10-Q 1 g66017e10-q.txt SOUND ADVICE, INC. 1 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 OCTOBER 31, 2000, 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. ------------------------------------------------------ (Exact name of registrant as specified in its charter) FLORIDA 59-1520531 ----------------------------------------- ------------------ (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1901 TIGERTAIL BOULEVARD, DANIA BEACH, FLORIDA 33004 --------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (954) 922-4434 ---------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE ----------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE. COMMON STOCK, PAR VALUE $.01 PER SHARE - 3,961,245 SHARES OUTSTANDING AS OF DECEMBER 8, 2000. 2 9 SOUND ADVICE, INC. AND SUBSIDIARIES INDEX

PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements. Condensed Consolidated Balance Sheets (Unaudited) ~~July~~October 31, 2000 and January 31, 2000 ...................... 3 Condensed Consolidated Statements of Income (Unaudited) for the Three and ~~Six~~Nine Months Ended ~~July~~October 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Six~~Nine Months Ended ~~July~~October 31, 2000 and 1999 ......... 5-6 Notes to Condensed Consolidated Financial Statements 6........ 7-89 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................ 910-1213 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13..................................... 14 SIGNATURES 14.................................................................... 15

Page 2 3 SOUND ADVICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) OCTOBER 31, 2000 AND JANUARY 31, 2000

~~July~~OCTOBER 31, 2000 ~~January~~JANUARY 31, 2000 ----------------- ---------------- ASSETS ~~Current~~CURRENT ~~Assets~~ASSETS: Cash $ ~~296~~2,~~640~~414,450 $ 564,898 Receivables: Vendors 43,~~238~~371,~~462~~758 3,979,027 Trade 1,~~000~~805,~~087~~123 1,024,652 Employees ~~498~~521,~~770~~514 431,775 ------------ ------------- 5,~~737~~698,~~319~~395 5,435,454 Less allowance for doubtful accounts (~~509~~612,~~600~~873) (508,640) ------------ ------------- 5,~~227~~085,~~719~~522 4,926,814 Inventories 3342,~~029~~104,~~179~~932 35,459,724 Prepaid income taxes ~~514~~591,~~664~~345 -- Prepaid and other current assets ~~496~~252,~~236~~651 830,407 Deferred tax assets, current 1,599,578 1,599,578 ------------ ------------- Total current assets 4152,~~164~~048,~~016~~477 43,381,421 Property and equipment, net 1517,~~434~~610,~~783~~225 15,024,047 Deferred tax assets, net 1,915,130 1,915,130 Other assets ~~418~~366,~~618~~846 435,389 Goodwill, net ~~159~~6,~~399~~741,326 176,472 ------------ ------------- $ 5978,~~091~~682,~~946~~004 $ 60,932,459 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Cash overdraft $ ~~966~~2,~~795~~838,958 $ 1,662,351 Borrowings under revolving credit facility 918,~~775~~528,~~835~~906 7,309,531 Current maturities of long-term debt, and capital lease obligation 1,~~510~~653,~~746~~550 1,516,834 Accounts payable 610,~~162~~196,~~716~~099 9,884,337 Income tax payable -- 781,041 Accrued liabilities 811,~~719~~897,~~706~~746 9,096,046 Deferred tax liabilities 111,156 111,156 ------------ ------------- Total current liabilities 2745,~~246~~226,~~954~~415 30,361,296 Long-term debt, excluding current maturities 2,~~629~~326,~~898~~972 3,363,424 Capital lease ~~obligation~~obligations, excluding current portion 1,~~493~~451,~~306~~720 788,444 Other liabilities and deferred credits 3,~~594~~624,~~492~~064 3,727,568 ------------ ------------- 3452,~~964~~629,~~650~~171 38,240,732 ------------ ------------- SHAREHOLDERS' EQUITY: Common stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 3,~~787~~961,~~394~~245 shares at ~~July~~October 31, 2000 and 3,766,394 at January 31, 2000 3739,~~874~~613 37,664 Additional paid-in capital 1112,~~245~~560,~~665~~455 11,175,205 Retained earnings 1213,~~843~~452,~~757~~765 11,478,858 ------------ ------------- Total shareholders' equity 2426,~~127~~025,~~296~~833 22,691,727 Commitments and contingencies ------------ ------------- $ 5978,~~091~~682,~~946~~004 $ 60,932,459 ============ =============

Page 3 4 SOUND ADVICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999

~~Three~~THREE ~~Months~~MONTHS ~~Ended~~ENDED ~~July~~OCTOBER 31, ~~Six~~NINE ~~Months~~MONTHS ~~Ended~~ENDED ~~July~~OCTOBER 31, --------------------------------- --------------------------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Net sales $ 4144,~~814~~616,~~570~~484 $ 4039,~~683~~263,~~949~~111 $ 84129,~~490~~107,~~917~~400 $ 79118,~~151~~414,~~402~~515 Cost of goods sold 2628,~~908~~180,~~778~~337 2625,~~718~~188,~~606~~517 5482,~~508~~688,~~204~~541 5176,~~598~~787,~~866~~385 ------------- ------------- ------------- ------------- Gross profit 1416,~~905~~436,~~792~~147 1314,~~965~~074,~~344~~594 2946,~~982~~418,~~713~~859 2741,~~552~~627,~~536~~130 Selling, general and administrative expenses 1314,~~319~~396,~~572~~400 12,~~737~~808,~~834~~285 2641,~~880~~277,~~883~~283 2538,~~364~~172,~~571~~856 ------------- ------------- ------------- ------------- Income from operations 12,~~586~~039,~~220~~747 1,~~227~~266,~~509~~309 35,~~101~~141,~~830~~576 23,~~187~~454,~~965~~274 Other income (expense): Interest expense (~~492~~478,~~069~~897) (~~356~~317,~~886~~589) (~~901~~1,~~953~~380,849) (~~706~~1,~~428~~024,017) Cost of terminated stock offering (574,246) -- (574,246) -- Other, net 3510,~~532~~404 10,~~934~~299 3848,~~022~~426 2030,~~349~~648 ------------- ------------- ------------- ------------- Income before income taxes 1997,~~129,683~~008 ~~881~~959,~~557~~019 23,~~237~~234,~~899~~907 12,~~501~~460,~~886~~905 Income taxes ~~441~~388,000 -- ~~873~~1,261,000 -- ------------- ------------- ------------- ------------- Net income $ ~~688~~609,~~683~~008 $ ~~881~~959,~~557~~019 $ 1,~~364~~973,~~899~~907 $ 12,~~501~~460,~~886~~905 ============= ============= ============= ============= Common and common equivalent per share amounts: Basic net income per share $ 0.1816 $ 0.2426 $ 0.3652 $ 0.4066 ============= ============= ============= ============= Diluted net income per share $ 0.1614 $ 0.2123 $ 0.3246 $ 0.3659 ============= ============= ============= ============= Weighted average number of shares outstanding - basic 3,~~776~~816,~~443~~163 3,~~735~~752,~~048~~672 3,~~771~~786,~~474~~479 3,~~734~~740,~~477~~542 ============= ============= ============= ============= Weighted average number of shares outstanding - diluted 4,~~305~~319,~~894~~050 4,~~168~~257,~~251~~745 4,~~315~~324,~~514~~177 4,~~120~~184,~~600~~755 ============= ============= ============= =============

Page 4 5 SOUND ADVICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999

2000 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,~~364~~973,~~899~~907 ~~$ 1~~2,~~501~~460,~~886~~905 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 12,~~785~~741,~~788~~501 12,~~745~~605,~~276~~538 Gain on disposition of assets (33,000) (1522,~~474~~876) Deferred income taxes, net -- (~~585~~960,~~500~~000) Changes in operating assets and liabilities: Decrease (increase) in: Receivables ~~(300~~20,~~905)~~492 1694,~~504,866~~286 Inventories 2(3,~~430~~817,~~545~~909) 1(2,~~776~~221,~~266~~921) Prepaid income taxes (~~514~~252,~~664~~650) -- Prepaid and other current assets ~~334~~256,~~171~~944 ~~(29~~4,~~809)~~916 Other assets (119,~~229)~~712 (212,~~724~~514) Increase (decrease) in: -- Accounts payable (32,~~721~~300,~~621~~220) (3,~~304~~149,~~861~~717) Income tax payable (781,041) -- Accrued liabilities ~~(376~~1,~~340)~~111,007 ~~(207~~1,~~848)~~000,186 Other liabilities & deferred credits (~~133~~103,~~076~~504) (87207,~~965~~865) ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 53(1,~~527~~164,761) 2190,~~294,113~~938 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (13,~~398~~414,~~816~~968) (12,~~066~~530,~~217~~868) Proceeds from disposition of assets 33,000 ~~821~~833,~~687~~137 Acquisition of ~~store~~stores ~~facility~~(4,565,000) -- (301,938) ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (17,~~365~~946,~~816~~968) (~~546~~1,~~468~~999,669) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on revolving credit facility 99158,~~602~~310,~~366~~615 73134,~~291~~186,~~662~~859 Repayments on revolving credit facility (97147,~~136~~091,~~062~~240) (74135,~~743~~414,~~642~~472) Principal payments on long-term debt (~~739~~1,~~614~~408,873) (467,483) ~~Decrease~~Increase in cash overdraft ~~(695~~1,~~556)~~176,607 --3,317,580 Principal payments under capital lease obligations (5799,~~773~~359) (46,~~155~~385) Proceeds from exercise of stock options 7073,~~670~~531 951,~~150~~375 ------------- ------------- NET CASH PROVIDED BY ~~(USED IN)~~ FINANCING ACTIVITIES 110,~~044~~961,~~031~~281 (1,~~914~~667,~~468)~~474 ~~============~~------------- ~~============~~------------- ~~Decrease~~Increase (decrease) in cash ~~(268~~1,~~258)~~849,552 (~~166~~141,~~823~~257) Cash, beginning of period 564,898 1,384,051 ------------- ------------- CASH, END OF PERIOD $ ~~296~~2,~~640~~414,450 $ 1,~~217~~242,~~228~~794 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest ~~Paid~~paid $ ~~830~~1,~~927~~005,131 $ ~~621~~913,~~079~~482 ============= ============= Income taxes paid, net of refunds $ 2,~~168~~633,705 $ ~~780~~1,580,000 ============ =~~===========~~ SUPPLEMENTAL DISCLOSURE OF STORE ACQUISITION: Total purchase price -- $ 301,938 Less: Fixed asset valuation -- (148,640) Inventory valuation -- (71,519) ------------ ------------ Amount included in goodwill -- $ 81,779 ============ =~~===========~~

Page 5 6 Sound Advice, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine months ended October 31, 2000 and 1999 (Continued)

~~Three~~SUPPLEMENTAL ~~Months~~DISCLOSURE ~~Ended~~OF ~~Six~~FAIR ~~Months~~VALUE ~~Ended~~OF ~~July~~ASSETS ~~31,~~ACQUIRED ~~July~~AND 31LIABILITIES ASSUMED IN CONNECTION WITH ACQUISITION: Receivables 179,200 -- Inventory 2,827,299 71,519 Prepaid expenses and other assets 17,882 -- Fixed assets 1,038,731 148,640 Goodwill 6,607,026 81,779 Other assets 20,341 -- --------------- -------------~~--------~~ ~~2000~~Total ~~1999~~assets ~~2000~~$ ~~1999~~10,690,479 $ 301,938 ============= ============= Accounts payable $ 2,611,982 $ -- Customer deposits 1,216,652 -- Accrued expenses 474,041 -- Notes payable 509,137 --- --------- ---- ----- --------- ~~Basic:~~Total ~~Weighted~~liabilities ~~average~~$ ~~common shares outstanding 3~~4,~~776~~811,~~443~~812 ~~3,735,048~~$ ~~3,771,474~~-- ~~3,734,477~~ ========= ====~~=====~~ ========= ====~~=====~~ ~~Diluted:~~Less ~~Weighted average~~ common ~~shares~~stock ~~outstanding~~issued ~~3,776,443~~to ~~3,735,048~~seller 31,~~771~~313,~~474~~667 ~~3,734,477 Dilutive effect of options and warrants 529,451 433,203 544,040 386,123~~ -- ------- ------~~---~~ --------- ----~~-----~~ ~~Total~~Net ~~4,305,894~~cash ~~4,168,251~~used in acquistion $ 4,~~315~~565,~~514~~000 4$ 301,~~120,600~~938 ========= ====~~=====~~ ========= ====~~=====~~

Page 6 7 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 October 31, 2000 and January 31, 2000 and the statements of income for the three and nine month periods ended October 31, 2000 and 1999 and statements of cash flows for the nine month periods ended October 31, 2000 and 1999. The results of operations for the three and nine months ended October 31, 2000 are not necessarily indicative of the operating results expected for the fiscal year ending January 31, 2001. 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 period ended January 31, 2000. 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.

Page 7 8 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 October 31, 2000 and 1999 are as follows: TRAILING FOUR QUARTERS ENDED OCTOBER 31, (Dollars in Thousands) QUARTERLY SALES 2000 1999 ------------------- ------------------- AMOUNT % AMOUNT % -------- ---- -------- -- Third Quarter $ 44,616 23.8% $ 39,263 23.1% (August - October) Second Quarter 41,815 22.2 40,684 23.8 (May - July) First Quarter 42,676 22.7 38,468 22.5 (February - April) Fourth Quarter 58,934 31.3 52,218 30.6 (November - January) -------- ---- -------- ---- SALES FOR TRAILING TWELVE MONTHS ENDED OCTOBER 31, 2000 AND 1999, RESPECTIVELY $188,041 100% $170,633 100% ======== ===== ======== ===== 4.) PROPERTY AND EQUIPMENT, NET Property and equipment, net, consists of the following: OCTOBER 31, 2000 JANUARY 31, 2000 ---------------- ----------------- Building $ 684,990 $ 684,990 Furniture and equipment 11,796,241 10,071,333 Leasehold improvements 22,800,094 19,859,021 Display fixtures 7,956,895 7,654,874 Vehicles 1,004,526 884,195 ------------ ------------ Total 44,242,746 39,154,413 Less accumulated depreciation (26,632,521) (24,130,366) ------------ ------------ Property and equipment, net $ 17,610,225 $ 15,024,047 ============ ============ 5.) STOCK OPTIONS During the quarter ended October 31, 2000, non-qualified stock options for 1,000 shares were exercised at $2.86 per share. Page 8 9 6.) ACQUISTION 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 $6.0 million, of which $4.5 million was paid in cash and $1.5 million was paid by issuing 172,851 shares of common stock. 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 $6.6 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 quarterly results. Purchase price allocations are preliminary. 7.) TERMINATION OF COMMON STOCK OFFERING In November 2000, the Company terminated its previously announced public stock offering due to the volatility in the financial marketplace. In connection with the termination, the Company expensed $574,000 of costs associated with the offering during the third quarter. 8.) PROVISION FOR INCOME TAXES In the three and nine months ended October 31, 2000, the Company recorded a provision for income taxes of $388,000 and $1,261,000, respectively, at an effective tax rate of 39%. In the three and nine months ended October 31, 1999, the Company reduced the valuation reserve on deferred tax assets by $374,500 and $960,000, respectively. 9.) RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101) and amended it in March and June 2000. The Company is required to adopt the provisions of SAB 101 in the fourth quarter of 2000. Page 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Net sales for the quarter ended October 31, 2000 increased $5,353,000 or 14% to $44,616,000 compared to $39,263,000 in the corresponding period in the prior fiscal year. The increase in sales resulted primarily from the increase in same store sales, the relocation and expansion of a Sound Advice store in November 1999 and the addition of one Bang & Olufsen store in February 2000. The core category of video was primarily reponsible for the sales increase. The largest sales increases were in projection televisions, audio speakers and custom installations. Comparable store net sales increased 11% in the quarter ended October 31, 2000 over the corresponding quarter in the prior year. The comparable store sales were adjusted to exclude the new Bang & Olufsen store opened in February 2000. 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. Net sales for the nine months ended October 31, 2000 increased $10,693,000 or 9% to $129,107,000 compared to $118,414,000 in the corresponding period in the prior fiscal year. As stated above, the increase in net sales for the nine month period resulted from the increase in same store sales, the relocation of a Sound Advice store and the addition of one Bang & Olufsen store compared to the prior year. Overall sales increased in the core categories of audio, video, mobile products and furniture. For the nine months, the largest sales increases were in projection televisions, audio speakers, and custom installations. Comparable store net sales, adjusted for the new store, increased 8% in the nine months ended October 31, 2000 compared to the corresponding nine month period in the prior fiscal year. 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 October 31, 2000 was $16,436,000, an increase of $2,362,000 or 17%, 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, home theater systems, and custom installation services. The gross profit margin was 36.8% in the quarter ended October 31, 2000 compared to 35.8% in the quarter ended October 31, 1999. Gross profit for the nine months ended October 31, 2000 was $46,419,000, an increase of $4,792,000 or 12% compared to the corresponding period in the prior year. As stated above, the increase in gross profit was directly related to the increase in total sales. The gross profit margin was 36.0% in the nine months ended October 31, 2000 compared to 35.2% in the nine months ended October 31, 1999. Page 10 11 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 October 31, 2000 was $14,396,000, an increase of $1,588,000 or 12% over the corresponding period in the prior year. SG&A expense in the nine months ended October 31, 2000 was $41,277,000, an increase of $3,104,000 or 8% over the corresponding period in the prior year. The increase in both periods was primarily a result of sales commissions on increased gross profit and costs associated with the new stores. SG&A as a percentage of net sales decreased to 32.3% for the quarter and 32.0% for the nine months ended October 31, 2000 from 32.6% for the corresponding quarter and 32.2% for the corresponding nine month period of the previous fiscal year. Income from operations in the quarter ended October 31, 2000 was $2,040,000, an increase of $773,000, or 61%, over the corresponding quarter in the prior year. Income from operations as a percentage of net sales increased to 4.6% in the quarter ended October 31, 2000 from 3.2% in the same quarter of the prior year. Income from operations in the nine months ended October 31, 2000 was $5,142,000, an increase of $1,687,000, or 49%, over the corresponding period in the prior year. Income from operations as a percentage of net sales increased to 4.0% in the nine months ended October 31, 2000 from 2.9% in the corresponding period in the prior year. Interest expense increased by $161,000 and $357,000, respectively, for the quarter and nine months ended October 31, 2000 from the corresponding periods in the prior fiscal year. The increases were attributable to an increase in the effective interest rate and increased borrowings compared to the comparable periods in the prior fiscal year. Income taxes of $388,000 for the quarter and $1,261,000 for the nine months ended October 31, 2000 were recorded at an effective tax rate of 39%. The income tax provision in the quarter and nine month periods of the prior fiscal year included an amount for taxes payable on pretax operating income and an increase in the valuation reserve for deferred tax assets. Net income for the quarter ended October 31, 2000 was $609,000 or $.16 per share basic and $.14 per share diluted compared to net income of $959,000 or $.26 per share basic and $.23 per share diluted for the same quarter in the previous fiscal year. Net income for the nine months ended October 31, 2000 was $1,974,000 or $.52 per share basic and $.46 per share diluted compared to net income of $2,461,000 or $.66 per share basic and $.59 per share diluted in the same period of the prior fiscal year. The decrease in net income for the quarter and nine months ended October 31, 2000 was primarily a result of the one time charge for expenses relating to our terminated stock offering and the recognition of a provision for income taxes as compared to a reduction in the valuation allowance for deferred tax assets in the comparable periods of the prior fiscal year. Page 11 12 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 $1,165,000 for the nine months ended October 31, 2000 primarily due to cash flows from net income and increased accrued liabilities, net of an increase in inventory since January 31, 2000. Working capital was approximately $6,822,000 at October 31, 2000, compared to $13,020,000 in working capital at January 31, 2000 for an overall decrease of $6,198,000. The increase in current assets of $8,667,000 during the nine month period was primarily related to the $6,645,000 increase in inventory of which $2,827,000 related to the acquisition of Showcase Home Entertainment. The net increase in current assets was offset by an overall increase of $14,865,000 in current liabilities. The net increase in current liabilities resulted primarily from an increase in borrowings under the revolving line of credit of $11,219,000, accrued liabilities of $2,802,000 and cash overdraft of $1,177,000. The increase in the revolving line of credit is primarily due to the acquisition of Showcase Home Entertainment and capital expenditures in connection with new stores. The increase in accounts payable and accrued liabilities is primarily related to obligations assumed in connection with the Showcase acquisition. Our $25,000,000 revolving credit facility expires on July 31, 2001. At October 31, 2000, there was $18,529,000 outstanding under the facility. The outstanding balance under the revolving credit facility is expected to be reduced by net cash proceeds from sales in the fourth quarter. This reduction will increase availability under the revolving credit facility for operating cash requirements and store expansion. Interest under the revolving credit facility is based on prime plus 1% and allows for LIBOR pricing options of one, two, three, or six month periods at 2.00% over the corresponding LIBOR rate for the respective period. In December 1999, we entered into a three year $5,000,000 term loan agreement payable in monthly installments at an effective interest rate of 9.96%. At October 31, 2000, there was $3,757,000 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 2001. However, in order to continue store expansion and upgrades beyond fiscal 2001 or to pursue acquisitions as a part of our expansion strategy, we may need to seek additional sources of debt or equity financing. Page 12 13 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 Form 10-Q, 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, the opening of additional stores, availability and terms of financing to refinance or repay existing financings or to fund capital and expansion needs, the continued and anticipated growth of the retail home entertainment and consumer electronics industry, our ability to effectively integrate a new operation with our exisiting operations, the profitability of a newly acquired entity, a change in interest rates, exchange rate fluctuations, the seasonality of our business 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. Page 13 14 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed with this report: EXHIBIT NO. DESCRIPTION ----------- ----------- 27. Financial Data Schedule (filed herewith). (b) Reports on Form 8-K. On September 14, 2000, the Company filed a Current Report on Form 8-K in connection with the adoption of an amendment to its 1997 Common Stock Purchase Rights Agreement. Page 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUND ADVICE, INC. ----------------------------------- (Registrant) Date DECEMBER 14, 2000 /s/ PETER BESHOURI ------------------------------------- Peter Beshouri, Chairman of the Board, President and Chief Executive Officer Date DECEMBER 14, 2000 /s/ KENNETH L. DANIELSON ------------------------------------- Kenneth L. Danielson, Chief Financial and Accounting Officer Page 15 16 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED OCTOBER 31, 2000 COMMISSION FILE NUMBER 0-15194 ----------------------------------------------------- SOUND ADVICE, INC. ----------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 17 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION -------- ----------- 27. Financial Data Schedule (filed herewith).

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