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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K 405
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO______
COMMISSION FILE NUMBER 0-15194
SOUND ADVICE, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-1520531
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1901 TIGERTAIL BOULEVARD, DANIA BEACH, FLORIDA 33004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 922-4434
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(Title of Class)
COMMON STOCK PURCHASE RIGHTS
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT ON APRIL 18, 2001, BASED UPON THE CLOSING
MARKET PRICE OF THE REGISTRANT'S VOTING STOCK ON THE NASDAQ NATIONAL MARKET ON
APRIL 18, 2001, AS REPORTED IN THE WALL STREET JOURNAL, WAS APPROXIMATELY
$40,778,000.
THE REGISTRANT HAD 4,073,745 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF APRIL 18, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC SECTIONS INCORPORATED ARE IDENTIFIED UNDER APPLICABLE ITEMS HEREIN)
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT TO BE FILED IN
CONNECTION WITH ITS 2001 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY
REFERENCE IN PART III OF THIS REPORT.
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TABLE OF CONTENTS
PAGE NO.
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PART I
ITEM 1. BUSINESS............................................................................... 1
Overview.......................................................................... 1
Industry.......................................................................... 1
Business Strategy................................................................. 2
Growth Strategy................................................................... 3
Store Operations.................................................................. 4
Products and Services............................................................. 6
Advertising and Marketing......................................................... 8
Information Systems............................................................... 9
Suppliers, Purchasing and Distribution............................................ 9
Competition....................................................................... 10
Employees......................................................................... 10
Intellectual Property............................................................. 10
ITEM 2. PROPERTIES............................................................................. 11
ITEM 3. LEGAL PROCEEDINGS...................................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 12
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 14
Common Stock Information.......................................................... 14
Dividend Policy................................................................... 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA..................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................................................... 16
Overview.......................................................................... 16
Results of Operations............................................................. 16
Liquidity and Capital Resources................................................... 18
Seasonality and Quarterly Results................................................. 19
Inflation......................................................................... 20
Recent Accounting Pronouncements.................................................. 20
Forward-Looking Statements........................................................ 20
Risk Factors...................................................................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................ 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................................... 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 25
ITEM 11. EXECUTIVE COMPENSATION................................................................. 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................. 26
SIGNATURES................................................................................... 30
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PART I
ITEM 1. BUSINESS
OVERVIEW
We are a full service specialty retailer of a broad range of selected
high-quality, upscale entertainment and consumer electronic products. We operate
24 full-size stores, five Bang & Olufsen stores and one Electronic Interiors
store in the State of Florida, the fourth largest state and the state with the
fastest growing population in the United States. In addition, we operate two
Showcase Home Entertainment stores in Scottsdale and Chandler, Arizona, and one
home theater showroom located in the Great Indoors in Scottsdale. Our full-size
Sound Advice and Showcase Home Entertainment stores sell home and car audio
systems (except that Showcase Home Entertainment stores do not carry car audio
systems), large screen projection and conventional view televisions, video
products, personal electronics, car security systems, home entertainment
furniture and related customized services and accessories. The Bang & Olufsen
stores feature Bang & Olufsen audio and video products and accessories. The
Electronic Interiors store is an entirely demonstration based store built to
simulate residential environments showcasing integrated entertainment systems.
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 (CEA), total manufacturers sales of consumer electronics
in the United States were estimated to be $81 billion in 2000, $78 billion in
1999 and $76 billion in 1998. 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 such as us.
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 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 stores 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 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
26.5% of the total sales attributable to the 100 largest retailers in 1999. 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 regional specialty retailers with strong name recognition
by consumers represent attractive acquisition candidates and that the smaller or
weaker specialty retailers will continue to face significant competitive
pressures, thereby providing opportunities for retailers with size advantages to
increase market share.
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NEW TECHNOLOGIES
Growth in the consumer electronics industry has historically been
driven by the introduction of new products based on technological innovations.
For example, the proliferation of videocassette 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, digital versatile discs players (DVD)
and direct broadcast satellite systems. The Consumer Electronics Association
estimates that:
o approximately 9.8 million DVD players were shipped in 2000
o approximately 12.3 million DVD players will be shipped in 2001
o revenues from digital television units sold will be $2.6 billion in
2000 and will increase to $9.6 billion in 2004
o 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. Our products
and services appeal to customers who are early technology adopters, those who
seek high quality components with numerous features as well as those who seek a
fully integrated solution. 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 the core categories of audio, video,
television and mobile electronics. We carry products and systems by high-end
manufacturers whose 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, Bang & Olufsen and B&W
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 XBR video, Mitsubishi
Diamond, Pioneer Elite and Sony Audio ES product lines which are not widely
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
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 pool 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 highly 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.
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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 audition Bang & Olufsen
products. Our first Electronic Interiors store, which opened in November
2000, is an entirely demonstration oriented environment, built to simulate a
residence and showcase some of our integrated systems. This new store format
will allow customers 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 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 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 believe we can increase our same store sales by continuing our focus
on products incorporating the latest technology, since higher per unit 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 on the market, we can benefit from the higher per unit prices at which
these products are sold. We are well positioned to lead the adoption of high-end
digital products such as high definition television, digital audio players and
direct broadcast satellite systems. We are also increasing our same store sales
by expanding the capabilities that can be incorporated into our integrated
systems. For example, we currently offer lighting and security solutions as a
part of our integrated designs.
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OPEN NEW STORES
We opened two new full-size stores, one in Tallahassee and one in North
Palm Beach, in November 1998, five mall based Bang & Olufsen stores in February
and December 1998, June 1999, March 2000 and October 2000 and one Electronic
Interiors in October 2000. In addition, we added two Showcase Home Entertainment
stores and one Great Indoors Home Theater Showroom through acquisition in
October 2000. We expect to continue to explore the opening of new stores in
geographic areas within our existing Florida and Arizona 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 one new
full-size store in Arizona, two new shopping mall based Bang & Olufsen stores
and one Electronic Interiors during fiscal 2002.
UPGRADE AND RELOCATE EXISTING STORES
We continually improve our existing stores by upgrading and rotating
product displays and remodeling the interiors. At times, we choose to relocate
our stores in connection with the need for expansion. In December 2000, we
relocated and upgraded our South Kendall-Miami location from a 11,000 square
foot facility to a 15,700 square foot facility. We currently plan to relocate
our Altamonte Springs store in fiscal 2002, from a 10,800 square foot facility,
to a 15,000 square foot facility located in Altamonte Springs. We believe these
relocations will improve each store's visibility and parking, and thereby
increase customer traffic to the stores.
PURSUE ACQUISITIONS
We believe that we may gain significant benefits through strategic
acquisitions of local and regional specialty retailers, both within the State of
Florida and nationally, who target similar customers and provide similar
products. Due to the fragmentation of the high-end market nationally, we feel
that many opportunities exist for the acquisition of small, high-end stores
that, while not currently having substantial market share, may be well
positioned to serve as a solid platform for our expansion. Since we have no
current intention of growing the Sound Advice name nationally, to the extent we
make acquisitions outside the State of Florida, we will likely operate the
acquired entity under its existing name and management.
STORE OPERATIONS
STORES
We operate 24 full-size Sound Advice stores, five Bang & Olufsen
stores, one Electronic Interiors store in Florida, two full-size Showcase Home
Entertainment stores in Scottsdale and Chandler, Arizona, and one home theater
showroom located in The Great Indoors store in Scottsdale, Arizona. Our
full-size store format features multiple home audio and video audition and
demonstration areas, portable electronics displays and an area displaying large
screen projection and direct view televisions. While our stores vary in size,
most of our full-size stores range from 15,000 to 17,000 square feet and are
located in high profile power centers and strip malls near major shopping malls.
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 have only selected products displayed.
Our Bang & Olufsen stores are typically 1,500 square feet. During fiscal 2002,
we are planning to add two additional Bang & Olufsen stores. We locate Bang &
Olufsen stores in upscale high traffic shopping malls or retail areas.
Our Electronic Interiors store is located adjacent to a Bang & Olufsen
store and incorporates fully automated "custom showrooms" with custom designed
home applications of high technology products. The store features a reproduction
of a movie theater, the latest electronics for the bedroom and bath and custom
decorated rooms with high performance home entertainment systems. The Electronic
Interiors store occupies 4,200 square feet and is physically connected to the
Bang & Olufsen store.
The Company has a management contract for a 600 square foot home
entertainment department in The Great Indoors, a Sears Roebuck specialty store
for home decorating and remodeling located in Scottsdale, Arizona.
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SITE SELECTION
We typically locate our full-size stores in either freestanding
buildings or strip shopping centers close to high vehicle 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 in major
metropolitan areas and are close to regional malls near "Big Box" consumer
electronics retailers such as Best Buy or Circuit City, and in other major
shopping areas.
STORE ECONOMICS
Our average investment for our full-size stores has been approximately
$2,100,000, including leasehold improvements, fixtures and equipment and
inventory. The average net sales per full-size store was approximately
$7,602,000 for fiscal 2001.
We estimate that the cost, other than initial inventory, of an
additional full-size store or relocating a store built to suit for us is between
$1,100,000 to $1,600,000. We currently estimate that, if we acquire an existing
store location, it will cost between $950,000 to $1,300,000 to retrofit the
property. We estimate the initial inventory cost for a new full-size store to be
between $750,000 and $1,100,000. Pre-opening expenses incurred in connection
with an additional full-size store are minimal.
Our average investment for the Bang & Olufsen stores we operate was
approximately $400,000, including leasehold improvements, fixtures and
equipment, and inventory. The average net sales per Bang & Olufsen store was
approximately $1,903,000 for fiscal 2001. We estimate the cost, other than
initial inventory, of opening a mall based Bang & Olufsen store is approximately
$200,000 to $275,000. Pre-opening expenses incurred in connection with an
additional Bang & Olufsen store are minimal.
TRAINING
We provide our new employees with extensive training tailored to the
skills that will be 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:
o 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 Hollywood, Florida store
located near 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 as well
as to attend the four product seminars we conduct each year.
o Newly hired custom home installers typically 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 the travel and
training is typically shared between us and these vendors.
o 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.
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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 under the general
manager. Each of our full-size Sound Advice stores also has an individual in
charge of the mobile electronics department. A single store manager manages each
Bang & Olufsen and Electronic Interior/Bang & Olufsen store.
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 Executive
Officer. In addition, we have two mobile electronics sales directors. We believe
that this structure improves decision making and communication throughout our
structure. We believe that 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 primary compensation plan is based on gross profit dollars. Sales
associates are compensated on straight commissions. The program is designed to
provide incentives to sales associates to sell products, services and labor.
General sales managers are compensated on personal sales, and overrides based on
store performance. Approximately 74% of our employees are compensated on a
commission basis including custom installers, delivery personnel and sales
staff.
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:
CATEGORY PRODUCTS SELECTED BRANDS
-------- -------- ---------------
Television......................... Conventional, projection, plasma, Sony, Mitsubishi, Pioneer,
LCD, DLP and two Panasonic, Toshiba,
piece projectors. Loewe, Sharp
Quasar, Runco and Bang & Olufsen
Video.............................. VCRs, camcorders, digital Sony, Panasonic, Hughes,
cameras, DVD players, digital Mitsubishi, Yamaha,
satellite systems and editing Canon, Aiwa, Philips,
equipment Denon and Faroudja
Audio.............................. Audio systems and components, Yamaha, B&W, Bose, Monster
compact disc players and Cable, Bang & Olufsen, Klipsch,
recorders and speakers Sony, Boston Acoustics,
Niles, Philips, Pioneer,
Velodyne, Denon, Krell,
B&K, Martin Logan, and
Mirage and McIntosh
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CATEGORY PRODUCTS SELECTED BRANDS
-------- -------- ---------------
Mobile Electronics................. Car and Marine components Alpine, Kenwood, Boston
and speakers, wireless Acoustics, Sony, MTX, Panasonic,
communications, installation Pioneer, Kicker, XTANT, MBQuart,
services and navigation Magellan, Clifford and JC Audio
equipment
Other.............................. Audio and video furniture, N.E.W., Sony, Siemens, Bell'o,
telephone systems, personal Panasonic, Tech-Craft, Laurier,
electronics, extended service JSP and Tova Design
contracts and repair services
The table below shows the approximate percentage of our sales
attributable to each of our major product and service categories for fiscal
1997, the twelve month period ended January 31, 1998 and fiscal 1999, 2000 and
2001.
FISCAL YEAR TWELVE MONTH FISCAL YEARS ENDED
ENDED PERIOD ENDED JANUARY 31,
JUNE 30, JANUARY 31, ----------------------------------------
PRODUCT OR SERVICE CATEGORY 1997 1998 1999 2000 2001
--------------------------- ----------- ----------- ---- ---- ----
Television and Video 37% 36% 39% 41% 44%
Home Audio 30 32 33 35 33
Mobile Electronics 15 15 14 13 11
Service, Installation and Product Warranty 10 10 10 9 9
Miscellaneous Products 8 7 4 2 3
--- --- --- --- ---
Total 100% 100% 100% 100% 100%
=== === === === ===
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:
CATEGORY BRANDS
-------- ------
Television and Video.......................... Mitsubishi, Pioneer Elite, Pioneer Plasma and Loewe
Audio......................................... Yamaha, B&W, Bang & Olufsen, Klipsch, Boston Acoustics,
Niles, Velodyne, Krell and Martin Logan
Mobile Electronics............................ Kicker, XTANT and MBQuart
SERVICES
We support our product sales by providing many important customer
services, including the following:
o home delivery and setup;
o home audio installation and design;
o home theater installation and design;
o home lighting and security system installation;
o mobile electronics installation;
o in-home repair service; and
o in-store and in-home product instruction.
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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 Florida stores by customers for
service or repairs are shipped to our service and repair facility through our
warehouse distribution system. Products brought to our Arizona stores are sent
to a locally authorized service center for repair. In both Florida and Arizona,
we employ in-home service technicians to repair and service products which
cannot be brought into the stores.
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. The extended warranty provides the customer 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 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 and checks, 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. These special financing programs may utilize our private label credit
card, or in some cases, a vendor issued credit card. We typically bear the cost
of these special financing programs. However, some of our vendors associated
with vendor issued credit cards 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 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 amounts 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 increase traffic into our stores while
building name recognition as the premier retailer of high-end consumer
electronics. Our image based advertising is used to create an awareness of the
high quality products and custom services we provide. Our advertisements
emphasize product features and benefits while de-emphasizing price. 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. We use a four part marketing cycle
each quarter. Each cycle includes (i) newspaper or insert advertisements that
emphasize an unusual product, or products, to generate store traffic, (ii) a
specific sales event, (iii) a direct mailing of special invitations for a
private sale to select customers in our database and (iv) a catalog mailing to
our customer database emphasizing new technologies and products. Each cycle is
structured to drive incremental traffic to the store.
The following table shows our net advertising expense as a percentage
of net sales for fiscal year ended June 30, 1997, the twelve month period ended
January 31, 1998 and fiscal years ended January 31, 1999, 2000 and 2001. Net
advertising expense represents gross advertising expense less market development
funds, cooperative advertising and other promotional amounts received from
vendors for incentive and promotional programs.
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FISCAL YEARS
FISCAL TWELVE MONTH ENDED
YEAR ENDED PERIOD ENDED JANUARY 31,
JUNE 30, JANUARY 31, ---------------------------------------------
1997 1998 1999 2000 2001
---------- ------------ ---- ----- -----
(DOLLARS IN THOUSANDS)
Net Advertising Expense $ 4,086 $ 4,371 $ 3,640 $ 2,881 $ 2,221
Percentage of Net Sales 2.7% 2.9% 2.4% 1.6% 1.1%
We have a website at www.wegivesoundadvice.com. Our 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, as we believe that our products are best promoted in a
demonstration based environment.
INFORMATION SYSTEMS
We use a third party 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:
o 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;
o monitor and analyze inventory levels, gross margin, product mix, and
sales volume by categories, by sales personnel or on a per store
basis;
o replenish inventory from our warehouse based on minimum and maximum
target levels established for each store and programmed into the
system; and
o 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 56% of our total product purchases during fiscal
2001. These five manufacturers were Mitsubishi, Panasonic, Pioneer, Sony and
Yamaha. 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 Progressive Retailers Organization, Inc., a
buying group comprised of 14 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.
A substantial portion of the inventory 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 Florida stores and
Central Florida stores, and Scottsdale, Arizona which service the Scottsdale /
Phoenix market stores. Each store receives shipments of inventory from the
central distribution and support warehouse facilities at least two to three
times a week, thereby enabling each store to maintain appropriate inventories of
all products and to promptly replenish inventories of fast moving products. 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 3.4 times during fiscal 2001.
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COMPETITION
Our principal competitors are the small specialty stores throughout the
State of Florida and the Scottsdale/Phoenix market. 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-based retailers
may increase in the future, we believe that our products are best marketed in a
demonstration oriented environment. We believe that this, combined with our
emphasis on in-home services, will keep us from facing significant direct
competition from the Internet. 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 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 January 31, 2001, we employed approximately 890 persons, of whom
approximately 74% were commissioned employees, including sales associates, car
stereo and mobile installers, custom and delivery installers and service
department technicians. Substantially all of our employees are employed on a
full-time basis. 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 and
"Showcase Home Entertainment" in the state of Arizona 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," or "Showcase Home Entertainment."
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ITEM 2. PROPERTIES
Our 30 Florida stores are clustered in each of four geographic areas:
the southeast coast of Florida (16 stores), the west coast of Florida (8
stores), central Florida (3 stores), north Florida (3 stores) and our three
Arizona stores which are located in the Scottsdale, Phoenix area. Most of our
stores are between 15,000 and 17,000 gross square feet. Retail selling area
represents the substantial square footage of each store, with the balance used
for merchandise storage and car audio and accessory installation. The full size
Sound Advice and Showcase Home Entertainment stores are generally located either
in freestanding buildings or in multi-store shopping centers. Typically, these
stores are close to regional malls or in shopping districts. We locate Bang &
Olufsen and Electronic Interior stores in upscale high traffic shopping malls.
The following table sets forth specific data regarding each of our stores:
APPROXIMATE
CURRENT YEAR TOTAL SQUARE LEASE EXPIRATION
REGION LOCATION OPENED FOOTAGE WITH OPTIONS
------ -------- ------ ------- ------------
FULL-SIZE STORES
Southeast Coast of Florida North Palm Beach Nov. 1998 18,500 Nov. 2022
Aventura Nov. 1996 15,000 Nov. 2021
Hollywood (1) Nov. 1994 31,800(1) Nov. 2019
West Kendall Aug. 1992 15,000 Mar. 2022
Plantation Nov. 1990 14,500 Nov. 2010
Hialeah Gardens Nov. 1990 20,800 Sept. 2010
Boca Raton Jan. 1990 18,000 Jan. 2015
West Palm Beach Nov. 1988 16,300 Nov. 2010
Ft. Lauderdale Nov. 1988 18,900 Aug. 2028
South Kendall Dec. 2000 15,700 Dec. 2025
Coral Gables Oct. 1974 13,300 Jan. 2002
West Coast of Florida Tampa - Dale Mabry Nov. 1999 15,000 Jan. 2025
Naples Nov. 1997 16,000 Mar. 2018
Fort Myers Nov. 1994 15,300 Nov. 2034
Clearwater May 1991 15,300 Apr. 2021
Tampa - Fowler Nov. 1989 17,200 Apr. 2014
St. Petersburg Sept. 1989 17,700 Sept. 2011
Sarasota May 1987 13,000 Apr. 2007
Central Florida Orlando - Sand Lake Nov. 1990 15,500 Nov. 2020
Altamonte Springs Sept. 1988 10,800 Aug. 2007
Orlando - East Colonial July 1988 15,400 Mar. 2013
North Florida Tallahassee Nov. 1998 15,000 Jan. 2014
Jacksonville - Regency Nov. 1991 15,000 Nov. 2021
Jacksonville - Orange Nov. 1991 16,240 Dec. 2021
Park
ARIZONA Chandler Feb. 2000 12,000 Feb. 2020
Scottsdale Oct. 1997 14,000 Oct. 2017
BANG & OLUFSEN STORES North Palm Beach Oct. 2000 1,500 June 2010
South Miami Mar. 2000 1,300 Nov. 2009
Naples June 1999 1,100 Jan. 2009
Boca Raton Dec. 1998 1,800 May 2011
Aventura Feb. 1998 1,700 Feb. 2008
ELECTRONIC INTERIORS STORE
North Palm Beach Oct. 2000 4,500 June 2010
THE GREAT INDOORS/HOME THEATER
Scottsdale Nov. 1999 600 Dec. 2021
(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 and Electronic Interior
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.
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Our headquarters are located in a 53,850 square foot facility,
which contains our executive offices, accounting, data processing, purchasing,
advertising operations, service and repair center and custom and delivery for
the South Florida region. The lease expires in June 2001 and includes two
additional one-year options. We are currently in negotiation for corporate and
administrative offices for approximately 15,000 square feet in the Fort
Lauderdale area. Our 56,320 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. We
are currently in negotiations for a new warehouse facility to combine the
warehouse service and delivery for the South Florida region into one facility.
Our 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 10,000 square foot leased facility in Orlando,
Florida, which is used as a regional warehouse and support facility.
ITEM 3. 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 conditions or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
executive officers and directors:
NAME AGE PRINCIPAL POSITION
---- --- ------------------
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 and Accounting Officer and Treasurer
G. Kay Griffith........................ 55 Director
Herbert A. Leeds....................... 83 Director
William F. Hagerty, IV................. 41 Director
Our officers are elected annually by the board of directors and hold
office at the pleasure of the board of directors.
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, Inc. A buying group comprised of
approximately 14 retailers (including Sound Advice) of Home Entertainment and
Consumer Electronic products located throughout the country. 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
("SEC"), 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, one of our founders 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.
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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 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 ours 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 has
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.
HERBERT A. LEEDS was elected a director of ours 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.
WILLIAM F. HAGERTY, IV was elected a director of ours 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 to January 2001, Mr. Hagerty was the Vice Chairman of National
Electronics Warranty Corporation, an administrator of warranty programs based in
Sterling, Virginia which is 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK INFORMATION
Our common stock, par value $.01 per share, 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.
PRICES
------
QUARTER ENDED HIGH LOW
------------- ---- ---
April 30, 1999................................ 4 5/8 2 1/4
July 31, 1999................................. 8 3/8 3 1/16
October 31, 1999.............................. 10 6 11/32
January 31, 2000.............................. 12 3/4 7 7/8
PRICES
------
QUARTER ENDED HIGH LOW
------------- ---- ---
April 30, 2000................................ 12 1/2 7
July 31, 2000................................. 11 3/8 7
October 31, 2000.............................. 10 3/16 5 5/16
January 31, 2001.............................. 8 7/8 3 3/4
As of April 18, 2001, there were 133 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.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not plan
to pay cash dividends in the foreseeable future. We are prohibited under our
revolving credit facility from paying cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Liquidity and Capital Resources."
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF STORES DATA)
The selected statement of operations and balance sheet data set forth
below for the fiscal year ended June 30, 1997, the transition period ended
January 31, 1998 and the fiscal years ended January 31, 1999, 2000 and 2001 have
been derived from our financial statements, which have been audited by our
independent auditors. The selected statements of operations for the seven months
ended January 31, 1997 and the twelve months ended January 31, 1998 have been
derived from our financial statements and are unaudited. 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 Report.
FISCAL FISCAL
YEAR TRANSITION PERIOD YEAR
ENDED ENDED SEVEN MONTHS ENDED FISCAL YEAR ENDED
--------- ---------------------- ----------- ------------------------------------
JUNE 30, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1997 1997 1998 1998 1999 2000 2001
-------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales $ 152,316 $ 98,558 $ 95,205 $ 148,963 $ 152,124 $ 177,349 $ 198,364
Cost of goods sold 102,298 67,005 64,234 99,527 98,893 115,057 127,745
Gross profit 50,018 31,553 30,971 49,436 53,231 62,292 70,619
Selling, general and administrative expenses 49,045 29,827 29,903 49,122 49,893 55,510 61,061
Income from operations 973 1,726 1,068 314 3,338 6,782 9,558
Other income (expense):
Interest expense (1,556) (891) (897) (1,562) (1,417) (1,367) (1,968)
Other income (expense) 101 31 48 120 96 (107) 194
Income (loss) before income taxes (benefit) (482) 866 219 (1,128) 2,017 5,308 7,784
Income taxes (benefit) 389 475 1,175 1,089 1,310 (1,218) 3,075
Net income (loss) $ (871) $ 391 $ (956) $ (2,217) $ 707 $ 6,526 $ 4,709
Common and common equivalent per share amounts:
Basic earnings (loss) per share $ (.23) $ .10 $ (.26) $ (.59) $ .19 $ 1.74 $ 1.23
Diluted earnings (loss) per share $ (.23) $ .10 $ (.26) $ (.59) $ .18 $ 1.55 $ 1.08
Weighted average number of shares
outstanding--basic 3,729 3,729 3,729 3,729 3,730 3,746 3,831
Weighted average number of shares
outstanding--diluted 3,729 3,729 3,729 3,729 3,965 4,223 4,357
STORE DATA:
Number of stores open at end of period:
Full-size stores 21 22 24 24 26
Bang & Olufsen, Electronic Interiors, Great
Indoors home theater -- -- 2 3 7
Weighted average net sales per store (1)
Full-size stores 7,253 4,473 6,669 7,161 7,602
Bang & Olufsen, Electronic Interiors,
Great Indoors home theater -- -- 1,770 2,053 1,903
BALANCE SHEET DATA:
Current assets 32,515 37,546 38,987 43,381 56,732
Current liabilities 24,724 31,960 34,225 30,361 48,476
Working capital 7,791 5,586 4,762 13,020 8,256
Total assets 46,550 51,789 55,217 60,932 84,031
Borrowing under revolving credit facility 11,875 10,700 13,776 7,310 18,141
Long term debt, excluding current maturities 1,384 859 797 4,152 3,173
Stockholders' equity 16,298 15,342 16,058 22,692 28,851
(1) Weighted average net sales per store represents the net sales of our
full-size stores and combined the net sales of our Bang & Olufsen,
Electronic Interiors and Great Indoors home theater stores for the
period divided by the number of full-size stores and combined Bang &
Olufsen, Electronic Interiors and Great Indoors home theater stores
open during the period, weighted to account for stores open for only a
portion of the period. The transition period ended January 31, 1998
includes sales for a seven month period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION ALONG WITH OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS REPORT. THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS,
UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS
BEYOND FISCAL 2001 MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY,
THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
We are a specialty retailer of high-end audio and visual entertainment
products and integrated systems, many of which incorporate the most recent
technology.
Our merchandising is focused on high-end products in the core
categories of audio, video and mobile electronics. This strategy has 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 and Electronic Interiors
stores. For the period from July 1997 to January 2001, we spent over $15.9
million on capital expenditures, primarily for new stores and revitalization of
existing stores. The expenditures were funded through internally generated funds
and borrowings available under our revolving credit facility. We currently
operate 24 Sound Advice stores, five Bang & Olufsen stores, one Electronic
Interiors / Bang & Olufsen store, two Showcase Home Entertainment stores and one
home theater showroom located in the Sears Great Indoors store in Scottsdale.
RESULTS OF OPERATIONS
The following tables set forth, for the fiscal years ended January 31,
1999, 2000 and 2001, (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.
PERIOD-TO-PERIOD
PERCENTAGE CHANGE
-------------------------------
PERCENTAGE OF NET SALES FISCAL YEARS ENDED
-------------------------------------- JANUARY 31,
FISCAL YEARS ENDED ------------------------------
JANUARY 31, 1999 2000
--------------------------------------- COMPARED TO COMPARED TO
1999 2000 2001 2000 2001
------ ------ ------- ------------ ------------
Net sales 100.0% 100.0% 100.0% 16.6% 11.9%
Cost of goods sold 65.0 64.9 64.4 16.3 11.0
---- --- --- ----- -----
Gross profit 35.0 35.1 35.6 17.0 13.4
Selling, general and administrative
expenses 32.8 31.3 30.8 11.3 10.0
---- --- --- ----- -----
Income from operations 2.2 3.8 4.8 103.2 40.9
Other income (expenses):
Interest expense (.9) (.8) (1.0) (3.5) 44.0
Other expenses, net * * .1 * **
---- --- --- ----- -----
Income before taxes (benefit) 1.3 3.0 3.9 163.2 46.6
---- --- --- ----- -----
Net income (loss) (0.5)% 3.7% 2.4% 823.1% (27.8%)
==== === === ===== =====
* Negligible
** Not meaningful
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FISCAL 2001 COMPARED TO FISCAL 2000
Net sales for fiscal 2001 were approximately $198,364,000, an increase
of $21,016,000, or 11.9% over the prior fiscal year. The increase in sales is
primarily attributable to an increase in same store sales as well as the opening
in February 2000 of one additional Bang & Olufsen store and the acquisition of
Showcase Home Entertainment. Sales increased in the core categories of audio,
video, and mobile electronics and were partially offset by a decrease in sales
of personal electronics, which we have de-emphasized in our product mix.
Comparable store sales increased 7.1% during fiscal 2001.
Gross profit represents net sales less cost of goods sold. Cost of
goods sold includes the cost of merchandise net of vendor rebates and discounts
and allowances for product shrinkage and obsolescence. Our gross profit was
approximately $70,619,000, an increase of $8,327,000, or 13.4%, in fiscal 2001
over the prior fiscal year. The increase in gross profit is directly related to
our increase in sales resulting from increased demand for custom labor, home
theater systems, digital audio and video equipment, along with a sales mix of
higher margin products. Our gross margin percentage was 35.6% in fiscal 2001
compared to 35.1% in fiscal 2000.
Selling, general and administrative expenses, which we refer to as
SG&A, includes costs related to sales commissions, salaries, advertising,
warehouse and distribution, corporate expenses, store operations, including rent
and utilities, and depreciation. SG&A expenses for fiscal 2001 were
approximately $61,061,000, an increase of $5,551,000, or 10.0%, over the prior
fiscal year. This increase in SG&A expenses was due to increased sales
commissions, which are based on the gross profit of products and services sold,
increased costs associated with new stores opened in fiscal 2001, and an
increase due to the acquisition of Showcase Home Entertainment, net of reduction
in advertising costs. SG&A expenses as a percentage of net sales decreased to
30.8% in fiscal 2001 from 31.3% 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 2001 was $9,558,000, an increase of
$2,776,000, or 40.9%, over the prior fiscal year. Income from operations as a
percentage of net sales increased to 4.8% in fiscal 2001 from 3.8% in fiscal
2000.
Interest expense for fiscal 2001 was $1,968,000, an increase of
$602,000 from the prior fiscal year. The increase in interest expense is
primarily reflective of a increased level of borrowings net of a decrease in the
effective interest rate, in relation to the prior fiscal year.
Other income and expense in 2001 includes a $561,000 charge for the
termination of a proposed secondary offering and $695,000 of income from the
settlement of certain litigation.
In fiscal 2001, we recorded net tax expense of $3,075,000, our
effective tax rate was approximately 39.5% in fiscal 2001.
Net income for fiscal 2001 was approximately $4,709,000, or $1.23 per
share basic and $1.08 per share diluted, as compared to a net income of
approximately $6,526,000, or $1.74 per share basic and $1.55 per share diluted,
in fiscal 2000. The reduction in net income for fiscal 2001 was primarily a
result of income tax expense in fiscal 2001 as compared to an income tax benefit
in fiscal 2000.
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 year. The increase in sales was 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% for fiscal 2000 as compared to the prior fiscal year.
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 increased
demand for custom labor, home theater systems, digital audio and video
equipment, along with a sales mix of higher margin products. Our gross margin
percentage was 35.1% in fiscal 2000 compared to 35.0% in fiscal 1999.
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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 reasons for the
increase in SG&A expenses were due to increased sales commissions, which are
based on the gross profit of products and services sold, increased operating
costs associated with new stores opened in late fiscal 1999 and in fiscal 2000,
partially offset by a reduction in advertising costs. SG&A as a percentage of
net sales decreased to 31.3% in fiscal 2000 from 32.8% in the prior year. The
decrease was partially attributable to the rate at which SG&A expenses, based on
sales or gross margin, increase in relation to fixed expenses, during a period
of increased comparable store sales and new store sales.
Income from operations in fiscal 2000 was $6,782,000, an increase of
$3,444,000, or 103.2%, 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 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 comparable periods in 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 reduced because of our return to sustained
profitability and customer acceptance of new technology. 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.
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,
additional stores and the reduction of the valuation reserve for 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, acquisitions, as well as
working capital to support our inventory requirements and SG&A expenses.
In fiscal 2001, net cash provided by operating activities was
approximately $909,000 resulting primarily from cash flows from net income of
$4,709,000, which was reduced by increases in inventory of $7,826,000 and
receivables of $1,210,000 and was increased by the increase in accrued
liabilities of $1,331,000. In connection with our store expansion program,
$5,076,000 of capital expenditures were incurred with an additional expenditure
of $4,634,000 for the acquisition of Showcase Home Entertainment and were funded
from increased borrowings, $909,000 in net cash flows generated from operations
and proceeds from the sale of assets. We had working capital of approximately
$8,256,000 as of January 31, 2001, a decrease from approximately $13,020,000
from January 31, 2000. The decrease in working capital resulted primarily from
increases in short term borrowings, accounts payable and accrued liabilities
which were partly offset by increases in inventories and receivables.
Our revolving credit facility was scheduled to expire on July 31, 2001
and was amended on April 19, 2001 to expire on July 31, 2004. The terms of the
amended facility allow us to borrow, repay, and reborrow up to $40,000,000 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
amended revolving credit facility bears interest on the outstanding balance at
prime rate plus .5% and allows for a LIBOR pricing option for one, two, three or
six month periods at 1.75% over the corresponding LIBOR rate for the respective
period. We pay a monthly fee based upon the unused portion of the commitment
which varies based upon the average outstanding loan balance at .375% per annum.
We incurred a renewal and amendment fee of $100,000. We are in compliance with
all of our loan covenants.
The amended revolving credit facility contains various affirmative and
negative covenants including those requiring us to maintain a quarterly
calculation of minimum EBITDA based on trailing 12 months performance. The
revolving credit facility limits the incurrence of additional debt, capital
expenditures, acquisitions and investments and prohibits cash dividends.
Borrowings under the revolving credit facility are collateralized by
our assets, including our cash depository accounts, trade receivables,
inventory, some fixed assets and intangible assets.
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The interest rate under our revolving credit facility ranged between
8.03% and 10.25% during fiscal 2001. The 8.03% rate is a result of the LIBOR
pricing option included as part of the revolving credit facility. As of January
31, 2001, the outstanding borrowings under our revolving credit facility were
approximately $18,141,000. The increase of approximately $10,830,000 in
outstanding borrowings in fiscal 2001 is primarily attributable to capital
expenditures and the acquisition of Showcase Home Entertainment.
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 interest rate of 9.96%. Proceeds from
the term loan financing 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 were required to maintain a minimum interest coverage ratio as defined
of no less than 3.50 to 1.00.
We currently believe that funds from our operations and borrowings
available under our revolving credit facility and vendor credit programs will be
sufficient to satisfy our currently projected operating cash requirements, and
our store expansion and relocation plans during fiscal 2002. However, in order
to continue store expansions and upgrades beyond 2002 or to pursue acquisitions
as a part of our expansion strategy, we may need to seek additional sources of
debt or equity financing.
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. 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, relocations, changes in
volume-related rebates from manufacturers, merchandising costs, price changes or
unfavorable local, regional or national economic developments that result in
reduced consumer spending.
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1999 1999 1999 2000 2000 2000 2000 2001
-------- ------- ----------- ----------- --------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
Net sales $38,468 $40,684 $39,263 $58,934 $42,676 $41,815 $44,616 $69,257
Gross profit 13,588 13,965 14,074 20,665 15,077 14,906 16,436 24,200
Income from operations 961 1,227 1,266 3,328 1,515 1,586 2,040 4,417
Income before income taxes
(benefit) 621 881 958 2,848 1,108 1,130 997 4,549
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INFLATION
We believe, because of competition among manufacturers and
technological changes in the consumer electronics industry, inflation has not
had a significant effect on results of our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB interpretation ("FIN") 44, "Accounting for Certain Transactions Involving
Stock Compensation," which clarifies the application of APB Opinion No. 25 for
certain issues. The interpretation was effective July 1, 2000, except for the
provisions that relate to modifications that directly or indirectly reduce the
exercise price of an award and the definition of an employee, which were
effective after December 15, 1998. The adoption of FIN 44 did not have an impact
on the Company's consolidated financial position, results of operations or cash
flows.
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 measure them at fair value. The Company adopted SFAS
133 on February 1, 2001, adoption of SFAS No. 133 did not have an impact 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. We adopted the provisions of SAB 101 in the fourth quarter of
fiscal 2001. Adoption of SAB 101 did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended) representing
our current expectations, beliefs, estimates or intentions concerning our future
performance and operating results, our products, services, markets and industry,
and/or future events relating to or effecting us and our business and
operations. When used in this report, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," and similar expressions as they
relate to us or our management are intended to identify forward-looking
statements. Our actual results or achievements could differ materially from
those indicated by the forward-looking statements because of various risks, and
uncertainties related to and including, without limitation, the effectiveness of
our business and marketing strategies, our product mix, customer demand,
availability of existing and new merchandise from and the establishment and
maintenance of relationships with suppliers, price competition for products and
services sold by us, management of expenses, gross profit margins, our ability
to open new stores and improve performance at existing locations, our ability to
effectively integrate the new Showcase Home Entertainment operations with our
existing operations, availability and terms of financing to refinance or repay
existing financings or to fund capital and expansion needs, the continued and
anticipated growth of the retail home entertainment and consumer electronics
industry, a change in interest rates, exchange rate fluctuations, the
seasonality of our business and the other risks and factors detailed in this
report and in our other filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond our ability to control. In many cases,
we cannot predict the risks and uncertainties that could cause actual results to
differ materially from those indicated by the forward-looking statements.
RISK FACTORS
You should carefully consider the risks and uncertainties described
below and all the other information included in this annual report. Any of the
following risks could have a material adverse effect on our business, financial
condition or operating results.
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
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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.
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. Current economic volatility may negatively
effect our results of operations for fiscal 2002.
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 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 A MAJORITY OF OUR STORES ARE LOCATED IN THE STATE OF FLORIDA, OUR BUSINESS
COULD BE MATERIALLY HARMED BY CONDITIONS AFFECTING THE STATE OF FLORIDA.
Out of the 33 stores we operate, 30 stores 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.
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.
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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.
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 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.
We recently completed the acquisition of the assets of Showcase Home
Entertainment of the Southwest, LLC and we plan to continue 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. We cannot assure you that the acquisition of Showcase
Home Entertainment of the Southwest will be successful or profitable. 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 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 56% of our purchases
during fiscal 2001. The loss of any of these key vendors or our failure to
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.
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WE MAY NEED ADDITIONAL CAPITAL AND MAY NOT BE ABLE TO OBTAIN IT.
We currently anticipate that our available cash resources will be sufficient
to meet our presently anticipated working capital and capital expenditure
requirements for the next 12 months. However, if we need to raise additional
funds in order to support further expansion, develop new or enhanced services
and products, respond to competitive pressures, acquire complementary businesses
or respond to unanticipated requirements, we have no assurance that additional
financing will be available when needed on terms favorable to us.
FUTURE SALES OF OUR COMMON STOCK COULD DEPRESS OUR STOCK PRICE.
As of the date hereof, we have 4,073,745 shares of common stock outstanding
and approximately 907,000 shares of common stock are issuable pursuant to
currently exercisable options and warrants. 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.
Our executive officers and directors beneficially own approximately 21.49% of
our outstanding common stock. As a result, those parties would be able to
significantly influence our affairs if they were to act together.
OUR STOCK PRICE MAY BE VOLATILE, WHICH MIGHT MAKE IT HARDER TO SELL 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 at the end of fiscal 2001, a one percent change in
the average effective interest rate would have an effect on income before income
taxes of approximately $181,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements and notes thereto and the
Consolidated Financial Statement Schedule and the report of the independent
auditors thereon set forth on pages F-1 to F-23 and S-1 herein are filed as part
of this report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the Registrant's 2001 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K,
except that the information regarding the Registrant's executive officers called
for by Item 401 of Regulation S-K has been included in Item 4.1 in PART I of
this report.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Registrant's 2001 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Registrant's 2001 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the Registrant's 2001 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. The financial statements and the required financial
statement schedule listed in the accompanying Table of Contents to Consolidated
Financial Statements and Financial Statement Schedule at page F-1 herein are
filed as part of this report.
3. The exhibits listed in the Exhibit Index are filed with or
incorporated by reference as part of this report.
EXHIBIT INDEX
EXHIBIT
NO.
-------
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 Form of 1997 Common Stock Purchase Rights Agreement, dated as of May 5, 1997, between the
Registrant and American Stock Transfer & Trust Company (incorporated by reference from the
Registrant's Registration Statement on Form 8-A, Exhibit 4.1, filed on May 13, 1997)
9. Right of First Refusal and Voting Trust Agreement, dated June 30, 1986, among Peter
Beshouri, Gregory Sturgis, Michael Blumberg and Joseph Piccirilli (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1986, Exhibit 9, File No. 33-5942)
10.1 Loan and Security Agreement (without schedules), dated as of April 11, 1996, between the
Registrant and Foothill Capital Corporation (incorporated by reference from the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Exhibit
10.2, File No. 0-15194) Amendment Number One to Loan and Security Agreement dated as of
December 8, 1997 between Registrant and Foothill Capital Corporation (incorporated by
reference from the Registrant's Quarterly Report on form 10-Q for the quarter ended
December 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) Combined
Amendment Number One to Loan and Security Agreement dated as of April 16, 2001 between
Registrant and Foothill Capital Corporation (filed herewith)
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).
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EXHIBIT
NO.
-------
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, between
the Registrant and Peter Beshouri, Michael Blumberg, Gregory Sturgis, Joseph Piccirilli
and Jacob E. Farkas, the trustees (incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1990, Exhibit 10.2, File No.
0-15194), First Amendment to the Sound Advice, Inc. Employee Stock Ownership Plan and
Trust, dated as of December 23, 1992 (incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1992, Exhibit 10.2, File
No. 0-15194), Second Amendment to the Sound Advice, Inc. Employee Stock Ownership Plan and
Trust, dated as of July 9, 1993 (incorporated by reference from the Registrant's 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 Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994, Exhibit 10.2, File No. 0-15194), Sixth Amendments to Employment
Agreements, both effective as of July 1, 1995, between the Registrant and each of Peter
Beshouri and Michael Blumberg (incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, Exhibit 10.1, File No.
0-15194), Seventh Amendments to Employment Agreements, both effective as of July 1, 1996,
between the Registrant and each of Peter Beshouri and Michael Blumberg (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1996, Exhibit 10.8, File No. 0-15194),
27
30
EXHIBIT
NO.
-------
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. 0-15194). 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
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)
10.12 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)
28
31
EXHIBIT
NO.
-------
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)
10.18 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) Amended and Restated
Employment Agreement dated as of January 2, 2001 (filed herewith)
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) Amended and Restated
Employment Agreement dated as of January 2, 2001 (filed herewith)
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 Subsidiaries of the Registrant (filed herewith)
23 Consent of Independent Public Accountants of KPMG LLP (filed herewith)
* Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form
10-K.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the last quarter of
fiscal year 2001.
29
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
April 2001.
Sound Advice, Inc.
By: /s/ PETER BESHOURI
---------------------------------
Peter Beshouri
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PETER BESHOURI Chairman of the Board, April 30, 2001
---------------------------------------- President and Chief Executive
Peter Beshouri (Principal Executive Officer)
/s/ MICHAEL BLUMBERG Director, Senior Vice President April 30, 2001
---------------------------------------- and Secretary
Michael Blumberg
/s/ G. KAY GRIFFITH Director April 30, 2001
----------------------------------------
G. Kay Griffith
/s/ WILLIAM HAGERTY, IV Director April 30, 2001
----------------------------------------
William Hagerty, IV
/s/ HERBERT A. LEEDS Director April 30, 2001
----------------------------------------
Herbert A. Leeds
/s/ KENNETH L. DANIELSON Chief Financial Officer and April 30, 2001
---------------------------------------- Treasurer (Principal Financial
Kenneth L. Danielson and Accounting Officer)
30
33
SOUND ADVICE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----------
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-23
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
F-1
34
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, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended January 31, 2001. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule on valuation and
qualifying accounts. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 2001 in conformity with accounting principles general accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Fort Lauderdale, Florida
March 29, 2001
F-2
35
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 AND 2000
2001 2000
----------- ----------
ASSETS
Current assets:
Cash $ 2,094,348 564,898
Receivables:
Vendors 4,776,621 3,979,027
Trade 1,517,142 1,024,652
Employees 411,997 431,775
----------- ----------
6,705,760 5,435,454
Less allowance for doubtful accounts 389,300 508,640
----------- ----------
6,316,460 4,926,814
Inventories, net 46,000,745 35,459,724
Prepaid and other current assets 907,910 830,407
Deferred tax assets 1,412,154 1,599,578
----------- ----------
Total current assets 56,731,617 43,381,421
Property and equipment, net 17,870,476 15,024,047
Deferred tax assets, noncurrent 2,197,302 1,915,130
Other assets 509,452 435,389
Goodwill, net 6,721,876 176,472
----------- ----------
$84,030,723 60,932,459
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 2,899,440 1,662,351
Borrowings under revolving credit facility 18,141,443 7,309,531
Current maturities of long-term debt 1,569,569 1,516,834
Accounts payable 12,745,439 9,884,337
Income taxes payable 1,086,872 781,041
Accrued liabilities 12,033,256 9,096,046
Deferred tax liabilities -- 111,156
----------- ----------
Total current liabilities 48,476,019 30,361,296
Long-term debt, excluding current maturities 1,937,303 3,363,424
Capital lease obligation, excluding current installments 1,235,449 788,444
Other liabilities and deferred credits 3,531,100 3,727,568
----------- ----------
Total liabilities 55,179,871 38,240,732
----------- ----------
Shareholders' equity:
Common stock; $.01 par value. Authorized 10,000,000 shares;
issued and outstanding 3,973,245 at January 31, 2001 and
3,766,394 shares at January 31, 2000 39,733 37,664
Additional paid-in capital 12,623,183 11,175,205
Retained earnings 16,187,936 11,478,858
----------- ----------
Total shareholders' equity 28,850,852 22,691,727
Commitments and contingencies
----------- ----------
$84,030,723 60,932,459
=========== ==========
See accompanying notes to consolidated financial statements.
F-3
36
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
2001 2000 1999
------------- ------------ ------------
Net sales $ 198,364,222 177,348,675 152,123,841
Cost of goods sold 127,745,124 115,056,780 98,893,332
------------- ------------ ------------
Gross profit 70,619,098 62,291,895 53,230,509
Selling, general and administrative expenses 61,061,160 55,510,026 49,892,795
------------- ------------ ------------
Income from operations 9,557,938 6,781,869 3,337,714
Other income (expense):
Interest expense (1,968,401) (1,366,863) (1,417,017)
Other income (expense) 194,541 (106,951) 96,311
------------- ------------ ------------
Income before income taxes (benefit) 7,784,078 5,308,055 2,017,008
Income taxes (benefit) 3,075,000 (1,217,661) 1,310,000
------------- ------------ ------------
Net income $ 4,709,078 6,525,716 707,008
============= ============ ============
Common and common equivalent per share amounts:
Basic net income per share $ 1.23 1.74 0.19
============= ============ ============
Diluted net income per share $ 1.08 1.55 0.18
============= ============ ============
Weighted average number of shares outstanding - basic 3,830,559 3,745,999 3,729,519
============= ============ ============
Weighted average number of shares outstanding - diluted 4,357,002 4,223,684 3,965,333
============= ============ ============
See accompanying notes to consoldiated financial statements.
F-4
37
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
COMMON STOCK
-----------------------------
NUMBER OF ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
------------- -------------- --------------- -------------- --------------
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 -- -- -- 4,709,078 4,709,078
Issuance of common stock 34,000 340 94,671 -- 95,011
Issuance of common stock
associated with acquisition 172,851 1,729 1,311,939 -- 1,313,668
Tax benefit on exercise of options -- -- 41,368 -- 41,368
--------- ------- ---------- ---------- ----------
Balance, January 31, 2001 3,973,245 $39,733 12,623,183 16,187,936 28,850,852
========= ======= ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
38
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
2001 2000 1999
------------- ------------ ------------
Cash flows from operating activities:
Net income $ 4,709,078 6,525,716 707,008
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,902,660 3,459,232 3,402,591
(Gain) loss on disposition of assets (42,500) 117,243 (26,782)
Deferred income taxes (205,904) (3,403,552) --
Income tax benefit from exercise of options 41,368 47,250 --
Changes in operating assets and liabilities,
net of acquisition:
Decrease (increase) in:
Receivables (1,210,446) 1,216,756 (1,464,349)
Inventories (7,825,554) (4,400,379) 40,166
Prepaid and other current assets (59,621) (358,285) (110,044)
Income taxes receivable -- -- 55,000
Other assets (89,722) (338,349) 18,972
Increase (decrease) in:
Accounts payable 249,120 (2,425,755) (853,721)
Income taxes payable 305,831 (290,907) 228,749
Accrued liabilities 1,331,465 2,496,355 (60,028)
Other liabilities and deferred credits (196,468) (409,208) 508,295
------------- ------------ ------------
Net cash provided by operating activities 909,307 2,236,117 2,445,857
------------- ------------ ------------
Cash flows from investing activities:
Capital expenditures (5,075,910) (3,237,447) (5,435,393)
Proceeds from disposition of assets 354,146 840,487 54,514
Acquisitions (4,634,622) (319,120) --
------------- ------------ ------------
Net cash used in investing activities (9,356,386) (2,716,080) (5,380,879)
------------- ------------ ------------
Cash flows from financing activities:
Borrowings on revolving credit facility 232,282,083 198,162,390 171,564,703
Repayments on revolving credit facility (221,450,171) (204,628,795) (168,488,919)
Principal payments on long-term debt (1,871,853) (587,225) (179,020)
Proceeds from issuance of long-term debt -- 5,000,000 --
Increase in cash overdraft 1,237,089 1,662,351 --
Principal payments under capital lease obligations (315,630) (8,736) (7,933)
Proceeds from exercise of stock options 95,011 60,825 8,850
------------- ------------ ------------
Net cash provided by (used in) financing
activities 9,976,529 (339,190) 2,897,681
Net increase (decrease) in cash 1,529,450 (819,153) (37,341)
Cash at beginning of year 564,898 1,384,051 1,421,392
------------- ------------ ------------
Cash at end of year $ 2,094,348 564,898 1,384,051
============= ============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 1,673,330 1,232,823 1,243,640
============= ============ ============
Income taxes paid, net of refunds $ 2,933,705 2,429,873 1,035,000
============= ============ ============
(Continued)
F-6
39
SOUND ADVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
2001 2000
----------- -------
Supplemental disclosures of fair value of assets
acquired and liabilities assumed
in connection with acquisitions:
Receivables $ 179,200 --
Inventory 2,715,467 71,519
Prepaid expenses and other assets 17,882 --
Fixed assets 1,038,731 148,640
Goodwill 6,692,863 98,961
Other assets 20,341 --
----------- -------
Total assets $10,664,484 319,120
=========== =======
Accounts payable 2,611,982 --
Customer deposits 1,216,652 --
Accrued expenses 389,093 --
Notes payable 498,467 --
----------- -------
Total liabilities 4,716,194 --
----------- -------
Less common stock issued to seller 1,313,668 --
----------- -------
Net cash used in acquisition $ 4,634,622 319,120
=========== =======
See accompanying notes to consolidated financial statements.
F-7
40
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(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, projection and conventional view
television, video products, personal electronics, home
entertainment furniture, custom design and installation services,
repair services and accessories. The Company operates 24 Sound
Advice stores, five Bang & Olufsen stores and one Electronic
Interiors store in Florida. Additionally, the Company operates two
Showcase Home Entertainment stores in Scottsdale and Chandler,
Arizona and one home theater showroom located in The Great Indoors
store in Scottsdale.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(C) RECEIVABLES
Receivables from vendors consist of cooperative advertising and
other amounts earned based on market development agreements along
with various promotional and other advertising 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.
(D) INVENTORIES
Merchandise and service parts inventories are stated at the lower
of cost or market. Cost is determined using a moving average,
which approximates the first-in, first-out method, and is recorded
net of volume and purchase discounts and rebates.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are provided over the following estimated useful
lives using the straight-line method.
DESCRIPTION YEARS
----------------------------------- ----------------------------
Building 30
Furniture and equipment 3 to 7
Leasehold improvements 15 or term of lease, if shorter
Display fixtures 3 to 7
Vehicles 3 to 5
F-8
41
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(F) 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, 10 to 15 years.
The Company assesses the recoverability of intangible assets by
determining whether the amortization of the intangible asset
balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired
operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount
rate commensurate with the risk of the acquired business. The
assessment of the recoverability of intangible assets will be
impacted if estimated future operating cash flows are not
achieved. Goodwill is presented net of accumulated amortization of
approximately $437,000 and $290,000 as of January 31, 2001 and
2000, respectively. Goodwill amortization expense for the years
ended January 31, 2001, 2000 and 1999, approximated $147,000,
$31,000 and $24,000, respectively.
(G) 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.
(H) SELF-INSURANCE ACCRUALS
The Company was self-insured 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.
(I) REVENUE RECOGNITION
The Company recognizes revenues from the sale of merchandise at
the time the merchandise is delivered. Service revenues are
recognized at the time the service is provided. The Company offers
extended warranty service contracts on behalf of an unrelated
third party. The Company recognizes net commission revenues for
extended warranty service contracts sold as these contracts are
sold 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 of consolidated net sales for the years
ended January 31, 2001, 2000 and 1999.
(Continued)
F-9
42
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(J) EXTENDED WARRANTY SERVICE CONTRACTS AND SALES INCENTIVE PROGRAM
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 warranty 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. The overall redemption rate for the years ended January
31, 2001, 2000 and 1999 were approximately 8 percent, 4 percent
and 7 percent of the value of the contracts issued, respectively.
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, 2001 and
2000, the liability for estimated redemptions approximated
$269,000 and $467,000, respectively. Amounts charged against the
liability for redemptions approximated $198,000 and $376,000 for
the years ended January 31, 2001 and 2000, respectively.
(K) ADVERTISING
The Company expenses advertising costs as incurred. 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, 2001, 2000 and 1999, approximated $2.2 million, $2.9 million
and $3.6 million, 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.
(Continued)
F-10
43
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(M) FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK
The carrying amount of cash, receivables, borrowings under the
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 of each instrument at rates
currently offered to the Company for similar debt instruments of
comparable maturities by the Company's bankers, and 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.
Three and two vendors accounted for 48 percent and 45 percent of
the Company's vendor receivables as of January 31, 2001 and 2000,
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 and Arizona 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
56 percent, 53 percent and 53 percent of the Company's purchases
during each of the years ended January 31, 2001, 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.
(Continued)
F-11
44
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(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 PER SHARE
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share
is computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding during
the period increased to include the number of additional common
shares that would have been outstanding if the dilutive potential
common shares had been issued. The dilutive effect of outstanding
options is reflected in diluted earnings per share by application
of the treasury stock method.
2001 2000 1999
------------- ------------- -------------
Basic:
Weighted average common shares
outstanding 3,830,559 3,745,999 3,729,519
============= ============= =============
Diluted:
Weighted average common shares
outstanding 3,830,559 3,745,999 3,729,519
Dilutive effect of options and
warrants 526,443 477,685 235,814
------------- ------------- -------------
Weighted average common shares
outstanding - diluted
4,357,002 4,223,684 3,965,333
============= ============= =============
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.
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 the years ended
January 31, 2000 and 1999 because the warrants exercise prices
were greater than the average market price of common shares for
each year.
(Continued)
F-12
45
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB interpretation ("FIN") 44, "Accounting for Certain
Transactions Involving Stock Compensation," which clarifies the
application of APB Opinion No. 25 for certain issues. The
interpretation was effective July 1, 2000, except for the
provisions that relate to modifications that directly or
indirectly reduce the exercise price of an award and the
definition of an employee, which were effective after December 15,
1998. The adoption of FIN 44 did not have an effect on the
Company's consolidated financial position, results of operations
or cash flows.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. ("SAB") 101, "Revenue Recognition in
Financial Statements" and amended it in March and June 2000.
Adoption of SAB 101, in the fourth quarter of 2001, did not have
an impact on the Company's consolidated financial position,
results of operations or cash flows.
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 measure them at fair value. The
Company adopted SFAS 133 on February 1, 2001. Adoption of SFAS No.
133 did not have an impact on the Company's consolidated financial
position, results of operations or cash flows.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
2001 2000
------------------ -------------------
Building $ 684,990 684,990
Furniture and equipment 12,093,643 10,071,333
Leasehold improvements 23,497,657 19,859,021
Display fixtures 8,249,196 7,654,874
Vehicles 1,039,601 884,195
------------------ -------------------
45,565,087 39,154,413
Less accumulated depreciation 27,694,611 24,130,366
------------------ -------------------
Property and equipment, net $ 17,870,476 15,024,047
================== ===================
Depreciation expense, including amortization of capital leases, for the
years ended January 31, 2001, 2000 and 1999, approximated $3.7 million,
$3.4 million and $3.4 million, respectively.
(Continued)
F-13
46
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(3) DEBT
(A) REVOLVING CREDIT FACILITY
In December 1997, the Company amended and extended its loan and
security agreement for a 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 up to $25 million, based upon a borrowing base equal to
the lesser of 70 percent of eligible inventory (as defined) at
cost or 55 percent of eligible inventory at retail selling price.
The availability under the facility is reduced by outstanding
letters of credit. The revolving credit facility bears interest on
the outstanding balance at prime plus 1 percent and allows for a
LIBOR pricing option for one-, two-, three- or six-month periods
at 2.5 percent over the corresponding LIBOR rate for the
respective period. The Company pays a monthly fee based upon the
unused portion of the commitment less $5 million at 0.375 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 $18,141,000 and $7,310,000 at January
31, 2001 and 2000, respectively.
The effective interest rate on the outstanding loan balance under
the financing arrangement in effect as of January 31, 2001 and
2000 was 9.1 percent and 10.4 percent, respectively.
In April 2001, the Company amended and extended its loan and
security agreement for a revolving line of credit facility with
its existing lender through July 31, 2004. The terms of the
agreement were amended to allow the Company to borrow, repay, and
reborrow up to $40 million, based upon a borrowing base equal to
the lesser of 70 percent of eligible inventory (as defined) at
cost or 55 percent of eligible inventory at retail selling price.
The availability under the facility is reduced by outstanding
letters of credit. The revolving credit facility bears interest on
the outstanding balance at prime plus .5 percent and allows for a
LIBOR pricing option for one-, two-, three- or six-month periods
at 2 percent over the corresponding LIBOR rate for the respective
period. The Company pays a monthly fee based upon the unused
portion of the commitment which varies upon the average
outstanding loan balance at .375 percent per annum. The Company
incurred a renewal and amendment fee of $100,000.
(Continued)
F-14
47
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
The amended loan and security agreement contains various
affirmative and negative covenants requiring the Company to
maintain a quarterly calculation of minimum EBITDA based on
trailing 12 months performance. 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.
(B) LONG-TERM DEBT
Long-term debt consists of the following:
2001 2000
------------------ ------------------
Note payable in monthly installments of $161,242,
including interest at 9.96 percent, with the
final payment due January 2003 collaterized
by property and equipment $ 3,363,424 4,880,258
Vehicle loans in monthly installments totaling
$2,406, including interest ranging from 9.4%
to 10.2% with the final payments due from
March 2003 to June 2004 65,975 --
Notes payable in monthly installments totaling
$3,117, including interest ranging from 10.7%
to 11.3% with the final payments due from
October 2004 to December 2004 77,473 --
------------------ ------------------
Total long-term debt 3,506,872 4,880,258
Less current installments 1,569,569 1,516,834
------------------ ------------------
Long-term debt, excluding current
installments $ 1,937,303 3,363,424
================== ==================
The aggregate maturities of long-term debt for each of the years
subsequent to January 31, 2001 are approximately: 2002,
$1,570,000; 2003, $1,873,000; 2004, $41,000; and 2005, $23,000.
The master security agreement for the note payable due January
2003 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 master
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.
(C) LETTERS OF CREDIT
The Company has standby letters of credit, in the aggregate of
approximately $1.2 million, maturing at various dates through
January 2002, primarily supporting self-insurance reserves. The
letters of credit were not drawn upon as of January 31, 2001.
(Continued)
F-15
48
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(4) INCOME TAXES
The components of income tax expense (benefit) for the Company are as
follows:
2001 2000 1999
---------------- ---------------- ----------------
Current:
Federal $ 2,801,615 1,864,683 1,202,276
State 479,289 321,208 107,724
---------------- ---------------- ----------------
3,280,904 2,185,891 1,310,000
Deferred:
Federal (175,810) (2,906,089) --
State (30,094) (497,463) --
---------------- ---------------- ----------------
(205,904) (3,403,552) --
Total $ 3,075,000 (1,217,661) 1,310,000
================ ================ ================
Income tax expense (benefit) attributable to income from continuing
operations was $3,075,000, $(1,217,661) and $1,310,000 for the years
ended January 31, 2001, 2000 and 1999, 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:
2001 2000 1999
------ ------ ------
Computed expected income tax
rate 34.0% 34.0% 34.0%
Effect of state and local
taxes, net of federal
income tax benefit 3.8 (4.6) 3.6
(Decrease) increase in
beginning of year balance
of federal valuation
allowance for deferred
tax asset -- (52.4) 25.1
Other 1.7 .1 2.2
------ ------ ------
Effective income tax
rate 39.5% (22.9)% 64.9%
====== ====== ======
(Continued)
F-16
49
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as
follows:
2001 2000
---------- ---------
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 108,765 191,397
Inventory adjustments 483,616 428,403
Fixed assets, principally due to differences in
depreciation 2,029,690 1,626,823
Deferred gain on sale 38,688 41,495
Accrued rent expense 844,639 866,465
Accrued insurance 27,817 33,518
Provision for warranty redemption 101,184 201,219
Lease incentive 19,112 45,027
Other 8,628 80,361
---------- ---------
Total gross deferred tax assets 3,662,139 3,514,708
Deferred tax liabilities:
Prepaid advertising 24,619 34,572
Prepaid insurance 28,064 74,580
Legal settlement expense -- 2,004
---------- ---------
Total gross deferred tax liability 52,683 111,156
---------- ---------
Net deferred tax asset $3,609,456 3,403,552
========== =========
The valuation allowance for deferred tax assets of January 31, 2001 and
2000 was $0. The net change in the total valuation allowance for the
years ended January 31, 2000 and 1999, was a decrease of $3,258,830 and
an increase of $817,766, respectively. The valuation allowance was
reduced in the fiscal year 2000 because the Company believes it is more
likely than not the deferred tax asset will be realized. 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.
(Continued)
F-17
50
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(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. As amended in September 2000,
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 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 $0.001 per Right at the option of
the board of directors. The Rights will expire on May 4, 2007. As
of January 31, 2001, 3,973,245 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 years ended January 31, 2001 and 2000, the option exercise
price represents the fair market value of the underlying share of
common stock at the date of grant. 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's original stock option plan (the "1986 Plan")
provided 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
option exercise price represents the fair-market value of the
underlying share of common stock at the date of grant. The option
term may not be longer than ten years. In connection with the
adoption of the 1999 Plan, the 1986 Plan was superceded.
On December 21, 2000, the Company issued 244,500 stock options at
an exercise price of $5.00 per share under the 1999 Plan. These
options have a term of ten years expiring on December 21, 2010.
(Continued)
F-18
51
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
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.
On May 18, 1998, the Company issued 10,000 stock options at an
exercise price of $2.86 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
on May 17, 2003.
Changes in stock options outstanding are as follows:
WEIGHTED-
NUMBER OF AVERAGE
SHARES PRICE EXERCISE PRICE
--------------- ---------------- -------------------
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
Granted 244,500 5.00 5.00
Exercised (34,000) 1.77-8.00 2.79
Canceled -- -- --
---------------
Outstanding January 31, 2001 1,066,000 $ 1.69-8.00 3.46
===============
Exercisable 1,066,000
===============
Available for future grants 33,500
===============
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 would have been adjusted to the
pro forma amounts approximated:
2001 2000 1999
------------- ------------- -------------
Net income:
As reported $ 4,709,000 6,526,000 707,000
Pro forma $ 4,036,000 5,593,000 558,000
Diluted income per share: As reported $ 1.08 1.55 0.18
Pro forma $ 0.93 1.32 0.14
============= ============= =============
(Continued)
F-19
52
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
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 effect on fiscal year 2001 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:
2001 2000 1999
--------------- --------------- ----------------
Expected dividend yield -- -- --
Expected stock price
volatility 1.21 1.31 1.34
Risk-free interest rate 4.9% 5.7% 5.3%
Expected life of options 7 years 3 years 3 years
For the years ended January 31, 2001, 2000 and 1999, the weighted
average fair value of options granted during the fiscal year was
$4.55, $6.11 and $2.45, respectively.
As of January 31, 2001, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $1.69 to $8.00 and 4.7 years, respectively.
As of January 31, 2001 and 2000, the number of options exercisable
was 1,066,000 and 855,500, respectively, and the weighted-average
exercise price of those options was $3.46 and $4.65, respectively.
(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 years ended January 31, 2001, 2000 and 1999.
(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, 2001, 2000 and 1999, approximated $307,000,
$277,000 and $57,000, respectively.
(Continued)
F-20
53
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
(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 capital leases that
expire through 2014. At January 31, 2001 and 2000, the gross amount of
property and equipment and related amortization recorded under the
capital leases were as follows:
2001 2000
------------------ -------------------
Building $ 684,990 684,990
Furniture and equipment 905,545 142,910
------------------ -------------------
1,590,535 827,900
Less accumulated amortization 404,400 285,820
------------------ -------------------
$ 1,186,135 542,080
================== ===================
Future minimum annual rental payments required under operating leases
that have initial or remaining noncancelable lease terms in excess of one
year as of January 31, 2001 and the capital lease payments are as
follows:
CAPITAL OPERATING
YEAR ENDING JANUARY 31, LEASE LEASES
------------------------------------------------------ ------------------- -------------------
2002 $ 402,133 $ 7,426,741
2003 402,133 6,878,331
2004 402,133 6,523,765
2005 208,826 6,310,607
2006 162,398 5,319,267
Thereafter 1,448,047 17,159,812
------------------- -------------------
Total minimum lease payments 3,025,670 $ 49,618,523
===================
Less amounts representing interest (at an effective
interest rate of approximately 16.6%)
1,606,316
-------------------
Present value of minimum capital lease
payments 1,419,354
Less current installments of obligations under
capital leases 183,905
-------------------
Obligations under capital leases, excluding
current installments $ 1,235,449
===================
(Continued)
F-21
54
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
The current installments of obligations under capital leases is included
in accrued liabilities. Total rental expense under the noncancelable
operating leases for the years ended January 31, 2001, 2000 and 1999, was
approximately $8.7 million, $8.1 million and $7.3 million, respectively.
(8) OTHER LIABILITIES
Included in accrued liabilities as of January 31, 2001 and 2000 are
approximately $7.1 million and $4.6 million, 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 and the base rental is accrued and included in other liabilities
and deferred credits in the consolidated balance sheets. As of January
31, 2001 and 2000, the recorded liability for accrued rent was
approximately $2.2 million and $2.3 million, respectively.
(9) COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company's executive officers have employment agreements
providing for minimum base salaries. These agreements expire on
January 31, 2002. The employment agreements provide for severance
pay benefits under certain conditions, such as if there is a
change in control of the Company (as defined), in the amount of
three times their base salary plus bonuses earned. Additionally,
the Company has entered into agreements with certain other key
employees that provide severance pay benefits under certain
conditions if there is a change in control of the Company.
(B) 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, 2001, 2000 and 1999, approximately $1,170,000,
$733,000 and $47,000, respectively, was earned under the plan.
(C) 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.
(Continued)
F-22
55
SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 AND 2000
For the year ended January 31, 2001, other income and expense
includes a charge of approximately $561,000 for the termination of
a proposed secondary offering and approximately $695,000 of income
from the settlement of certain litigation.
(10) ACQUISITION AND DIVESTITURES
On October 17, 2000, the Company purchased the assets and assumed certain
liabilities of Showcase Home Entertainment of the Southwest, LLC, a
Scottsdale, Arizona based retailer of consumer electronics and custom
design services. The purchase price for the acquisition was $5.8 million,
of which $4.6 million was paid in cash and $1.3 million was paid by
issuing 172,851 shares of common stock, plus acquisition fees. The
acquisition has been accounted for under the purchase method of
accounting. The excess of the purchase price paid over the fair value of
net assets acquired of approximately $6.7 million was recorded as
goodwill and will be amortized over 15 years. Under the name Showcase
Home Entertainment, the Company operates two upscale showrooms in
Scottsdale and Chandler, Arizona, as well as a home theater showroom in
the home entertainment department of The Great Indoors home design center
located in Scottsdale. The results of operations for Showcase have been
included in the consolidated statement of income since the date of the
acquisition and are not significant to the fiscal year results.
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-23
56
SOUND ADVICE, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
BALANCE AT
BEGINNING OF CHARGED TO COSTS OTHER CHANGES BALANCE AT END
DESCRIPTION YEAR AND EXPENSES ADD (DEDUCT) OF YEAR
--------------------------------------- ---------------- ---------------- ---------------- ----------------
Allowance for doubtful accounts:
January 31, 2001 $ 508,640 485,100 (604,440)(A) 389,300
================ ================ ================ ================
January 31, 2000 $ 440,900 611,760 (544,020)(A) 508,640
================ ================ ================ ================
January 31, 1999 $ 384,100 482,110 (425,310)(A) 440,900
================ ================ ================ ================
Allowance for redemption of extended
service warranty contracts:
January 31, 2001 $ 467,000 -- (198,000) 269,000
================ ================ ================ ================
January 31, 2000 $ 843,000 -- (376,000) 467,000
================ ================ ================ ================
January 31, 1999 $ 1,270,000 -- (427,000) 843,000
================ ================ ================ ================
(A) Amounts represent write-off of uncollectible receivables.