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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 30, 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
incorporation or organization) identification no.)
1901 TIGERTAIL BOULEVARD, DANIA BEACH, FLORIDA 33004
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(Address of principal executive offices) (Zip Code)
(954) 922-4434
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.
COMMON STOCK, PAR VALUE $.01 PER SHARE - 4,104,995 SHARES OUTSTANDING AS OF JUNE
8, 2001.
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SOUND ADVICE, INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
April 30, 2001 and January 31, 2001 3
Condensed Consolidated Statements of Income (Unaudited)
for the Three Months Ended April 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended April 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 9-11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SOUND ADVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
APRIL 30, 2001 AND JANUARY 31, 2001
APRIL 30, 2001 JANUARY 31, 2001
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ASSETS
CURRENT ASSETS:
Cash $ 3,363,453 $ 2,094,348
Receivables:
Vendors 5,112,297 4,776,621
Trade 1,477,691 1,517,142
Employees 461,623 411,997
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7,051,611 6,705,760
Less allowance for doubtful accounts (459,200) (389,300)
------------ ------------
6,592,411 6,316,460
Inventories 39,814,397 46,000,745
Prepaid and other current assets 294,805 907,910
Deferred tax assets, current 1,412,154 1,412,154
------------ ------------
Total current assets 51,477,220 56,731,617
Property and equipment, net 18,045,492 17,870,476
Deferred tax assets, net 2,197,302 2,197,302
Other assets 461,793 509,452
Goodwill, net 6,633,956 6,721,876
------------ ------------
$ 78,815,763 $ 84,030,723
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 3,007,108 $ 2,899,440
Borrowings under revolving credit facility 23,062,793 18,141,443
Current maturities of long-term debt 1,685,551 1,569,569
Accounts payable 6,313,002 12,745,439
Income tax payable 513,457 1,086,872
Accrued liabilities 8,525,927 12,033,256
Total current liabilities 43,107,838 48,476,019
Long-term debt, excluding current maturities 1,406,764 1,937,303
Capital lease obligation 1,190,571 1,235,449
Other liabilities and deferred credits 3,294,255 3,531,100
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48,999,428 55,179,871
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SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
authorized 10,000,000 shares; issued
and outstanding 4,073,745 shares at
April 30, 2001 and 3,973,245
at January 31, 2001 40,737 39,733
Additional paid-in capital 12,800,062 12,623,183
Retained earnings 16,975,536 16,187,936
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Total shareholders' equity 29,816,335 28,850,852
Commitments and contingencies
------------ ------------
$ 78,815,763 $ 84,030,723
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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SOUND ADVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 2001 AND 2000
THREE MONTHS ENDED APRIL 30,
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2001 2000
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Net sales $ 48,307,393 $ 42,676,347
Cost of goods sold 30,586,587 27,599,426
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Gross profit 17,720,806 15,076,921
Selling, general and administrative
expenses 15,872,829 13,561,311
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Income from operations 1,847,977 1,515,610
Other income (expense):
Interest expense (552,172) (409,884)
Other, net 6,795 2,490
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Income before income taxes 1,302,600 1,108,216
Income taxes 515,000 432,000
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Net income $ 787,600 $ 676,216
============ ============
Common and common equivalent per share amounts:
Basic net income per share $ 0.19 $ 0.18
============ ============
Diluted net income per share $ 0.17 $ 0.16
============ ============
Weighted average number of shares
outstanding - basic 4,041,284 3,766,394
============ ============
Weighted average number of shares
outstanding - diluted 4,639,621 4,320,960
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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SOUND ADVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 2001 AND 2000
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 787,600 $ 676,216
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,052,662 865,176
Gain on disposition of assets (4,168) --
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables (275,951) (26,330)
Inventories 6,186,348 (119,968)
Prepaid and other current assets 613,105 630,087
Other assets 27,993 (1,846)
Increase (decrease) in:
Accounts payable (6,432,437) (2,357,275)
Income tax payable (573,415) 432,000
Accrued liabilities (3,507,329) (1,159,495)
Other liabilities and deferred credits (236,845) (67,665)
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NET CASH USED IN OPERATING ACTIVITIES (2,362,437) (1,129,100)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,120,092) (555,616)
Proceeds from disposition of assets 4,168 --
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NET CASH USED IN INVESTING ACTIVITIES (1,115,924) (555,616)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility 54,331,253 36,819,196
Repayments on revolving credit facility (49,409,903) (33,502,513)
Principal payments on long-term debt (414,557) (365,222)
Increase (decrease) in cash overdraft 107,668 (1,662,351)
Principal payments under capital lease obligations (44,878) (9,162)
Proceeds from exercise of stock options 177,883 --
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NET CASH PROVIDED BY FINANCING ACTIVITIES 4,747,466 1,279,948
------------ ------------
Increase (decrease) in cash 1,269,105 (404,768)
Cash, beginning of period 2,094,348 564,898
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CASH, END OF PERIOD $ 3,363,453 $ 160,130
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 510,884 $ 369,827
============ ============
Income taxes paid $ 1,088,415 $ --
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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SOUND ADVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in conformity with instructions to Form 10-Q
and, therefore, do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. Certain items included in these statements are based on
management estimates. In the opinion of management, the accompanying
financial statements contain all adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position of the Company
at April 30, 2001 and January 31, 2001 and the statements of income for the
three month periods ended April 30, 2001 and 2000 and statements of cash
flows for the three month periods ended April 30, 2001 and 2000. The results
of operations for the three months ended April 30, 2001 are not necessarily
indicative of the operating results expected for the fiscal year ending
January 31, 2002. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in
the Company's annual report on Form 10-K for the year ended January 31,
2001.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net 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 diluted potential common shares had been issued. The diluted effect of
outstanding options is reflected in diluted earnings per share by
application of the treasury stock method.
THREE MONTHS ENDED
APRIL 30,
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2001 2000
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Basic:
Weighted average common shares
outstanding 4,041,284 3,766,394
========= =========
Diluted:
Weighted average common shares
outstanding 4,041,284 3,766,394
Dilutive effect of options and warrants 598,337 554,566
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Total 4,639,621 4,320,960
========= =========
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3. SEASONALITY
Historically, the Company's net sales are greater during the
holiday season than during other periods of the year. Net sales by fiscal
quarters and their related percentages for the trailing four quarters ended
April 30, 2001 and 2000 are as follows:
TRAILING FOUR QUARTERS ENDED OCTOBER 31,
---------------------------------------------
(Dollars in Thousands)
QUARTERLY SALES
2001 2000
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AMOUNT % AMOUNT %
-------- ----- -------- -----
First Quarter
(February - April) $ 48,307 23.7 $ 42,676 23.5
Fourth Quarter
(November - January) 69,257 33.9 58,934 32.5
Third Quarter
(August - October) 44,616 21.9 39,263 21.6
Second Quarter
(May - July) 41,815 20.5 40,684 22.4
-------- ----- -------- -----
SALES FOR TRAILING TWELVE
MONTHS ENDED APRIL 30,
2001 AND 2000, RESPECTIVELY $203,995 100% $181,557 100%
4. PRPOERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
APRIL 30, 2001 JANUARY 31, 2001
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Building $ 684,990 $ 684,990
Furniture and equipment 12,262,347 12,093,643
Leasehold improvements 24,178,102 23,497,657
Display fixtures 8,388,388 8,249,196
Vehicles 1,151,575 1,039,601
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Total 46,665,402 45,565,087
Less accumulated depreciation 28,619,910 27,694,611
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Property and equipment, net $18,045,492 $17,870,476
=========== ===========
5. STOCK OPTIONS
During the quarter ended April 30, 2001, stock options for 95,500
shares and stock warrants for 5,000 shares were exercised at an exercise
price ranging from $1.70 to $1.89 per share.
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6. PROVISION FOR INCOME TAXES
In the three months ended April 30, 2001, the Company recorded a
provision for income taxes of $515,000, at an effective tax rate of 39.5%.
In the three months ended April 30, 2000, the Company recorded a provision
for income taxes of $432,000, at an effective tax rate of 39%.
7. SUBSEQUENT EVENT
On June 1, 2001, the Company entered into an Agreement and Plan of
Merger with Tweeter Home Entertainment Group, Inc. ("Tweeter"), providing
for the acquisition by Tweeter of all the outstanding common stock of Sound
Advice. The Merger is structured as a tax-free exchange for stock and will
be accounted for by Tweeter as a purchase. Under the terms of the agreement,
each outstanding share of Sound Advice common stock will be converted into
Tweeter common stock, at an exchange ratio of 1 for 1 while the five-day
average market price for Tweeter common stock two days prior to closing is
between $21 and $30 per share. If the five-day average market price for
Tweeter common stock is above $30 per share, the exchange ratio will
decrease in order to maintain $30 per share. If the five-day average market
price for Tweeter common stock is below $21 per share, the exchange ratio
will increase in order to maintain $21 per share. Both parties have the
right to terminate if the five-day average closing price of Tweeter common
stock is below $18 per share at the time of closing. The transaction, which
is expected to close on or about September 1, 2001, is subject to
shareholder approval by both companies, any necessary regulatory approvals
and other customary closing conditions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales for quarter ended April 30, 2001 increased $5,631,000 or
13% to $48,307,000 as compared to $42,676,000 in the corresponding period in
the prior fiscal year. The increase in sales resulted primarily from the
acquisition of Showcase Home Entertainment in October 2000 and an increase
in same store sales. The core category of video was primarily responsible
for the sales increase. The largest product sales increases were in
projection televisions, direct view television and custom installations.
Comparable store net sales increased 1.5% in the quarter ended April 30,
2001 over the corresponding quarter in the prior year. Our operations,
similar to those of other retailers, are subject to seasonal influences.
Historically, we have realized greater sales and profits during the holiday
selling season.
Cost of goods sold includes the cost of merchandise, net of vendor
rebates and discounts, allowances for product shrinkage and obsolescence.
Gross profit for the quarter ended April 30, 2001 was $17,720,000, an
increase of $2,644,000 or 18%, compared to the corresponding quarter in the
prior fiscal year. The increase in gross profit was directly related to the
increased sales of projection televisions, direct view televisions and
custom installation services. The gross profit margin was 36.7% in the
quarter ended April 30, 2001 as compared to 35.3% in the quarter ended April
30, 2000.
Selling, general and administrative expenses, referred to as SG&A
expense, includes costs related to sales commissions, salaries, advertising,
warehouse and distribution, corporate expenses, store operations, including
rent and utilities and depreciation. SG&A expense for the quarter ended
April 30, 2001 was $15,873,000, an increase of $2,312,000 or 17% over the
corresponding period in the prior year. The increase was primarily a result
the costs associated with the newly acquired stores, sales commissions on
increased gross profit and the costs associated with newly opened stores.
SG&A as a percentage of net sales increased to 32.9 % for the quarter April
30, 2001 from 31.8% for the corresponding quarter of the prior fiscal year.
Income from operations in the quarter ended April 30, 2001 was
$1,848,000, an increase of $332,000, or 22%, over the corresponding quarter
in the prior year. Income from operations as a percentage of net sales
increased to 3.8% in the quarter ended April 30, 2001 from 3.6% in the
corresponding quarter in the prior fiscal year.
Interest expense increased by $142,000 for the quarter ended April
30, 2001 from the corresponding period in the prior fiscal year. The
increase was attributable to increased borrowings compared to the
corresponding quarter in the prior fiscal year net of a decrease in interest
rates.
Income taxes of $515,000 for the quarter ended April 30, 2001 were
recorded at an effective tax rate of 39.5%. The income tax provision in the
corresponding quarter of the prior fiscal year was $432,000 recorded at an
effective rate of 39.0%.
Net income for the quarter ended April 30, 2001 was $788,000 or
$.19 per share (basic) and $.17 per share (diluted) compared to net income
of $676,000 or $.18 per share (basic) and $.16 per share (diluted) for the
corresponding quarter in the prior fiscal year.
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FINANCIAL CONDITION
Historically, our primary sources of capital for working capital,
expansion and growth have been our revolving line of credit, net cash from
operations and vendor credit. Our primary cash requirements are for new
store openings, relocations and upgrades of existing stores, as well as
working capital to support our inventory requirements and SG&A expenses.
Net cash used in operating activities was approximately $2,362,000
for the three months ended April 30, 2001 primarily due to cash flows from
net income and a decrease of accounts payable and accrued liabilities, net
of a decrease in inventory since January 31, 2001. Working capital was
approximately $8,369,000 at April 30, 2001, compared to $8,256,000 in
working capital at January 31, 2001 for an overall increase of $113,000. The
decrease in current assets of $5,254,000 during the three months ended April
30, 2001 was primarily related to the $6,186,000 decrease in inventory and
the $1,269,000 increase in cash. There was an overall decrease of $5,368,000
in current liabilities. The net decrease in current liabilities resulted
primarily from an increase in borrowings under the revolving line of credit
of $4,921,000, a decrease in accrued liabilities of $3,507,000 and a
decrease in accounts payable of $6,432,000. The increase in the revolving
line of credit is primarily due to the decreases in accounts payable and
accrued liabilities net of a decrease in inventory.
At April 30, 2001, there was $23,063,000 outstanding under the
facility. Our revolving credit facility expires on July 31, 2004. The terms
of the 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 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 commitment which varies based upon the average outstanding loan
balance at .375% per annum. We are in compliance with all of our loan
covenants. In December 1999, we entered into at three $5,000,000 term loan
agreement payable in monthly installments at an effective interest rate of
9.96%. At April 30, 2001, there was $2,960,000 outstanding under the term
loan agreement.
We believe that funds generated by operations combined with
borrowings available under the revolving credit facility and vendor credit
programs will be sufficient to satisfy our projected operating cash
requirements and store expansion and relocation plans during fiscal 2002.
However, in order to continue store expansion and upgrades beyond fiscal
2002 or to pursue acquisitions as a part of our expansion strategy, we may
need to seek additional sources of debt or equity financing.
On June 1, 2001, the Company entered into an Agreement and Plan of
Merger with Tweeter Home Entertainment Group, Inc. ("Tweeter"), providing
for the acquisition by Tweeter of all the outstanding common stock of Sound
Advice. The Merger is structured as a tax-free exchange for stock and will
be accounted for by Tweeter as a purchase. Under the terms of the agreement,
each outstanding share of Sound Advice common stock will be converted into
Tweeter common stock, at an exchange ratio of 1 for 1 while the five-day
average market price for Tweeter common stock two days prior to closing is
between $21 and $30 per share. If the five-day average market price for
Tweeter common stock is above $30 per share, the exchange ratio will
decrease in order to maintain $30 per share. If the five-day average market
price for Tweeter common stock is below $21 per share, the exchange ratio
will increase in order to maintain $21 per share. Both parties have the
right to terminate if the five-day average closing price of Tweeter common
stock is below $18 per share at the time of closing. The transaction, which
is expected to close on or about September 1, 2001, is subject to
shareholder approval by both companies, any necessary regulatory approvals
and other customary closing conditions.
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FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements (within the
meaning of Section 21E. of the Securities Exchange Act of 1934, as amended)
representing 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, the consummation of the
merger with Tweeter and the other risks and factors detailed in this Form
10-Q 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.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on April 12, 2001 each
of the nominees listed below was elected a director of the Company to hold
office until the 2003 annual meeting of the shareholders and until his or
her respective successor has been elected and qualified. Tabulated with the
name of each of the nominees elected is the number of common shares cast for
each nominee and the number of common shares withholding authority to vote
for each nominee. There were no broker non-votes or abstentions with respect
to the election of directors.
NOMINEE VOTES FOR VOTES AGAINST VOTES WITHHELD
------- --------- ------------- --------------
Herbert A. Leeds 3,177,355.5 298,260.0 0
William F. Hagerty, IV 3,177,355.5 298,260.0 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUND ADVICE, INC.
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(Registrant)
Date JUNE 14, 2001 /s/ PETER BESHOURI
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Peter Beshouri, Chairman of the
Board, President and Chief
Executive Officer
Date JUNE 14, 2001 /s/ KENNETH L. DANIELSON
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Kenneth L. Danielson, Chief
Financial and Accounting Officer
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