levels established for each store and programmed into the system;
and
- review and analyze the performance of each of our stores and sales
personnel on a daily basis.
SUPPLIERS, PURCHASING AND DISTRIBUTION
We have no long-term merchandise purchase contracts or commitments. We
acquire our products from approximately 150 manufacturers, five of which
accounted for approximately 53% of our total product purchases during fiscal
2000. These five manufacturers were Sony, Mitsubishi, Panasonic, Yamaha and B&W.
We believe that competitive sources of supply would be available for most of our
products in the event that one or more of our sources were no longer available.
However, a loss of a primary source of supply would be likely to have an adverse
impact on us. To the extent that the unavailable source is for a product line
for which we are the primary distributor in our markets, we may only be able to
replace these products with products that are widely available in our markets.
Our policy is to take advantage of cash or payment discounts offered by
manufacturers. We have also been able to obtain substantial levels of
manufacturers' rebates based on volume buying levels and on occasion we have
been able to negotiate favorable terms on very large volume purchases. Since
March 1986, we have been a member of the Progressive Retailers Organization, a
buying group comprised of 16 retailers of home entertainment and consumer
electronic products located throughout the country, such as Tweeter Home
Entertainment and Ultimate Electronics. Membership in the Progressive Retailers
Organization allows the members to combine their purchases in order to negotiate
more favorable terms from vendors.
Substantially all the inventory that we purchase is shipped directly to our
central distribution facility located in Deerfield Beach, Florida. Inventory is
also shipped to and distributed from our support warehouses located in Tampa and
Orlando, Florida, which service the West Coast of Florida stores and Central
Florida stores, respectively. Each store receives shipments of inventory from
the central distribution and support warehouse facilities at least three times a
week, thereby enabling each store to maintain appropriate inventories of all
products and to promptly replenish inventories of fast moving merchandise. We
believe that our distribution system allows us to support a broad selection of
merchandise within the stores, while minimizing store level inventory
requirements. Inventory turn was approximately 3.7 times during fiscal 2000.
COMPETITION
Our principal competitors are the small specialty stores throughout the
State of Florida. To a lesser extent, we compete with local and regional
specialty stores that target the high-end market and larger national retailers,
such as Best Buy and Circuit City, with whom we have a limited product overlap.
While competition from Internet retailers will grow in the future, we believe
that our products are best marketed in a demonstration oriented environment. We
believe that this, combined with our on-location services, will keep us from
facing significant direct competition from Internet retailers. Lastly, many of
the manufacturers whose products we carry do not authorize the sale of their
products on the Internet or, to the extent they authorize
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<PAGE> 36
Internet sales, they establish minimum prices at which these products are to be
offered. As such, the incentive for customers to purchase these products using
the Internet is diminished.
EMPLOYEES
As of the date of this prospectus, we employed 801 persons, of whom
approximately 74% were commissioned employees, including car stereo and mobile
installers, service department technicians, sales associates and delivery and
custom installers. Substantially all of our employees are full-time. Our
employees are not unionized and we have never experienced a strike or work
stoppage. We usually experience some employee turnover, particularly during the
early term of their employment. We believe that our employee relations are good.
INTELLECTUAL PROPERTY
We have registered the "Sound Advice" name in the State of Florida but not
with the United States Patent and Trademark Office. We are not aware of any
adverse claims regarding the use of the name "Sound Advice."
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<PAGE> 37
PROPERTIES
Our 28 stores are clustered in each of four geographic areas: the
south-east coast of Florida (14 stores), the south-west coast of Florida (eight
stores), central Florida (three stores) and north Florida (three stores). Most
of our stores are between 15,000 and 17,000 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 table sets forth specific data regarding each of our
stores:
<TABLE>
<CAPTION>
CURRENT YEAR APPROXIMATE TOTAL LEASE EXPIRATION
REGION STORE LOCATION OPENED SQUARE FOOTAGE WITH OPTIONS
------ -------------------------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
FULL-SIZE STORES
Southeast Coast of Florida................... North Palm Beach Nov. 1998 18,500 Nov. 2022
15,000 Nov. 2021
Aventura Nov. 1996
31,800(1) Nov. 2019
Hollywood Nov. 1994
15,000 Mar. 2022
West Kendall Aug. 1992
17,500 Nov. 2010
Plantation Nov. 1990
20,800 Sept. 2010
Hialeah Gardens Nov. 1990
18,000 Jan. 2015
Boca Raton Jan. 1990
16,300 Nov. 2010
West Palm Beach Nov. 1988
18,900 Aug. 2028
Ft. Lauderdale Nov. 1988
11,000 Jan. 2022
South Kendall Oct. 1983
13,300 Jan. 2002
Coral Gables Oct. 1974
West Coast of Florida........................ Tampa - Dale Mabry Nov. 1999 15,000 Jan. 2025
16,000 Mar. 2018
Naples Nov. 1997
15,300 Nov. 2034
Fort Myers Nov. 1994
15,300 Apr. 2021
Clearwater May 1991
17,200 Apr. 2014
Tampa - Fowler Nov. 1989
17,700 Sept. 2011
St. Petersburg Sept. 1989
13,000 Apr. 2007
Sarasota May 1987
Central Florida.............................. Orlando - Sand Lake Nov. 1990 15,400 Nov. 2020
10,800 Aug. 2007
Altamonte Springs Sept. 1988
15,400 Mar. 2013
Orlando - East Colonial July 1988
North Florida................................ Tallahassee Nov. 1998 15,000 Jan. 2014
15,000 Nov. 2021
Jacksonville - Regency Nov. 1991
16,240 Dec. 2021
Jacksonville - Orange Park Nov. 1991
BANG & OLUFSEN STORES
1,300 Nov. 2009
South Miami Mar. 2000
1,100 Jan. 2009
Naples June 1999
1,800 May 2011
Boca Raton Dec. 1998
1,700 Feb. 2008
Aventura Feb. 1998
1,500 Summer 2010
North Palm Beach October
2000
ELECTRONIC INTERIORS
STORE North Palm Beach October 4,200 Summer 2010
2000
</TABLE>
---------------
(1) Includes training facilities.
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 Bang & Olufsen stores provide for a base rental with
cost of living adjustments or annual percentage increases and a percentage of
sales upon attainment of a specified level of sales. In addition, the leases
generally require us to pay all or a portion of the real estate taxes and
assessments, utilities, insurance and common area and interior maintenance and
repairs.
Our headquarters are located in a 53,900 square foot facility which
contains our executive offices, accounting, data processing, purchasing and
advertising operations and service and repair center. The lease expires in June
2001 and includes two additional one-year options. Our 56,300 square foot
central warehouse and distribution facility is located in Deerfield Beach,
Florida, approximately 15 miles north of our corporate headquarters. The lease
for this facility expires in May 2002. Our new warehouse and support facility
for our Florida West Coast Stores which we relocated in Tampa, Florida, contains
approximately 12,500 square feet. The lease for this facility expires in January
2003, exclusive of two five-year renewal options. We also occupy a
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<PAGE> 38
leased facility, which is approximately 10,000 square feet, in Orlando, Florida,
which is used as a regional warehouse and support facility. The lease for this
facility expires in May 2005 exclusive of a five year renewal option.
LEGAL PROCEEDINGS
We are, from time to time, involved in litigation relating to claims
arising out of our operations in the normal course of business. These claims
against us are generally covered by insurance. We are not currently subject to
any litigation which singularly or in the aggregate could reasonably be expected
to have a material adverse effect on our financial condition or results of
operations.
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<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION
---- --- ------------------
<S> <C> <C>
Peter Beshouri............................. 46 Chairman of the Board, President and Chief
Executive Officer
Michael Blumberg........................... 52 Senior Vice President, Secretary and
Director
Christopher O'Neil......................... 47 Executive Vice President, Chief Operating
Officer and Assistant Secretary
Kenneth L. Danielson....................... 50 Chief Financial Officer and Treasurer
G. Kay Griffith(1)......................... 55 Director
William F. Hagerty, IV(1).................. 41 Director
Herbert A. Leeds(1)........................ 83 Director
</TABLE>
---------------
(1) Members of the audit committee and stock option committee of our board of
directors.
Our officers are elected annually by the board of directors and hold office
until the next annual meeting of the Board of Directors or until their
successors have been duly elected and qualified.
Peter Beshouri, who has been an employee of Sound Advice since 1974, has
served as our Chairman of the Board and Chief Executive Officer since August
1982. Before that, he was the general sales manager of Sound Advice, and had
also served as a store manager and district manager. He was elected our
President in May 1985. Mr. Beshouri currently serves as a director of
Progressive Retailers Organization. In August 1995, Mr. Beshouri, together with
Sound Advice and a former chief financial officer of Sound Advice, voluntarily
agreed with the Securities and Exchange Commission, to the entry of a cease and
desist order by the SEC concerning our Form 10-K for fiscal 1991 and Forms 10-Q
for the quarters ended September 30 and December 31, 1991, which the SEC found
in that order had been materially misstated. The cease and desist order with
respect to Mr. Beshouri related to his supervisory responsibility in connection
with Sound Advice violating 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.
Mr. Beshouri did not admit or deny any wrongdoing. No fine or penalty was
imposed by the SEC on Mr. Beshouri.
Michael Blumberg, a founder and a director of Sound Advice, has served as
Senior Vice President since May 1989. Prior to that, he served as Vice President
beginning in August 1982, Vice President of Purchasing and Finance since May
1986 and Vice President of Purchasing and Marketing since October 1987. From our
inception until February 1995, Mr. Blumberg served as Treasurer and, since
October 1989, has also served as Secretary.
Christopher O'Neil joined us in 1979 as a car audio buyer and has been
serving as our Executive Vice President and Chief Operating Officer since
February 1992. Prior to that, Mr. O'Neil served as Vice President of Purchasing
beginning in May 1986, Vice President of Car Audio Purchasing in May 1989, which
title changed to Vice President/Purchasing in May 1990. Since December 1990, Mr.
O'Neil has also served as our Assistant Secretary.
Kenneth L. Danielson joined our finance department in September 1993 and
was named our Chief Financial Officer in October 1993. In February 1995, he was
also elected Treasurer. Prior to joining us, Mr. Danielson was employed by
Storer Communications, Inc., 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
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employment by Storer, he was employed by Coopers & Lybrand LLP from 1971 to
1978. Mr. Danielson is a certified public accountant.
G. Kay Griffith was elected a director of Sound Advice and a member of the
audit committee of the board of directors in July 1992 and was appointed a
member of the stock option committee in January 1997. Ms. Griffith joined us as
an employee in May 1993 and served as our Executive Vice President and Chief
Administrative Officer from September 1993 until February 1996. Since March
1998, Ms. Griffith has served as the President/Chief Executive Officer of the
G&L Holding Group, Inc. and G&L Banks headquartered in Pensacola, Florida. In
February 1996, Ms. Griffith formed Corporate Growth Consultants, Inc., a
management consulting firm that specializes in finance, strategic planning and
training. From the formation of that firm through 1997, Ms. Griffith performed
consulting services for us. From June 1991 to May 1993, Ms. Griffith was
Chairman and President/Chief Executive Officer of Admiralty Bank, headquartered
in Palm Beach Gardens, Florida. From September 1983 to June 1991, she held a
variety of officer positions with NationsBank of Florida, N.A., the last of
which was Senior Vice President/Regional Banking Executive.
William F. Hagerty, IV was elected a director of Sound Advice in February
1998 and a member of the audit committee of the board of directors in February
1998 and was appointed a member of the stock option committee in October 1999.
Mr. Hagerty has been a principal of Hagerty, Peterson & Company, LLC, a private
equity investment firm based in Washington, D.C., since 1996. In addition, since
August 1996 Mr. Hagerty has been the Vice Chairman of National Electronics
Warranty Corporation, an administrator of warranty programs based in Sterling,
Virginia primarily engaged in the sale of product warranty contracts and through
which administrator we offer customers extended warranty contracts for most of
our products. From 1994 to present, Mr. Hagerty has been a principal of the
Management Advisory Group, a Washington, D.C. based consulting firm which is a
wholly-owned subsidiary of Hagerty, Peterson & Company, LLC. During 1993 and
1994, Mr. Hagerty was affiliated with Trident Capital, L.P., a private equity
investment firm based in Chicago, Illinois. During the Bush Administration
(1991-1993), Mr. Hagerty served in the White House as the Chief Economist of the
President's Council on Competitiveness. From 1984 to 1991, he was a management
consultant with the Boston Consulting Group serving as the senior expatriate in
its Tokyo office with responsibility for all of that firm's international
activities in Japan.
Herbert A. Leeds was elected a director of Sound Advice in April 1996 and
was appointed a member of our audit committee in May 1996 and our stock option
committee in January 1997. Since 1975, Mr. Leeds has been President and Chief
Executive Officer of Leeds Business Counseling, Inc., a consulting firm owned by
him which has provided consulting services mainly to companies in the retail
industry and developers of retail malls. Since forming that firm, Mr. Leeds has,
from time to time, performed consulting services for us. Prior to launching his
company, Mr. Leeds served as the President and Chief Executive Officer and held
other senior executive positions with major department store chains.
COMPOSITION OF THE BOARD OF DIRECTORS
Our board of directors currently consists of five members. The board of
directors is divided into three staggered classes, consisting of two Class I
directors, Herbert A. Leeds and William F. Haggerty, IV, one Class II director,
G. Kay Griffith and two Class III directors, Peter Beshouri and Michael
Blumberg. The initial terms of the three classes will expire in 2000, 2001 and
2002, respectively. We believe that classification of the board of directors
facilitates continuity and stability of its business strategies and policies as
determined by the board of directors. Any shareholder holding 15% or more of the
outstanding shares of common stock is entitled to require cumulative voting for
the election of directors at the following meeting of the shareholders held in
order to elect directors. Consequently, at each annual meeting of shareholders,
the holders of a majority of the common stock will be able to elect all of the
successors of the class of directors whose terms expire at that meeting.
COMMITTEES OF THE BOARD OF DIRECTORS
The audit committee of the board of directors makes recommendations
concerning the engagement of independent public accountants, reviews the plans
for and results of the audit engagement with the independent public accountants,
approves professional services provided by the independent public account-
36
<PAGE> 41
ants and reviews the adequacy of our internal accounting controls. The audit
committee consists of G. Kay Griffith, William F. Hagerty, IV and Herbert A.
Leeds.
The stock option committee of the board of directors establishes and
implements compensation policies and programs for our executive officers and
exercises all powers of the board of directors in connection with our stock
option plans. The stock option committee of the board of directors consists of
G. Kay Griffith, William F. Hagerty, IV and Herbert A. Leeds.
COMPENSATION OF DIRECTORS
Directors who are also our officers or employees are not paid additional
compensation for acting as a director. We have established a standard
arrangement for compensating directors who are not our officers or employees for
services provided in that person's capacity as a director. Effective January 1,
1998, each outside director receives a fee of $5,000 on a quarterly basis for
serving as our director, as well as reimbursement of any out-of-pocket expenses
incurred for travel, lodging and meals in connection with attendance at any
meeting.
EXECUTIVE COMPENSATION
The following table sets forth information about the compensation of our
Chief Executive Officer and each of our three other executive officers whose
combined salary and bonus exceed $100,000 during fiscal 1997, the transition
period, fiscal 1999 and fiscal 2000 for services in all capacities (these
individuals are referred to as named executives):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
---------------------------- SECURITIES ALL OTHER
NAMES AND PRINCIPAL POSITION PERIOD SALARY BONUS UNDERLYING OPTIONS COMPENSATION
---------------------------- ------ -------- -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Peter Beshouri............................. 2000 $400,000 $200,000 60,000 0
Chairman, President and 1999 324,008 20,250 0 0
Chief Executive Officer 1998* 189,005 0 0 0
1997 324,008 0 105,000(1) 0
Michael Blumberg........................... 2000 320,000 75,000 24,000 0
Senior Vice President 1999 294,008 9,200 0 0
1998* 171,504 0 0 0
1997 294,008 0 90,000(1) 0
Christopher O'Neil......................... 2000 180,000 75,000 24,000 0
Executive Vice President 1999 178,333 9,200 0 3,500(3)
and Chief Operating Officer 1998* 87,500 0 0 4,900(3)
1997 150,000 0 101,000(1)(2) 8,367(3)
Kenneth L. Danielson....................... 2000 180,000 75,000 24,000 0
Chief Financial Officer and Treasurer 1999 180,000 9,200 0 0
1998* 93,333 0 0 0
1997 160,000 0 110,000(1)(4) 0
</TABLE>
---------------
* Seven-month transition period ended January 31, 1998.
(1) 75,000 of the options granted to each officer in fiscal 1997 were
non-qualified stock options. Those options vested and became exercisable
during fiscal 2000 with an exercise price of $1.89 per share and a term of
five years expiring on April 28, 2002. The remainder of these options are
qualified options.
(2) 11,000 of the incentive stock options issued to this officer in fiscal 1997
were issued in exchange for the cancellation of 11,000 incentive stock
options previously granted to such officer in fiscal 1994 which had an
exercise price of $6.29 per share and expired on September 21, 1998. The
11,000 incentive stock options which replaced the cancelled stock options
have an exercise price of $1.69 per share and expire on March 9, 2002.
(3) This sum represents the aggregate amount of a monthly automobile allowance
paid during fiscal 1997, the transition period and fiscal 1999.
(4) 20,000 of the incentive stock options issued to Mr. Danielson in fiscal 1997
were issued in exchange for the cancellation of 20,000 incentive stock
options previously granted to him in fiscal 1994 which had an exercise price
of
37
<PAGE> 42
$6.29 per share and expired on September 21, 1998. The 20,000 incentive
stock options which replaced the cancelled stock options have an exercise
price of $1.69 per share and expire on March 9, 2002.
The annual compensation amounts set forth above do not include any amounts
for perquisites and other personal benefits, securities or property extended to
our named executives, such as life insurance and disability insurance, because
we do not believe that, with respect to any individual, the dollar value of that
other annual compensation would equal or exceed the lesser of $50,000 or 10% of
the individual's total annual compensation shown above.
Securities underlying options in the table above represent incentive stock
options or non-qualified stock options issued pursuant to our 1999 stock option
plan adopted in September 1999 or our 1986 stock option plan adopted in May 1986
as subsequently amended and restated.
OPTION GRANTS IN FISCAL 2000
The following table shows all grants of options to the named executives
during fiscal 2000. The table also shows the value of the options granted at the
end of the option term of ten years if the price of our stock was to appreciate
annually by 5% and 10%. We can not assure you that our stock price will
appreciate at the rates shown in the table. All of the options set forth in the
table were issued pursuant to our 1999 stock option plan and are immediately
exercisable incentive stock options.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------
NUMBER POTENTIAL REALIZABLE VALUE
OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR (PER SHARE) DATE 5% 10%
---- ----------- ------------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Peter Beshouri........................... 60,000 27.0% $8.00 11/2/09 $301,800 $765,000
Michael Blumberg......................... 24,000 10.8 8.00 11/2/09 120,720 306,000
Christopher O'Neil....................... 24,000 10.8 8.00 11/2/09 120,720 306,000
Kenneth L. Danielson..................... 24,000 10.8 8.00 11/2/09 120,720 306,000
</TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL 2000
AND FISCAL 2000 YEAR-END OPTION VALUES
The following table provides information as to options exercised by each of
the named executives during fiscal 2000, and the value of unexercised options
held by the named executives at our fiscal year-end measured in terms of the
closing market price of our common stock on January 31, 2000.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS
OPTIONS AT AT JANUARY 31,
SHARES JANUARY 31, 2000 2000(1)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Peter Beshouri............................. 0 0 165,000/-0- $ 853,800/-0-
Michael Blumberg........................... 0 0 114,000/-0- 695,400/-0-
Christopher O'Neil......................... 0 0 155,000/-0- 1,004,010/-0-
Kenneth L. Danielson....................... 0 0 164,000/-0- 1,072,050/-0-
</TABLE>
---------------
(1) The closing market price of our common stock on the Nasdaq National Market
on January 31, 2000 was $9.25.
EMPLOYMENT AGREEMENTS
During fiscal 1997, the transition period and fiscal 1999, Peter Beshouri
and Michael Blumberg each had an employment agreement with us which provided for
an annual base salary for fiscal 1998 of $320,650 for
38
<PAGE> 43
Peter Beshouri and $290,400 for Michael Blumberg. The actual salaries paid to
each of Messrs. Beshouri and Blumberg are set forth in the Executive
Compensation table. The term of each employment agreement was originally for a
three year period expiring June 30, 1992, and had been extended each fiscal year
thereafter for additional one year periods.
Effective as of July 1, 1999, these employment agreements were again
extended for additional three year terms (until January 31, 2002) on
substantially the same terms and conditions as in effect under their respective
employment agreements during the previous fiscal year except that the annual
base salary payable to Mr. Beshouri and Mr. Blumberg pursuant to the amended
agreements was increased to $400,000 and $320,000, respectively, effective
February 1, 1999. Under the latest extensions of the employment agreements, each
of Messrs. Beshouri and Blumberg will be entitled to participate in our annual
incentive bonus plan and long term incentive stock option program. We are also
required to furnish each of Messrs. Beshouri and Blumberg with, among other
things, family health, life and disability insurance coverage.
The employment agreements with Messrs. Beshouri and Blumberg also provide
that, in the event of a change in control of Sound Advice, each of them can
terminate his full-time employment. A change in control occurs when Messrs.
Beshouri and Blumberg and other individuals or designees voted for or approved
by them no longer collectively comprise at least a majority of the members of
our board of directors or if either Mr. Beshouri or Mr. Blumberg is forced by a
merger, consolidation, reorganization or otherwise by operation of law or other
form of transaction to sell his shares of voting capital stock in Sound Advice
or if 50% or more of the consolidated assets, properties and businesses of Sound
Advice is sold or otherwise transferred to a third party or if an individual,
other than either Messrs. Beshouri and Blumberg, or another company or entity or
a group acting in concert becomes the beneficial owner of 25% or more of the
outstanding voting capital stock of Sound Advice as a result of acquisitions
made from persons other than Messrs. Beshouri and Blumberg or Sound Advice,
assuming such acquisitions from Sound Advice were approved by Messrs. Beshouri
and Blumberg. In the event that change in control was resisted by either Messrs.
Beshouri or Blumberg as evidenced by that person's failure to approve that
change in control either in his capacity as our director or shareholder, and
except as set forth below, he would be entitled to his compensation (both annual
salary and any bonus) and the other benefits provided for in his employment
agreement for the greater of three years or the remaining term of his employment
agreement. However, neither of Messrs. Beshouri or Blumberg would be entitled to
receive the compensation discussed in the previous sentence if:
- he accepts a new employment agreement with us or any successor; or
- our board of directors voted for or approved the change in control at a
time when Messrs. Beshouri and Blumberg and other individuals or
designees collectively comprised at least a majority of our board of
directors and he was offered a new contract at least as favorable as his
current employment agreement.
Effective February 1, 1999, we entered into employment agreements with each
of Christopher O'Neil, our Executive Vice President and Chief Operating Officer,
and Kenneth L. Danielson, our Chief Financial Officer and Treasurer. The term of
each agreement is for a three year period ending January 31, 2002. The
agreements provide for an annual salary of $184,000, participation in the annual
incentive bonus plan, long term incentive stock option plan and fringe benefits.
The agreements provide that if a change in control occurs, each of Messrs.
O'Neil and Danielson are entitled to receive a lump sum severance payment equal
to twice his salary and bonus for the last fiscal year. This severance payment
is not owed if the employee is either terminated for cause, as defined, or is no
longer employed with us on the closing date or effective date of the change in
control, whichever is later.
SEVERANCE AGREEMENTS
In May 1997, we entered into severance agreements with some of our
non-executive officer employees. In March 1998, these agreements were extended
for a one year period and we entered into severance agreements with two
additional non-executive officer employees. Effective February 1, 2000, these
agreements were extended for an additional one year period. The agreements
provide that if a change in control occurs, the employee is entitled to receive
a lump sum severance payment equal to up to one half of the employee's gross
39
<PAGE> 44
wages from the 12 months immediately preceding the month in which the change in
control occurs. This severance payment is not owed if the employee is:
- terminated for cause or is no longer employed with us on the closing date
or effective date of the change in control, whichever is later; or
- the employee is offered on or prior to the change in control to continue
as an employee of ours or our successor in substantially the same
position then held and the employee receives a written agreement from us
or our successor to the effect that, in the event that the employee is
terminated without cause within one year after the change in control
date, he shall be paid the severance payment in one lump sum on the date
of termination.
STOCK PLANS
1999 Stock Option Plan.
In September 1999, our board of directors adopted the Sound Advice 1999
stock option plan and recommended that it be submitted to our shareholders for
their approval at the next annual meeting. Our shareholders approved the option
plan at the 1999 annual meeting held on October 27, 1999. Pursuant to the option
plan, our employees and non-employee directors are given an opportunity to
acquire our common stock. The option plan is intended to supersede our 1986
option plan. The effective date of the option plan is September 30, 1999. In
November 1999, we granted 222,000 options, pursuant to our new plan, for an
exercise price of $8.00 per share.
A total of 500,000 shares of common stock are reserved for issuance under
the option plan, with that number to be appropriately adjusted in the event of
stock splits, stock dividends, combinations or reclassification of shares of our
common stock, or like capital adjustments. The option plan provides for the
granting to key employees of both "incentive stock options" within the meaning
of section 422A of the Code and "non-qualified stock options" and for the
granting to non-employee directors of "non-qualified stock options." An
incentive stock option has some tax advantages for the participant as compared
to a non-qualified stock option.
The following is a summary of some of the material features of the option
plan.
Shares Available For Awards; Annual Per-Person Limitations. Under the
option plan, the total number of shares of common stock that may be subject to
the granting of options under the option plan at any time during the term of the
option plan shall be equal to 500,000 shares.
The option plan provides for administration by the stock option committee
appointed by the board of directors who may change the members at any time,
which determines, by majority vote, the persons to be granted options under the
option plan, the number of shares subject to each option and the option price,
and which will specify whether options granted are incentive stock options or
non-qualified stock options. Members of the committee are not eligible to
receive options under the option plan unless approved by the members of the
board of directors who are not members of the stock option committee. No options
granted under the option plan are transferable by the optionee other than by
will or by the laws of descent and distribution, and each option is exercisable,
during the lifetime of the optionee, only by the optionee. Any options granted
to an employee will terminate three months after the optionee's termination of
employment except in cases of (i) disability occurring while employed or (ii)
death while employed or within three months thereafter. No options may be
granted under the option plan commencing 10 years after adoption of the option
plan.
The exercise price of any incentive stock option granted under the option
plan shall be not less than the fair market value of the shares subject to the
option on the date of grant. The exercise price of any non-qualified stock
option granted under the option plan shall be not less than 85% of the fair
market value of the shares subject to the option on the date of grant. The term
of each option and the manner in which it may be exercised will be determined by
the committee, subject to the requirement that no option may be exercisable more
than 10 years after the date of grant. With respect to any incentive stock
option granted to an employee who owns stock possessing more than 10% of the
voting rights of our outstanding capital stock on the date of
40
<PAGE> 45
grant, the exercise price of the option must be at least equal to 110% of the
fair market value of the shares subject to the option on the date of grant and
the option may not be exercisable more than five years after the date of grant.
The aggregate fair market value of the common stock, determined at the date of
the option grant, for which any employee may be granted incentive stock options
under the option plan in any calendar year may not exceed $100,000, plus
permissible carry over allowances. The option plan permits the exercise of
options either by a cash payment or, with the consent of the committee, by
surrender of shares of common stock, valued at fair market value at the date of
surrender, or a combination thereof.
INCENTIVE BONUS PLAN
In fiscal 1995, our board of directors adopted an annual incentive bonus
plan for some of our employees. The amounts that can potentially be granted
under the plan are based upon our annual operating performance. During fiscal
1997 and the transition period no bonuses were earned under the plan. During
fiscal 2000 and fiscal 1999, $732,600 and $47,850, respectively, were earned in
bonuses under the plan.
EMPLOYEE STOCK OWNERSHIP PLAN
We have an employee stock ownership plan, or ESOP, which holds shares of
our common stock for the benefit of all of our employees. We made no
contribution to the ESOP during fiscal 1997, the transition period, fiscal 1999
or fiscal 2000. However, as a result of reallocations to employee accounts of
the ESOP caused by employee terminations and pay outs of vested interests of
former employees, with respect to the ESOP'S fiscal year ended June 30, 1998,
Mr. Beshouri was allocated 27.115 additional shares of common stock, Mr.
Blumberg was allocated 27.116 additional shares of common stock, Mr. O'Neil was
allocated 17.349 additional shares of common stock and Mr. Danielson was
allocated .222 additional shares of common stock. There were no further
reallocations to employee accounts for the ESOP's fiscal years ended June 30,
1997 or 1999.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Under the Florida Business Corporation Act, a director is not personally
liable for monetary damages to the corporation or any other person for any
statement, vote, decision, or failure to act unless (i) the director breached or
failed to perform his duties as a director and (ii) a director's breach of, or
failure to perform, those duties constitutes (1) a violation of the criminal
law, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful, (2) a
transaction from which the director derived an improper personal benefit, either
directly or indirectly, (3) a circumstance under which an unlawful distribution
is made, (4) in a proceeding by or in the right of the corporation or procure a
judgment in its favor or by or in the right of a shareholder, conscious
disregard for the best interest of the corporation or willful misconduct, or (5)
in a proceeding by or in the right of someone other than the corporation or a
shareholder, recklessness or an act or omission which was committed in bad faith
or with malicious purpose or in a manner exhibiting wanton and willful disregard
of human rights, safety, or property. A corporation may purchase and maintain
insurance on behalf of any director or officer against any liability asserted
against him and incurred by him in his capacity or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the Florida Business Corporation Act.
Our articles and bylaws provide that we shall, to the fullest extent
permitted by applicable law, indemnify any officer or director or any former
officer or director.
41
<PAGE> 46
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of September 12, 2000, certain
information regarding the beneficial ownership of our common stock as of the
date of this prospectus and as adjusted to reflect the sale by us and the
selling shareholders of the shares of common stock offered hereby by:
- each person (or group of affiliated persons) known by us to be the
beneficial owner of more than 5% of the outstanding common stock;
- each of our named executives and directors;
- all of our executive officers and directors as a group; and
- the selling shareholders.
This table also provides information with respect to the number of shares
of common stock that certain of our shareholders are obligated to sell if the
underwriters exercise their over-allotment option and the impact that this will
have on those shareholders' post-offering common stock holdings. Except as
otherwise indicated in the footnotes to this table, we believe that the persons
named in this table have sole voting and investment power with respect to all
the shares of common stock indicated.
<TABLE>
<CAPTION>
SHARES OWNED BEFORE
OFFERING SHARES TO BE OFFERED SHARES OWNED AFTER OFFERING
------------------------- BY THE SELLING ---------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE SHAREHOLDERS NUMBER PERCENTAGE
------------------------ ----------- ---------- -------------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Peter Beshouri(2)(3)............ 516,088 13.1% 0 516,088 9.0%
Michael Blumberg(2)(4).......... 460,938 11.8 0 460,938 8.1
FMR Corp.(5).................... 228,500 6.0 0 228,500 4.1
Dimensional Fund Advisors
Inc.(6)........................ 223,647 6.0 0 223,647 4.0
Kenneth L. Danielson(7)......... 221,001 5.6 0 221,001 3.8
Joseph Piccirilli(2)............ 210,468 5.6 194,532 15,935 *
Christopher O'Neil(8)........... 161,391 4.1 0 161,391 2.8
Gregory Sturgis(2).............. 155,468 4.1 155,468 0 0
William F. Hagerty, IV(9)....... 43,100 1.1 0 43,100 *
G. Kay Griffith(10)............. 41,000 1.1 0 41,000 *
Herbert A. Leeds................ 5,000 * 0 5,000 *
All directors and officers as a
group (seven persons including
some of those listed above).... 1,448,518 32.7 0 1,448,518 23.3
<CAPTION>
ASSUMING THE OVER-ALLOTMENT OPTION IS
EXERCISED BY THE UNDERWRITERS
------------------------------------------
SHARES OWNED AFTER OFFERING
SHARES TO BE ---------------------------
NAME OF BENEFICIAL OWNER OFFERED NUMBER PERCENTAGE
------------------------ ------------ ------------ -----------
<S> <C> <C> <C>
Peter Beshouri(2)(3)............ 128,300 387,788 6.7%
Michael Blumberg(2)(4).......... 128,265 332,673 5.8
FMR Corp.(5).................... 0 228,500 4.1
Dimensional Fund Advisors
Inc.(6)........................ 0 223,647 4.0
Kenneth L. Danielson(7)......... 10,000 211,001 3.7
Joseph Piccirilli(2)............ 15,935 * *
Christopher O'Neil(8)........... 40,000 121,391 2.1
Gregory Sturgis(2).............. 0 0 0
William F. Hagerty, IV(9)....... 0 43,100 *
G. Kay Griffith(10)............. 0 41,000 *
Herbert A. Leeds................ 0 5,000 *
All directors and officers as a
group (seven persons including
some of those listed above).... 306,565 1,141,953 18.3
</TABLE>
---------------
* Less than 1%.
(1) The address of each person is care of Sound Advice, 1901 Tigertail
Boulevard, Dania Beach, Florida 33004.
(2) See "Right of First Refusal and Voting Trust Agreement" below.
(3) Includes 620.448 vested shares in our ESOP (based upon the annual report of
the ESOP for fiscal 1999) and 165,000 shares of common stock underlying
immediately exercisable stock options.
(4) Includes 620.452 vested shares in our ESOP (based upon the annual report of
the ESOP for fiscal 1999) and 114,000 shares of common stock underlying
immediately exercisable stock options.
(5) 82 Devonshire Street, Boston, Massachusetts 02109. Based upon a Schedule
13G filed for the calendar year ended December 31, 1999. Includes 220,500
shares of common stock held by Fidelity Management & Research Company
through its Fidelity Low-Priced Stock Fund, as to which Edward C. Johnson,
III has sole dispositive power and as to which the Board of Trustees of the
Fund has sole voting power. Also includes 8,000 shares of common stock held
by Fidelity Management Trust Company, as to which Edward C. Johnson, III
has sole dispositive and voting power. Under the beneficial ownership rules
of the Securities and Exchange Commission, Strategic Advisers, Inc., a
wholly owned subsidiary of FMR Corp., and some members of the Johnson
family may be deemed to beneficially own these shares.
(6) 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. Based upon a
Schedule 13G filed by Dimensional Fund Advisors Inc. on February 14, 2000.
Consists of 223,647 shares held by other investment vehicles, including
group trusts, for which Dimensional acts as an investment manager.
Dimensional has both voting and dispositive power over these shares, but
disclaims beneficial ownership of them.
(7) Includes 1.205 vested shares in our ESOP (based upon the annual report of
the ESOP for fiscal 1999) and 164,000 shares of common stock underlying
immediately exercisable stock options.
(8) Includes 390.811 vested shares in our ESOP (based upon the annual report of
the ESOP for fiscal 1999) and 155,000 shares of common stock underlying
immediately exercisable stock options.
(9) Includes 42,600 shares of our common stock over which Mr. Hagerty has
shared voting and investment power.
(10) Includes 40,000 shares of common stock underlying immediately exercisable
stock options.
(11) Represents shares of common stock issuable upon the exercise of immediately
exercisable warrants.
RIGHT OF FIRST REFUSAL AND VOTING TRUST AGREEMENT
On June 30, 1986, our principal shareholders at that time, Peter Beshouri,
Michael Blumberg, Joseph Piccirilli and Gregory Sturgis, entered into a right of
first refusal and voting trust agreement. The voting trust
42
<PAGE> 47
under the agreement expired on June 30, 1996, while the right of first refusal
continues. Pursuant to the agreement, each of these principal shareholder, for
himself and on behalf of his heirs, beneficiaries, legal representatives and
permitted assigns, has agreed not to sell, transfer, assign, pledge, encumber or
otherwise dispose of any of his shares of common stock except (a) by will or the
laws of intestate succession, (b) to a trust in which the principal shareholder
or his immediate family are the sole beneficiaries, (c) with the written consent
of all of the other principal shareholders or (d) pursuant to the right of first
refusal granted to the other principal shareholders. Under the right of first
refusal, in the event a principal shareholder or his heirs, beneficiaries, legal
representatives or permitted assigns desires to sell any shares of common stock
pursuant to a bona fide offer or otherwise, the other principal shareholders
shall have the right and option to purchase the shares at a price equal to the
bona fide offer price per share, if any, or the average of the closing bid and
ask prices on the Nasdaq National Market for our common stock over the four full
weeks preceding the date the notice of intent to sell is given. We are in the
process of obtaining waivers of these rights of first refusal from these
principal shareholders to the extent necessary to allow the sales contemplated
by this offering.
CERTAIN TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Due to the fact that, during fiscal 2000 and fiscal 1999, the seven month
transition period ended January 31, 1998 and fiscal 1997, we did not have a
compensation committee of our board of directors (or board committee performing
equivalent functions), Peter Beshouri and Michael Blumberg, in their capacities
as members of our board of directors, participated in deliberations of the board
of directors concerning the authorization of the three-year renewals of the
employment agreements of Messrs. Beshouri and Blumberg discussed in "Employment
Agreements." Furthermore, Messrs. Sturgis (a former director), McEwen (a former
director) and Leeds, in their capacities as members of our company's board of
directors during fiscal 1997, participated in deliberations of the board
concerning the granting of warrants to purchase 5,000 shares of common stock to
each of them.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 10,000,000 shares of common stock.
The following summary description of our capital stock is not intended to
be complete and is qualified in its entirety by reference to the provisions of
applicable law and to our Amended and Restated Articles of Incorporation and
Amended and Restated By-laws, filed as exhibits to the Registration Statement of
which this prospectus is a part.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders. Any shareholder holding 15% or
more of the outstanding shares of common stock is entitled to require cumulative
voting for the election of directors at the following meeting of the
shareholders held in order to elect directors. Cumulative voting allows, but
does not require, each shareholder to cast for any one director candidate the
number of votes that are equal to the product of the number of shares of common
stock held by such shareholder and the number of directors to be elected.
Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available for
this purpose. Upon the liquidation, dissolution or winding up of Sound Advice,
the holders of common stock are entitled to receive ratably the net assets of
Sound Advice available after the payment of all debts and other liabilities.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
offered by us in the offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
could be subject to, and may be adversely affected by, the rights of the holders
of shares of any series of preferred stock, if any, which the shareholders may
authorize in the future.
43
<PAGE> 48
FLORIDA LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
We are subject to (i) Section 607.0901 of the Florida Business Corporation
Act, which generally requires supermajority approval by disinterested directors
or shareholders of certain specified transactions between a corporation and
holders of more than 10% of the outstanding shares of the corporation (or their
affiliates), and (ii) Section 607.0902 of the Florida Business Corporation Act,
which generally provides that shares acquired in excess of certain specified
thresholds will not possess any voting rights unless such voting rights are
approved by a majority vote of the corporation's disinterested shareholders.
The authorized but unissued shares of common stock are available for future
issuance without shareholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued and unreserved common stock may enable the
board of directors to issue shares to persons friendly to current management
which could render more difficult or discourage an attempt to obtain control of
Sound Advice by means of a proxy contest, tender, offer, merger or otherwise,
and thereby protect the continuity of our management.
SHAREHOLDERS RIGHTS PLAN
In May 1997, our board of directors adopted a common stock purchase rights
plan and subsequently declared a dividend distribution of one common stock
purchase right on each outstanding share of common stock. As amended, each right
has an initial exercise price of $50 for one share of common stock. Generally,
the rights will be exercisable only if a person or group acquires 15% 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% or more of the common stock.
Upon that occurrence, each right (other than rights owned by the person or group
making the acquisition or announcing the tender offer) will entitle the holder
to purchase from us 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% or more of the
common stock, the rights are redeemable for $.001 per right at the option of the
board of directors. The rights plan could have the effect of making it more
difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of us without negotiating with our board of
directors. The rights will expire on May 4, 2007. As of September 12, 2000,
3,788,394 rights were outstanding.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Sound Advice's common stock is
American Stock Transfer & Trust Company.
44
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among us, the underwriters, and the selling shareholders, each of the
underwriters named below has severally agreed to purchase from us the number of
shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Fahnestock & Co. Inc......................................
Ryan, Beck & Co...........................................
---------
Total........................................... 2,150,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to conditions. The underwriters are committed to
purchase and pay for all the above shares of common stock, if any are purchased.
Public Offering and Dealers Concession. The underwriters propose to offer
the shares of common stock offered by this prospectus to the public at the
offering price per share set forth on the cover page of this prospectus and to
certain dealers at that price less a concession not in excess of $______ per
share. The underwriters may allow, and these dealers may reallow, concessions
not in excess of $______ per share on sales to certain other dealers. After
commencement of this offering, the underwriters may change the offering price,
concessions and other selling terms. None of these changes will alter the amount
of proceeds to be received by us as described on the cover page of this
prospectus.
Over-Allotment Option. The selling shareholders have granted the
underwriters an option, which may be exercised within 30 days after the date of
this prospectus, to purchase up to 322,500 additional shares of common stock to
cover over-allotments, if any, at the public offering price less the
underwriting discount, as described on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, each of the underwriters
will be severally committed, subject to several conditions, to purchase these
additional shares of common stock in proportion to their respective purchase
commitments, as indicated in the preceding table, and the selling shareholder
will be obligated to sell these additional shares to the underwriters. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the shares of common stock offered by this
prospectus. These additional shares will be sold by the underwriters on the same
terms as those on which the shares offered by this prospectus are being sold.
Underwriting Compensation. Underwriting compensation will consist of the
underwriting discount and the reimbursement of expenses and the grant of
warrants described below. The underwriting discount consists of the difference
between the amount paid by the underwriters to purchase the shares of common
stock from us and the offering price of the shares to the public. The
underwriting discount represents 6.5% of the public offering price per share of
common stock. The following table summarizes the compensation and estimated
expenses we and the selling shareholders will pay:
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts paid by us.................... $ $ $ $
Expenses payable by us...............................
Underwriting discounts paid by the selling
shareholders.......................................
Expenses payable by the selling shareholders.........
</TABLE>
The underwriters will also receive a nonaccountable expense allowance of
$75,000. Of this amount, $30,000 has been advanced to the underwriters; however,
any unaccounted for portion of this $30,000 will be returned to us in the event
this offering is not consummated.
Offering Expenses. We estimate that the offering expenses, excluding the
representatives of the underwriters' nonaccountable expense allowance, payable
by us will be $825,000.
45
<PAGE> 50
Indemnification of Underwriters. In the underwriting agreement, we and the
selling shareholders have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in connection with these
liabilities.
Discretionary Accounts. The underwriters have informed us that they do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Warrants. We have agreed to grant the representatives of the underwriters
warrants to purchase up to 200,000 shares of common stock. The warrants and the
underlying shares of common stock are being registered pursuant to the
Registration Statement filed with respect to the common stock offered by this
prospectus. The warrants are exercisable at any time during a period of four
years commencing one year after their issuance and provide for an exercise price
equal to 120% of the public offering price of the common stock. The warrants are
non-transferable for a period of one year, except to officers of the
representatives of the underwriters, and grant to the holders of the warrants
certain registration rights for the common stock issuable upon the exercise
thereof.
Lock-up Agreements. We, our executive officers and directors and certain
other shareholders have agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities
Exchange Commission a registration statement under the Securities Act of 1933
relating to any shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, or publicly disclose
the intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of the underwriters for a period of 90 days
after the date of this prospectus.
Stabilization and Other Transactions. In order to facilitate this
offering, persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of our common stock during and
after this offering, including over-allotment, stabilizing and short-covering
transactions and the imposition of penalty bids. Persons participating in this
offering may also engage in passive market-making transactions in our common
stock on the Nasdaq National Market. Specifically, the underwriters may over-
allot or otherwise create a short position in our common stock for their own
account by selling more shares than have been sold to them by us. The
underwriters may elect to cover this short position by purchasing shares of our
common stock in the open market or by exercising the over-allotment option
granted to the underwriters. In addition, the underwriters may stabilize or
maintain the price of our common stock by bidding for or purchasing shares of
our common stock in the open market and may impose penalty bids, under which
selling concessions allowed to syndicate members or other broker-dealers
participating in this offering are reclaimed if shares of our common stock
previously distributed in this offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages resales.
We make no representation as to the magnitude or effect of these stabilization
transactions. Persons participating in this offering may effect these
transactions on the Nasdaq National Market or otherwise and may discontinue
these transactions at any time.
LEGAL MATTERS
Greenberg Traurig, P.A., Miami, Florida, will deliver an opinion to the
effect that the shares of common stock being offered in this offering are
validly issued, fully paid and non-assessable. Some legal matters related to
this offering will be passed upon for the underwriters by Morgan, Lewis &
Bockius LLP, Miami, Florida.
EXPERTS
The consolidated financial statements and schedule of Sound Advice, Inc.
and subsidiaries as of January 31, 2000 and 1999, and for the years ended
January 31, 2000 and 1999, the seven-month period ended January 31, 1998 and the
year ended June 30, 1997, have been included herein and in this prospectus in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
46
<PAGE> 51
AVAILABLE INFORMATION
Sound Advice files reports, proxy statements and other information with the
Securities and Exchange Commission. Investors may inspect and copy these
reports, proxy statements and other information at the SEC's Public Reference
Room the SEC maintains at 450 Fifth Street, N.W., Washington D.C. 20549 and at
the SEC's Regional Offices at Seven World Trade Center, New York, New York 10048
and 500 West Madison Street, Chicago, Illinois 60661. Investors may obtain
information on the operation of the SEC's Public Reference Room by calling the
SEC at 1(800)SEC-0330. This information also is available at the SEC's World
Wide Web site at http://www.sec.gov. This information also can be inspected at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
Sound Advice filed a Registration Statement on Form S-1 under the
Securities Act relating to the common stock offered by this prospectus with the
SEC. This prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement, portions having been omitted from this prospectus in accordance with
the rules and regulations of the SEC. Statements contained in this prospectus
concerning the contents of any contract or any other document referred to are
not necessarily complete; reference is made in each instance to the copy of that
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference. For further
information with respect to Sound Advice and the common stock offered in this
offering, we refer investors to the Registration Statement, the exhibits thereto
and the financial statements, notes and schedules filed as a part thereof.
47
<PAGE> 52
SOUND ADVICE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
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-19
</TABLE>
F-1
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Sound Advice, Inc.:
We have audited the accompanying consolidated balance sheets of Sound
Advice, Inc. and subsidiaries (the "Company") as of January 31, 2000 and 1999,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years ended January 31, 2000 and 1999, the seven-
month period ended January 31, 1998 and the year ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sound
Advice, Inc. and subsidiaries as of January 31, 2000 and 1999, and the results
of their operations and their cash flows for the years ended January 31, 2000
and 1999, the seven-month period ended January 31, 1998 and the year ended June
30, 1997, in conformity with generally accepted accounting principles.
KPMG LLP
Fort Lauderdale, Florida
March 28, 2000
F-2
<PAGE> 54
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2000 (UNAUDITED), JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>
JANUARY 31,
JULY 31, -------------------------
2000 2000 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 296,640 564,898 1,384,051
Receivables:
Vendors............................................ 4,238,462 3,979,027 5,376,641
Trade.............................................. 1,000,087 1,024,652 868,378
Employees.......................................... 498,770 431,775 339,451
----------- ----------- -----------
5,737,319 5,435,454 6,584,470
Less allowance for doubtful accounts............... 509,600 508,640 440,900
----------- ----------- -----------
5,227,719 4,926,814 6,143,570
Inventories, net...................................... 33,029,179 35,459,724 30,987,826
Prepaid income taxes.................................. 514,664 -- --
Prepaid and other current assets...................... 496,236 830,407 472,122
Deferred tax assets................................... 1,599,578 1,599,578 --
----------- ----------- -----------
Total current assets.......................... 41,164,016 43,381,421 38,987,569
Property and equipment, net............................. 15,434,783 15,024,047 16,006,704
Deferred tax assets, noncurrent......................... 1,915,130 1,915,130 --
Other assets............................................ 418,618 435,389 115,040
Goodwill, net........................................... 159,399 176,472 107,729
----------- ----------- -----------
$59,091,946 60,932,459 55,217,042
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft........................................ $ 966,795 1,662,351 --
Borrowings under revolving credit facility............ 9,775,835 7,309,531 13,775,936
Current maturities of long-term debt.................. 1,510,746 1,516,834 467,483
Accounts payable...................................... 6,162,716 9,884,337 12,310,092
Income taxes payable.................................. -- 781,041 1,071,948
Accrued liabilities................................... 8,719,706 9,096,046 6,599,691
Deferred tax liabilities.............................. 111,156 111,156 --
----------- ----------- -----------
Total current liabilities..................... 27,246,954 30,361,296 34,225,150
Long-term debt, excluding current maturities............ 2,629,898 3,363,424 --
Capital lease obligation, excluding current
installments.......................................... 1,493,306 788,444 797,180
Other liabilities and deferred credits.................. 3,594,492 3,727,568 4,136,776
----------- ----------- -----------
Total liabilities............................. 34,964,650 38,240,732 39,159,106
----------- ----------- -----------
Shareholders' equity:
Common stock; $.01 par value. Authorized 10,000,000
shares; issued and outstanding 3,787,394 shares
(unaudited) at July 31, 2000, 3,766,394 shares at
January 31, 2000 and 3,733,894 shares at January
31, 1999........................................... 37,874 37,664 37,339
Additional paid-in capital............................ 11,245,665 11,175,205 11,067,455
Retained earnings..................................... 12,843,757 11,478,858 4,953,142
----------- ----------- -----------
Total shareholders' equity.................... 24,127,296 22,691,727 16,057,936
Commitments and contingencies
----------- ----------- -----------
$59,091,946 60,932,459 55,217,042
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 55
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX-MONTH PERIODS ENDED JULY 31, 2000 AND 1999 (UNAUDITED),
THE FISCAL YEARS ENDED JANUARY 31, 2000 AND 1999,
THE SEVEN-MONTH PERIOD ENDED JANUARY 31, 1998
AND THE FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
TRANSITION
SIX MONTHS ENDED FISCAL YEARS PERIOD FISCAL YEAR
JULY 31, --------------------------- ----------- ------------
------------------------- JANUARY 31, JANUARY 31, JANUARY 31, JUNE 30,
2000 1999 2000 1999 1998 1997
----------- ----------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. $84,490,917 79,151,402 177,348,675 152,123,841 95,204,659 152,316,416
Cost of goods sold......... 54,508,204 51,598,866 115,056,780 98,893,332 64,233,844 102,298,599
----------- ----------- ------------ ------------ ----------- ------------
Gross profit............. 29,982,713 27,552,536 62,291,895 53,230,509 30,970,815 50,017,817
Selling, general and
administrative
expenses................. 26,880,883 25,364,571 55,510,026 49,892,795 29,903,064 49,044,756
----------- ----------- ------------ ------------ ----------- ------------
Income from operations... 3,101,830 2,187,965 6,781,869 3,337,714 1,067,751 973,061
Other income (expense):
Interest expense......... (901,953) (706,428) (1,366,863) (1,417,017) (897,086) (1,556,314)
Other income (expense)... 38,022 20,349 (106,951) 96,311 48,572 101,255
----------- ----------- ------------ ------------ ----------- ------------
Income (loss) before
income (benefit)
taxes................ 2,237,899 1,501,886 5,308,055 2,017,008 219,237 (481,998)
Income (benefit) taxes..... 873,000 -- (1,217,661) 1,310,000 1,175,000 389,000
----------- ----------- ------------ ------------ ----------- ------------
Net income (loss)........ $ 1,364,899 1,501,886 6,525,716 707,008 (955,763) (870,998)
=========== =========== ============ ============ =========== ============
Common and common
equivalent per share
amounts:
Basic net income (loss)
per share.............. $ 0.36 0.40 1.74 0.19 (0.26) (0.23)
=========== =========== ============ ============ =========== ============
Diluted net income (loss)
per share.............. $ 0.32 0.36 1.55 0.18 (0.26) (0.23)
=========== =========== ============ ============ =========== ============
Weighted average number of
shares
outstanding -- basic..... 3,771,474 3,734,477 3,745,999 3,729,519 3,728,894 3,728,894
=========== =========== ============ ============ =========== ============
Weighted average number of
shares
outstanding -- diluted... 4,315,514 4,120,600 4,223,684 3,965,333 3,728,894 3,728,894
=========== =========== ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 56
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX-MONTH PERIOD ENDED JULY 31, 2000 (UNAUDITED),
THE FISCAL YEARS ENDED JANUARY 31, 2000 AND 1999,
THE SEVEN-MONTH PERIOD ENDED JANUARY 31, 1998,
AND THE FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER OF ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
---------- ------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
Net income......................... -- -- -- 6,525,716 6,525,716
Issuance of common stock........... 32,500 325 60,500 -- 60,825
Tax benefit on exercise of
options......................... -- -- 47,250 -- 47,250
---------- ------- ---------- ---------- ----------
Balance, January 31, 2000............ 3,766,394 37,664 11,175,205 11,478,858 22,691,727
Net income (unaudited)............. -- -- -- 1,364,899 1,364,899
Issuance of common stock
(unaudited)..................... 21,000 210 70,460 -- 70,670
---------- ------- ---------- ---------- ----------
Balance, July 31, 2000 (unaudited)... 3,787,394 $37,874 11,245,665 12,843,757 24,127,296
========== ======= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 57
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JULY 31, 2000 AND 1999 (UNAUDITED),
THE FISCAL YEARS ENDED JANUARY 31, 2000 AND 1999,
THE SEVEN-MONTH PERIOD JANUARY 31, 1998
AND THE FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
TRANSITION
SIX MONTH PERIOD FISCAL YEARS PERIOD FISCAL YEAR
---------------------------- --------------------------- ------------ ------------
JULY 31, JULY 31, JANUARY 31, JANUARY 31, JANUARY 31, JUNE 30,
2000 1999 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 1,364,899 1,501,886 6,525,716 707,008 (955,763) (870,998)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization....... 1,785,788 1,745,276 3,459,232 3,402,591 1,875,315 3,090,078
Loss (gain) loss on disposition of
assets............................ (33,000) (15,474) 117,243 (26,782) -- 876
Deferred income taxes............... -- (585,500) (3,403,552) -- 189,028 620,000
Income tax benefit from exercise of
options........................... -- -- 47,250 -- -- --
Changes in operating assets and
liabilities:
Decrease (increase) in:
Receivables..................... (300,905) 1,504,866 1,216,756 (1,464,349) (1,126,066) (24,347)
Inventories..................... 2,430,545 1,776,266 (4,400,379) 40,166 (3,238,742) (202,149)
Prepaid and other current
assets........................ 334,171 (29,809) -- 55,000 273,000 842,571
Income taxes receivable......... (514,664) -- (358,285) (110,044) 308,740 (32,705)
Other assets.................... (1,229) (2,724) (338,349) 18,972 (31,753) 9,038
Increase (decrease) in:
Accounts payable................ (3,721,621) (3,304,861) (2,425,755) (853,721) 5,536,022 (3,977,749)
Income taxes payable............ (781,041) -- (290,907) 228,749 643,199 200,000
Accrued liabilities............. (376,340) (207,848) 2,496,355 (60,028) 1,809,274 (301,908)
Other liabilities and deferred
credits....................... (133,076) (87,965) (409,208) 508,295 (515,547) (161,967)
------------ ------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities........ 53,527 2,294,113 2,236,117 2,445,857 4,766,707 (809,260)
------------ ------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures.................. (1,398,816) (1,066,217) (3,237,447) (5,435,393) (2,148,341) (2,723,687)
Proceeds from disposition of assets... 33,000 821,687 840,487 54,514 -- --
Acquisition of store facility......... -- (301,938) (319,120) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities.................... (1,365,816) (546,468) (2,716,080) (5,380,879) (2,148,341) (2,723,687)
------------ ------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Borrowings on revolving credit
facility............................ 99,602,366 73,291,662 198,162,390 171,564,703 102,128,424 171,896,950
Repayments on revolving credit
facility............................ (97,136,062) (74,743,642) (204,628,795) (168,488,919) (103,302,806) (169,122,532)
Principal payments on long-term
debt................................ (739,614) (467,483) (587,225) (179,020) (99,499) (160,968)
Proceeds from issuance of long-term
debt................................ -- -- 5,000,000 -- -- --
(Decrease) increase in cash
overdraft........................... (695,556) -- 1,662,351 -- -- --
Principal payments under capital lease
obligations......................... (57,773) (4,155) (8,736) (7,933) (4,373) (6,454)
Proceeds from exercise of stock
options............................. 70,670 9,150 60,825 8,850 -- --
------------ ------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... 1,044,031 (1,914,468) (339,190) 2,897,681 (1,278,254) 2,606,996
Net (decrease) increase in cash........ (268,258) (166,823) (819,153) (37,341) 1,340,112 (925,951)
Cash at beginning of year.............. 564,898 1,384,051 1,384,051 1,421,392 81,280 1,007,231
------------ ------------ ------------ ------------ ------------ ------------
Cash at end of year.................... $ 296,640 1,217,228 564,898 1,384,051 1,421,392 81,280
============ ============ ============ ============ ============ ============
Supplemental disclosures of cash flow
information:
Interest paid......................... $ 830,927 621,079 1,232,823 1,243,640 849,347 1,380,742
============ ============ ============ ============ ============ ============
Income taxes paid, net of refunds..... $ 2,168,705 780,000 2,429,873 1,035,000 69,773 (1,273,571)
============ ============ ============ ============ ============ ============
Supplemental disclosure of store
acquisition:
Total purchase price.................. 301,938 319,120
Less:
Fixed asset valuation............... (148,640) (148,640)
Inventory valuation................. (71,519) (71,519)
------------ ------------
Amount included in goodwill........... 81,779 98,961
============ ============
Supplemental disclosure of leases (unaudited):
During the six months ended July 31, 2000, the Company incurred capital lease obligations of $450,989 in connection with lease
agreements to acquire equipment.
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 58
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Sound Advice, Inc. and subsidiaries (the "Company") operate in a
single-business segment, which is the retailing and servicing of home and car
audio systems, video products, personal electronics, home entertainment
furniture, cellular telephones, custom design and installation services, repair
services and accessories. Its operations are conducted in the state of Florida
through 24 Sound Advice stores and three specialty stores under the Bang &
Olufsen name.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(C) 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 market development agreements along with various
promotional and other incentive programs. The funds received under these
programs are determined based upon specific agreements with the vendors 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. Also included in receivables from vendors are amounts due
for warranty repairs. Trade receivables consist primarily of amounts due from
custom design 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.
(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.
<TABLE>
<CAPTION>
DESCRIPTION YEARS
----------- -----
<S> <C>
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
</TABLE>
F-7
<PAGE> 59
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(G) GOODWILL
Goodwill, which represents the excess purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, generally 10 to 15 years. Goodwill is presented net of
accumulated amortization of approximately $290,000 and $259,000 as of January
31, 2000 and 1999, respectively.
(H) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(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.
(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 proceeds from the sale of extended warranty
contracts less the amounts due to the third party for the cost of such contracts
in net sales at the time of sale as the earnings process has been completed. Net
revenue from warranty contract sales represented approximately 2 percent to 3
percent of consolidated net sales for each period presented.
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 5 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, 2000 and 1999, the liability
for estimated redemptions approximated $467,000 and $843,000, respectively.
Amounts charged against the liability for redemptions approximated $376,000,
$427,000, $578,000 and $926,000 for the years ended January 31, 2000 and 1999,
the transition period ended January 31, 1998 and the fiscal year ended June 30,
1997, respectively.
F-8
<PAGE> 60
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(K) ADVERTISING
The Company expenses advertising costs when the advertisement occurs.
Advertising expense is recorded net of funds received from market development
agreements, vendor advertising incentives and promotional programs. Advertising
expense, net, for the years ended January 31, 2000 and 1999, the transition
period ended January 31, 1998 and for the fiscal year ended June 30, 1997,
approximated $2,881,000, $3,640,000, $3,149,000 and $4,086,000, respectively.
(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 45 percent and 48 percent of the
Company's vendor receivables as of January 31, 2000 and 1999, 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 doubtful accounts.
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 each of the years ended January 31, 2000 and 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.
(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 Statement of Financial Accounting Standards ("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.
F-9
<PAGE> 61
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(O) STOCK-BASED COMPENSATION PLAN
Stock-based compensation is recognized 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 is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. For disclosure purposes, pro forma net income
and pro forma earnings per share are provided as if the fair value based method
defined in SFAS No. 123, "Accounting for Stock-Based Compensation," had been
applied.
(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.
<TABLE>
<CAPTION>
FISCAL YEARS
JANUARY 31, TRANSACTION PERIOD FISCAL YEAR
--------------------- JANUARY 31, JUNE 30,
2000 1999 1998 1997
--------- --------- ------------------ -----------
<S> <C> <C> <C> <C>
Basic:
Weighted average common shares outstanding........ 3,745,999 3,729,519 3,728,894 3,728,894
========= ========= ========= =========
Diluted:
Weighted average common shares outstanding........ 3,745,999 3,729,519 3,728,894 3,729,894
Dilutive effect of options and warrants........... 477,685 235,814 -- --
--------- --------- --------- ---------
Total...................................... 4,223,684 3,965,333 3,728,894 3,729,894
========= ========= ========= =========
</TABLE>
Outstanding options to purchase 222,000 shares of common stock at $8.00 per
share were not included in the computation of diluted earnings per share for the
year ended January 31, 2000 because the exercise price of the options was
greater than the average market price of common shares for the year.
Options to purchase 213,500 and 218,500 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 year ended June 30, 1997,
respectively, but were not included in the computation of diluted earnings per
share because the inclusion of the options would be antidilutive. Options to
purchase 437,500 and 450,500 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 year ended June 30, 1997, 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
expired on June 14, 1999 and 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
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" which amended SFAS 133 to change the effective date to fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to
F-10
<PAGE> 62
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
measure them at fair value. Management does not anticipate a significant impact
of the adoption of SFAS No. 133 on the Company's consolidated financial
position, results of operations or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101) and amended it in March
and June 2000. The Company is required to adopt the provisions of SAB 101 in the
fourth quarter of 2000. The Company is currently reviewing the provisions of SAB
101 and has not fully assessed the impact of its adoption.
(R) UNAUDITED INTERIM PERIOD
The unaudited interim condensed combined financial statements for the
six-month periods ended July 31, 2000 and 1999 and as of July 31, 2000 have been
prepared on the same basis as the Company's audited combined financial
statements as of and for the year ended January 31, 2000. In the opinion of
management, all adjustments, consisting of normal, recurring accruals, necessary
to present fairly the financial position of the Company at July 31, 2000, and
the results of operations and cash flows for the six-month periods ended July
31, 2000 and 1999. The results of operations for the six-month period ended July
31, 2000 are not necessarily indicative of the results expected for the year
ending January 31, 2001.
(S) RECLASSIFICATIONS
Certain amounts in 1999, 1998 and 1997 consolidated financial statements
have been reclassified to conform to the 2000 presentation. Such
reclassifications did not have an effect on the results of operations.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Land........................................................ -- 521,465
Building.................................................... 684,990 1,119,605
Furniture and equipment..................................... 10,071,333 9,664,424
Leasehold improvements...................................... 19,859,021 19,100,481
Display fixtures............................................ 7,654,874 7,183,697
Vehicles.................................................... 884,195 1,097,490
---------- ----------
39,154,413 38,687,162
Less accumulated depreciation............................... 24,130,366 22,680,458
---------- ----------
Property and equipment, net................................. 15,024,047 16,006,704
========== ==========
</TABLE>
Depreciation expense, including amortization of capital leases, for the
years ended January 31, 2000 and 1999, the transition period ended January 31,
1998 and for the fiscal year ended June 30, 1997, approximated $3,411,000,
$3,378,000, $1,838,000 and $3,004,000, respectively.
(3) DEBT
(A) REVOLVING CREDIT FACILITY
In December 1997, the Company amended and extended its $25 million
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
F-11
<PAGE> 63
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2000 and 2001 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.
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 were approximately $7,310,000 and $13,776,000
at January 31, 2000 and 1999, respectively. The availability under line of
credit was approximately $12,078,000 at January 31, 2000.
The effective interest rate on the outstanding loan balance under the
financing arrangement in effect as of January 31, 2000 and 1999 was 10.4 percent
and 8.6 percent, respectively.
(B) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
2000 1999
---------- -------
<S> <C> <C>
Note payable in monthly installments of $161,242, including
interest at 9.96 percent, with the final payment due
January 2003 collaterized by fixed assets................. $4,880,258 --
Note payable in 60 equal monthly installments based upon the
short-term commercial paper rate plus 2.6 percent......... -- 52,203
Mortgage note payable in monthly installments of $1,779,
plus interest at the lender's prime rate plus 1 percent... -- 415,280
---------- -------
Total long-term debt................................... 4,880,258 467,483
Less current installments.............................. 1,516,834 467,483
---------- -------
Long-term debt, excluding current installments......... $3,363,424 --
========== =======
</TABLE>
Maturities of long-term debt are $1,517,000, $1,675,000 and $1,688,000 in
fiscal years 2001, 2002 and 2003, respectively.
(C) LETTERS OF CREDIT
The Company has standby letters of credit, in the aggregate of
approximately $738,000, maturing at various dates through April 2001, primarily
supporting self-insurance reserves. The letters of credit were not drawn upon as
of January 31, 2000.
F-12
<PAGE> 64
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INCOME TAXES
The components of income tax (benefit) expense for the Company are as
follows:
<TABLE>
<CAPTION>
TRANSITION
YEARS ENDED PERIOD ENDED YEAR ENDED
------------------------- ------------ -----------
JANUARY 31, JANUARY 31, JANUARY 31, JUNE 30,
2000 1999 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Current:
Federal............................... $ 1,864,683 1,202,276 985,972 (231,000)
State................................. 321,208 107,724 -- --
----------- --------- --------- --------
2,185,891 1,310,000 985,972 (231,000)
Deferred:
Federal............................... (2,906,089) -- 189,028 620,000
State................................. (497,463) -- -- --
----------- --------- --------- --------
(3,403,552) -- 189,028 620,000
Total......................... $(1,217,661) 1,310,000 1,175,000 389,000
=========== ========= ========= ========
</TABLE>
Income tax (benefit) expense attributable to income from continuing
operations was $(1,217,661), $1,310,000, $1,175,000 and $389,000 for the years
ended January 31, 2000 and 1999, the transition period ended January 31, 1998
and year ended June 30, 1997, respectively, and differed from the amounts
computed by applying the U.S. federal income tax rate of 34 percent to pretax
income from continuing operation as a result of the following:
<TABLE>
<CAPTION>
TRANSITION
YEARS ENDED PERIOD ENDED YEAR ENDED
------------------------- ------------ -----------
JANUARY 31, JANUARY 31, JANUARY 31, JUNE 30,
2000 1999 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Computed expected income tax rate.................. 34.0% 34.0% 34.0% (34.0)%
Effect of state and local taxes, net of federal
income tax benefit............................... (4.6) 3.6 -- --
Reserve for tax examination........................ -- -- 276.0 41.5
(Decrease) increase in beginning of year balance of
federal valuation allowance for deferred tax
asset............................................ (52.4) 25.1 201.0 72.6
Other.............................................. .1 2.2 25.0 .7
----- ---- ----- -----
Effective income tax rate........................ (22.9)% 64.9% 536.0% 80.8%
===== ==== ===== =====
</TABLE>
F-13
<PAGE> 65
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for deferred income taxes (benefit) consists of the
following:
<TABLE>
<CAPTION>
TRANSITION
YEARS ENDED PERIOD ENDED YEAR ENDED
------------------------- ------------ -----------
JANUARY 31, JANUARY 31, JANUARY 31, JUNE 30,
2000 1999 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Accounts receivable, principally due to
allowance for doubtful accounts............... $ (25,480) (35,337) (8,630) 90,304
Inventory adjustments........................... 56,443 (136,251) (427,154) 155,618
Prepaid expenses................................ 6,190 67,946 (79,994) 60,601
Fixed assets, principally due to differences in
depreciation.................................. (414,989) (432,013) (547,581) (204,601)
Accrued rent expense............................ (22,578) (93,392) 74,873 (8,433)
Provision for warranty redemption............... 116,102 114,608 236,906 40,836
Lease incentive................................. 222,342 (267,369) -- --
Deferred tax valuation allowance................ (3,258,830) 817,766 804,358 349,000
Other........................................... (82,752) (35,958) 136,250 136,675
----------- -------- -------- --------
Total................................. $(3,403,552) -- 189,028 620,000
=========== ======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts...................................... $ 191,397 165,917
Inventory adjustments..................................... 428,403 484,846
Legal settlement expense.................................. -- 39,345
Fixed assets, principally due to differences in
depreciation........................................... 1,626,823 1,211,834
Deferred gain on sale..................................... 41,495 44,287
Accrued rent expense...................................... 866,465 843,887
Accrued insurance......................................... 33,518 70,951
Provision for warranty redemption......................... 201,219 317,321
Lease incentive........................................... 45,027 267,369
Other..................................................... 80,361 --
---------- ----------
Total gross deferred tax assets................... 3,514,708 3,445,757
Less valuation allowance............................. -- (3,258,830)
---------- ----------
Net deferred tax assets.............................. 3,514,708 186,927
---------- ----------
Deferred tax liabilities:
Prepaid advertising....................................... 34,572 108,646
Prepaid insurance......................................... 74,580 31,749
Legal settlement expense.................................. 2,004 --
Other..................................................... -- 46,532
---------- ----------
Total gross deferred tax liability................ 111,156 186,927
---------- ----------
Net deferred tax asset............................... $3,403,552 --
========== ==========
</TABLE>
The valuation allowance for deferred tax assets at January 31, 2000 and
1999 was $0 and $3,258,830, respectively. The net change in the total valuation
allowance for the years ended January 31, 2000 and 1999, the transition period
ended January 31, 1998 and the year ended June 30, 1997 was a decrease of
$3,258,830, and increases of $817,766, $804,358 and $349,000, respectively. The
valuation allowance was reduced because
F-14
<PAGE> 66
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company believes it is more likely than not the deferred asset will be
realized, due to the Company's return to sustained profitability and customer
acceptance of new technology. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences. The amount of
the deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
(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, 2000, 3,728,894 Rights were
outstanding.
(B) STOCK OPTION PLANS
In September 1999, the board of directors adopted the Company's 1999 Stock
Option Plan (the "1999 Plan"), which provides for the issuance of incentive
stock options or non-qualified stock options. Under the 1999 Plan, the Company
has reserved up to 500,000 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, 2000, 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 1999
Plan after September 30, 2009.
The Company also has another stock option plan (the "1986 Plan") which
provides for the issuance of either incentive stock options or non-qualified
stock options. Under the 1986 Plan, as amended, the Company has reserved up to
750,000 shares of common stock for future issuance. The exercise price
provisions of the 1986 Plan are similar to the 1999 Plan. For year ended January
31, 1999, the transition period ended January 31, 1998 and for the fiscal year
ended June 30, 1997, 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 1986 Plan after November 10, 2001.
On November 2, 1999, the Company issued 222,000 stock options at an
exercise price of $8.00 per share under the 1999 Plan. These options have a term
of ten years expiring on November 2, 2009.
F-15
<PAGE> 67
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 29, 1997, the Company issued 422,500 stock options at an exercise
price of $1.89 per share under the 1986 Plan subject to certain vesting
criteria. All of these options vested during fiscal year 2000. 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.
All of the warrants and the additional 10,000 options vested during fiscal year
2000.
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, 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
Granted........................................... 222,000 8.00 8.00
Exercised......................................... (22,500) 1.77-1.89 1.86
Canceled.......................................... -- -- --
--------
Outstanding, January 31, 2000....................... 855,500 $1.69-8.00 4.65
Exercisable....................................... 855,500
========
Available for future grants....................... 306,000
========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock option
plans 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 income (loss) would have been
adjusted to the pro forma amounts approximated:
<TABLE>
<CAPTION>
TRANSITION
YEARS ENDED PERIOD ENDED YEAR ENDED
------------------------- ------------ ----------
JANUARY 31, JANUARY 31, JANUARY 31, JUNE 30,
2000 1999 1998 1997
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net income (loss):
As reported..................................... $6,526,000 707,000 (956,000) (871,000)
Pro forma....................................... $5,593,000 558,000 (1,131,000) (891,000)
Diluted income (loss) per share:
As reported..................................... $ 1.55 .18 (.26) (.23)
Pro forma....................................... $ 1.32 .14 (.30) (.24)
========== ======= ========== ========
</TABLE>
F-16
<PAGE> 68
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma net income reflects only options granted since July 1, 1995.
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 pro forma affect on fiscal 2000 may not be representative of the
pro forma effects on net income for future years.
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>
2000 1999 1998 1997
------- ------- ---- --------
<S> <C> <C> <C> <C>
Expected dividend yield............................. -- -- -- --
Expected stock price volatility..................... 1.31 1.34 1.01
Risk-free interest rate............................. 5.7% 5.3% -- 5.9-6.1%
Expected life of options............................ 3 years 3 years -- 3 years
</TABLE>
For the years ended January 31, 2000, 1999 and June 30, 1997, the weighted
average fair value of options granted during the fiscal year was $6.11, $2.45
and $1.15, respectively. There were no options granted during the transition
period.
As of January 31, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.69 to $8.00 and 4.1
years, respectively.
As of January 31, 2000, 1999 and 1998 and June 30, 1997, the number of
options exercisable was 855,500, 208,500, 213,500 and 221,500, respectively, and
the weighted-average exercise price of those options was $4.65, $1.72, $1.72 and
$1.76, 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. Each warrant was exercisable into one share of
common stock at an exercise price of $8.70 per share. The warrants expired,
unexercised, on June 14, 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, 2000 and 1999, the
transition period ended January 31, 1998 or fiscal year ended June 30, 1997.
(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 years ended January 31, 2000 and 1999, the
transition period ended January 31, 1998 and for the fiscal year ended June 30,
1997 approximated $277,000, $57,000, $0 and $215,000, respectively.
F-17
<PAGE> 69
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LEASES
The Company is obligated under a number of noncancelable 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.
The Company also has property and equipment under a capital that expires in
2014. At January 31, 2000 and 1999, the gross amount of property and equipment
and related amortization recorded under the capital lease were as follows:
<TABLE>
<CAPTION>
JANUARY 31,
------------------
2000 1999
-------- -------
<S> <C> <C>
Building.................................................... 685,000 685,000
Furniture and equipment..................................... 142,900 142,900
-------- -------
827,900 827,900
Less accumulated amortization............................... 285,820 230,500
-------- -------
542,080 597,400
======== =======
</TABLE>
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, 2000 and the capital lease payments
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JANUARY 31, LEASE LEASES
----------------------- ---------- -----------
<S> <C> <C>
2001.............................................. $ 162,396 $ 6,564,169
2002.............................................. 162,396 6,589,649
2003.............................................. 162,396 6,009,023
2004.............................................. 162,396 5,619,799
2005.............................................. 162,396 5,370,635
Thereafter................................... 1,590,168 16,428,595
---------- -----------
Total minimum lease payments........................... 2,402,148 $46,581,870
===========
Less amounts representing interest (at an effective interest
rate of approximately 19%)................................ 1,605,771
----------
Present value of minimum capital lease payments........... 796,377
Less current installments of obligations under capital
lease..................................................... 7,933
----------
Obligations under capital lease, excluding current
installments........................................... $ 788,444
==========
</TABLE>
Total rental expense under the noncancelable operating leases for the years
ended January 31, 2000 and 1999, the transition period ended January 31, 1998
and for the fiscal year ended June 30, 1997 was approximately $8,138,000,
$7,264,000, $3,981,000 and $6,542,000, respectively.
(8) OTHER LIABILITIES
Included in accrued liabilities as of January 31, 2000 and 1999 are
approximately $4,575,000 and $3,361,000, respectively, of customer deposits on
future sales orders.
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
F-18
<PAGE> 70
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in other liabilities and deferred credits in the consolidated balance sheets. As
of January 31, 2000 and 1999, the recorded liability for accrued rent was
approximately $2,303,000 and $2,243,000, respectively.
(9) COMMITMENT AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS
Two of the Company's officers have employment agreements, which provided
for aggregate base salaries of $720,000, $611,050 and $360,000, respectively,
for the years ended January 31, 2000 and 1999 and the transition period ended
January 31, 1998 and $611,050 for the fiscal year ended June 30, 1997. These
agreements have been extended through January 31, 2002 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 years ended
January 31, 2000 and 1999, approximately $733,000 and $47,000, respectively, 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.
(10) ACQUISITION AND DIVESTITURES
In June 1999, the Company acquired certain assets from a third party for an
aggregate purchase price of approximately $319,000 in cash and other acquisition
costs. The aggregate purchase price was allocated to the assets acquired and
liabilities assumed, resulting in recognition of goodwill of approximately
$99,000. This transaction was accounted for as a purchase.
In June 1999, the Company sold certain assets for $794,000 in cash. The
Company realized and recorded a loss on the sale of these assets of
approximately $14,000. The assets sold consisted of property and equipment.
F-19
<PAGE> 71
[BACK INSIDE COVER]
[MAP OF STATE OF FLORIDA SHOWING LOCATION OF STORES]
<PAGE> 72
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(WE GIVE SOUND ADVICE LOGO)
SOUND ADVICE, INC.
2,150,000 SHARES
COMMON STOCK
--------------------
PROSPECTUS
--------------------
SEPTEMBER , 2000
FAHNESTOCK & CO. INC.
RYAN, BECK & CO.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INVESTORS MAY RELY ONLY ON THE INFORMATION IN THIS PROSPECTUS. SOUND
ADVICE, THE SELLING SHAREHOLDERS AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANYONE
TO PROVIDE ANY DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES OF SOUND ADVICE'S
COMMON STOCK TO ANY PERSON IN ANY JURISDICTION WHERE IT IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE OF SHARES MEANS THAT INFORMATION IN
THIS PROSPECTUS IS CORRECT OR COMPLETE AFTER THE DATE OF THIS PROSPECTUS.
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered.
Sound Advice will pay all of these expenses.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 6,592
NASD filing fee............................................. 2,997
Nasdaq listing fee.......................................... 17,500
Printing, engraving and mailing expenses.................... 200,000*
Legal fees and expenses..................................... 300,000*
Accounting fees and expenses................................ 100,000*
Transfer agent fees and expenses............................ 75,000*
Miscellaneous............................................... 197,911
--------
Total............................................. $900,000
========
</TABLE>
---------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 607.0850 of the Florida Business
Corporation Act to indemnify its directors and officers to the extent provided
for in such statute. The Registrant's Amended and Restated Articles of
Incorporation provide that the Registrant will indemnify and may insure its
officers and directors to the full extent not prohibited by law. The Registrant
has also entered into an agreement (the form of which is filed as Exhibit 10.1
hereto) with each of its directors and executive officers where it has agreed to
indemnify each of them to the fullest extent permitted by law. In general,
Florida law permits a Florida corporation to indemnify its directors, officers,
employees and agents, and persons serving at the corporation's request in such
capacities for another enterprise, against liabilities arising from conduct that
such persons reasonably believed to be in, nor not opposed to, the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
Pursuant to the Underwriting Agreement to be filed as Exhibit 1.1 to this
Registration Statement, the Underwriter has agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with the Offering, including
certain liabilities under the Securities Act of 1933, as amended,
Section 8 of the Underwriting Agreement (to be filed as Exhibit 1.1 to this
Registration Statement) provides that the Underwriters severally and not jointly
will indemnify and hold harmless the Registrant and each director, officer and
controlling person of the Registrant from and against any liability caused by
any statement or omission in the Registration Statement, in the prospectus, in
any Preliminary Prospectus or in any amendment of supplement thereto, in each
case to the extent that the statement or omission was made in reliance upon and
in conformity with written information furnished to the Registrant by the
Underwriters expressly for use therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 5, 1997, the board of directors of Sound Advice 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. As amended, each Right has an
initial exercise price of $50.00 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
II-1
<PAGE> 74
to purchase from Sound Advice the number of shares of common stock having a
market value equal to twice the exercise price of the Right.
If Sound Advice 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 Sound Advice. The Rights will expire on May 4, 2007.
There are currently 3,728,894 Rights outstanding.
II-2
<PAGE> 75
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement(2)
3.1 -- Amended and Restated Articles of Incorporation, of the
Registrant (incorporated by reference from Registrant's
quarterly report on Form 10-Q for the quarter ended October
31, 1999, Exhibit 3.3, File No. 0-15194)
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 -- Specimen Certificate representing the common stock
(incorporated by reference from Amendment No. 1 to the
Registrant's Registration Statement No. 33-5942, Exhibit
4.1, filed June 24, 1986).
4.2 -- 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)
4.3 -- Form of Warrant Agreement, including form of Warrants(2)
5.1 -- Opinion of Greenberg Traurig, P.A. with respect to the
legality of the shares being offered(2)
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
1, 1997, Exhibit 10.1, File No. 0-15194)
Amendment Number Two to Loan and Security Agreement dated as
of January 31, 1999 between Registrant and Foothill Capital
Corporation (incorporated by reference from the Registrant's
Annual Report on Form 10-K for the fiscal year ended January
31, 1999, Exhibit 10.1, File No. 0-15194)
10.2 -- Master Security Agreement dated as of December 23, 1999
between the Registrant and Heller Financial Leasing, Inc.
(incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31,
2000, Exhibit 10.2, File No. 0-15194)
10.3 -- 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)
10.4 -- 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)
10.5* -- Sound Advice, Inc. Employee Stock Ownership Plan and Trust,
made January 15, 1990,
</TABLE>
II-3
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
------- -----------
<C> <C> <S>
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, File No.
0-15194), Second Amendment to the Sound Advice, Inc.
Employee Stock Ownership Plan and Trust, dated as of July 9,
1993 (incorporated by reference from the Registrant's 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)
10.6 -- Employment Agreements, dated June 30, 1986, between
Registrant and each of Peter Beshouri and Michael Blumberg
(incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1986,
Exhibit 10.26, File No. 33-5942), First Amendments to
Employment Agreements, both dated as of May 20, 1989,
between the Registrant and each of Peter Beshouri and
Michael Blumberg (incorporated by reference from
Registration Statement No. 33-28745, Exhibit 10.20, filed
May 16, 1989), Second Amendments to Employment Agreements,
both dated as of October 27, 1989, between the Registrant
and each of Peter Beshouri and Michael Blumberg
(incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1989,
Exhibit 10.2, File No. 0-15194), Third Amendments to
Employment Agreements, both dated as of July 1, 1992,
between the Registrant and each of Peter Beshouri and
Michael Blumberg (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992, Exhibit 10.15, File No. 0-15194),
Fourth Amendments to Employment Agreements, both dated as of
July 1, 1993, between the Registrant and each of Peter
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 Registration'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 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 January 31, 1999, Exhibit 10.5, File No.
0-15294), Tenth Amendment(s) to Employment Agreements, both
dated as of February 1, 1999, 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 July 31, 1999, Exhibits 10.1 and
10.2, File No. 0-15194)
10.7* -- Form of Agreement entered into as of May 1, 1997, between
the Registrant and each of two
</TABLE>
II-4
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
------- -----------
<C> <C> <S>
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)
10.8 -- 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)
10.9 -- 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)
10.10 -- Amended and Restated Lease, dated as of December 1, 1991,
between Chase, Gunsaullus, Scherer and the Registrant
(incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992,
Exhibit 10.19, File No. 015194)
10.11 -- 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)
10.12 -- 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)
10.13 -- Credit Card Program Agreement, dated August 12, 1992,
between Monogram Credit Card Bank of Georgia ("Monogram")
and the Registrant (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992, Exhibit 10.29, File No. 0-15194),
together with Amendment thereto, dated June 14, 1996,
between Monogram and Registrant (incorporated by reference
from the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, Exhibit 10.14, File No.
0-15194)
10.14 -- 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)
10.15 -- 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)
10.16 -- 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)
10.17 -- 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
</TABLE>
II-5
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
------- -----------
<C> <C> <S>
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)
10.18 -- Employment Agreement, dated as of January 31, 1999, between
the Registrant and Kenneth L. Danielson (incorporated by
reference from the Registrant's quarterly report on Form
10-Q for the quarter ended July 31, 1999, Exhibit 10.3, File
No. 0-15194)
10.19 -- Employment Agreement, dated as of January 31, 1999, between
the Registrant and Christopher P. O'Neil (incorporated by
reference from the Registrant's quarterly report on Form
10-Q for the quarter ended July 31, 1999, Exhibit 10.3, File
No. 0-15194)
10.20* -- 1999 Stock Option Plan (incorporated by reference from the
Registrant's Schedule 14A, Appendix B, filed February 3,
2000, File No. 0-15194)
21.1 -- Subsidiaries of the Company (incorporated by reference from
the Registrant's Annual Report on Form 10-K for the year
ended January 31, 2000, Exhibit 21.1, File No. 0-15194)
23.1 -- Consent of KPMG LLP(2)
23.2 -- Consent of Greenberg Traurig, P.A., counsel to Sound Advice
(to be included in Exhibit 5.1)
24.1 -- Power of Attorney (included on Signature Page)
</TABLE>
---------------
* Management contract or compensation plan or arrangement required to be filed
as an exhibit to this registration statement pursuant to Item 16(a) of Form
S-1.
(1) Filed as an exhibit to our Registration Statement on Form S-1 filed on May
8, 2000.
(2) Filed herewith.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and that offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Miami,
state of Florida, on September 13, 2000.
SOUND ADVICE, INC.
By: /s/ KENNETH L. DANIELSON
--------------------------------------
Kenneth L. Danielson,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been duly signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ------------------
<C> <S> <C>
* Chairman of the Board, September 13, 2000
----------------------------------------------------- President and Chief
Peter Beshouri Executive Officer
* Director, Senior Vice September 13, 2000
----------------------------------------------------- President and Secretary
Michael Blumberg
* Director September 13, 2000
-----------------------------------------------------
G. Kay Griffith
* Director September 13, 2000
-----------------------------------------------------
William Hagerty, IV
* Director September 13, 2000
-----------------------------------------------------
Herbert A. Leeds
/s/ KENNETH L. DANIELSON Chief Financial Officer and September 13, 2000
----------------------------------------------------- Treasurer (Principal
Kenneth L. Danielson Financial and Accounting
Officer)
</TABLE>
* Executed by Kenneth L. Danielson as attorney-in-fact.
II-7
<PAGE> 80
SOUND ADVICE, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT OTHER
BEGINNING OF CHARGED TO COSTS CHANGES BALANCE AT END
DESCRIPTION YEAR AND EXPENSES ADD (DEDUCT) OF YEAR
----------- ------------ ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
January 31, 2000.................... $ 440,900 $611,760 $(544,020)(A) $ 508,640
========== ======== ========= ==========
January 31, 1999.................... 384,100 482,110 (425,310)(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
========== ======== ========= ==========
Allowance for redemption of extended
service warranty contracts:
January 31, 2000.................... 843,268 -- (376,546)(B) 466,722
========== ======== ========= ==========
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
========== ======== ========= ==========
Allowance for inventory obsolescence:
January 31, 2000.................... 700,000 350,000 -- 1,050,000
========== ======== ========= ==========
January 31, 1999.................... 700,000 -- -- 700,000
========== ======== ========= ==========
January 31, 1998.................... 700,000 -- -- 700,000
========== ======== ========= ==========
June 30, 1997....................... $ 830,000 $ -- $(130,000)(C) $ 700,000
========== ======== ========= ==========
</TABLE>
---------------
(A) Amount represents write-off of uncollectible receivables.
(B) Amount represents net change between beginning of period and end of period
balances.
(C) Amount represents provision and disposition of personal computer and
related accessory inventories.
S-1
