10-Q 1 g70058e10-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 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. ------------------ (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 - 4,104,995 SHARES OUTSTANDING AS OF JUNE 8, 2001. 2 SOUND ADVICE, INC. AND SUBSIDIARIES INDEX

PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements. Condensed Consolidated Balance Sheets (Unaudited) ~~October~~April 3130, ~~2000~~2001 and January 31, ~~2000~~2001 ~~......................~~ 3 Condensed Consolidated Statements of Income (Unaudited) for the Three ~~and Nine~~ Months Ended ~~October~~April 3130, ~~2000~~2001 and ~~1999~~2000 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Three Months Ended ~~October~~April 3130, ~~2000~~2001 and ~~1999~~2000 ~~.........~~ 5-6 Notes to Condensed Consolidated Financial Statements ~~........ 7~~6-98 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .~~.......................~~ 109-1311 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 14 SIGNATURES ~~.................................................................... 15~~13

2 3 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

~~OCTOBER~~APRIL 3130, ~~2000~~2001 JANUARY 31, ~~2000~~2001 ------------------- ------------------ ASSETS CURRENT ASSETS: Cash $ 23,~~414~~363,~~450~~453 $ ~~564~~2,~~898~~094,348 Receivables: Vendors 35,~~371~~112,~~758~~297 34,~~979~~776,~~027~~621 Trade 1,~~805~~477,~~123~~691 1,~~024~~517,~~652~~142 Employees ~~521~~461,~~514~~623 ~~431~~411,~~775~~997 ------------ ------------ 57,~~698~~051,~~395~~611 56,~~435~~705,~~454~~760 Less allowance for doubtful accounts (~~612~~459,~~873~~200) (~~508~~389,~~640~~300) ------------ ------------ 56,~~085~~592,~~522~~411 46,~~926~~316,~~814~~460 Inventories 4239,~~104~~814,~~932~~397 3546,~~459~~000,~~724~~745 Prepaid ~~income taxes 591,345 -- Prepaid~~ and other current assets ~~252~~294,~~651~~805 ~~830~~907,~~407~~910 Deferred tax assets, current 1,~~599~~412,~~578~~154 1,~~599~~412,~~578~~154 ------------ ------------ Total current assets 5251,~~048,~~477,220 4356,~~381~~731,~~421~~617 Property and equipment, net 1718,~~610~~045,~~225~~492 1517,~~024~~870,~~047~~476 Deferred tax assets, net 12,~~915~~197,~~130~~302 12,~~915~~197,~~130~~302 Other assets ~~366~~461,~~846~~793 ~~435~~509,~~389~~452 Goodwill, net 6,~~741~~633,~~326~~956 ~~176~~6,~~472~~721,876 ------------ ------------ $ 78,~~682~~815,~~004~~763 $ 6084,~~932~~030,~~459~~723 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Cash overdraft $ 23,~~838~~007,~~958~~108 $ 12,~~662~~899,~~351~~440 Borrowings under revolving credit facility 1823,~~528~~062,~~906~~793 718,~~309~~141,~~531~~443 Current maturities of long-term debt, ~~and capital lease obligation~~ 1,~~653~~685,~~550~~551 1,~~516~~569,~~834~~569 Accounts payable 106,~~196~~313,~~099~~002 912,~~884~~745,~~337~~439 Income tax payable --513,457 ~~781~~1,~~041~~086,872 Accrued liabilities 118,~~897~~525,~~746~~927 912,~~096~~033,~~046~~256 ~~Deferred tax liabilities 111,156 111,156 ------------ ------------~~ Total current liabilities 4543,~~226~~107,~~415~~838 3048,~~361~~476,~~296~~019 Long-term debt, excluding current maturities 21,~~326~~406,~~972~~764 31,~~363~~937,~~424~~303 Capital lease ~~obligations,~~obligation ~~excluding current portion~~ 1,~~451~~190,~~720~~571 ~~788~~1,~~444~~235,449 Other liabilities and deferred credits 3,~~624~~294,~~064~~255 3,~~727~~531,~~568~~100 ------------ ------------ 5248,~~629~~999,~~171~~428 3855,~~240~~179,~~732~~871 ------------ ------------ SHAREHOLDERS' EQUITY: Common stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 34,~~961~~073,~~245~~745 shares at ~~October~~April 3130, ~~2000~~2001 and 3,~~766~~973,~~394~~245 at January 31, ~~2000~~2001 3940,~~613~~737 3739,~~664~~733 Additional paid-in capital 12,~~560~~800,~~455~~062 1112,~~175~~623,~~205~~183 Retained earnings 1316,~~452~~975,~~765~~536 1116,~~478~~187,~~858~~936 ------------ ------------ Total shareholders' equity 2629,~~025~~816,~~833~~335 2228,~~691~~850,~~727~~852 Commitments and contingencies ------------ ------------ $ 78,~~682~~815,~~004~~763 $ 6084,~~932~~030,~~459~~723 ============ ============

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 4 SOUND ADVICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2001 AND 2000

THREE MONTHS ENDED ~~OCTOBER~~APRIL 3130, ~~NINE MONTHS ENDED OCTOBER 31,~~ --------------------------------- ----~~-----------------------------~~ ~~2000~~2001 ~~1999~~ 2000 ~~1999~~ ------------- ------------- ~~------------- -------------~~ Net sales $ 4448,~~616~~307,~~484~~393 $ 3942,~~263~~676,~~111~~347 ~~$ 129,107,400 $ 118,414,515~~ Cost of goods sold 2830,~~180~~586,~~337~~587 2527,~~188~~599,~~517~~426 ~~82,688,541 76,787,385~~ ------------- ------------- ~~------------- -------------~~ Gross profit 1617,~~436~~720,~~147~~806 1415,~~074~~076,~~594~~921 ~~46,418,859 41,627,130~~ Selling, general and administrative expenses 1415,~~396~~872,~~400~~829 1213,~~808~~561,~~285~~311 ~~41,277,283 38,172,856~~ ------------- ------------- ~~------------- -------------~~ Income from operations 21,~~039~~847,~~747~~977 1,~~266~~515,~~309~~610 ~~5,141,576 3,454,274~~ Other income (expense): Interest expense (~~478~~552,~~897~~172) (~~317~~409,~~589~~884) ~~(1,380,849) (1,024,017) Cost of terminated stock offering (574,246) -- (574,246) --~~ Other, net 106,~~404~~795 102,~~299~~490 ~~48,426 30,648~~ ------------- ------------- ~~------------- -------------~~ Income before income taxes ~~997~~1,~~008 959~~302,~~019~~600 31,~~234~~108,~~907~~216 ~~2,460,905~~ Income taxes ~~388~~515,000 ~~-- 1~~432,~~261,~~000 -- ----------~~---~~ ------------- ~~------------- -------------~~ Net income $ ~~609~~787,~~008~~600 $ ~~959~~676,~~019~~216 ~~$ 1,973,907 $ 2,460,905~~ ============= ============= ~~============= =============~~ Common and common equivalent per share amounts: Basic net income per share $ 0.1619 $ 0.2618 ~~$ 0.52 $ 0.66~~ ============= ============= ~~============= =============~~ Diluted net income per share $ 0.1417 $ 0.2316 ~~$ 0.46 $ 0.59~~ ============= ============= ~~============= =============~~ Weighted average number of shares outstanding - basic 34,~~816~~041,~~163~~284 3,~~752~~766,~~672~~394 ~~3,786,479 3,740,542~~ ============= ============= ~~============= =============~~ Weighted average number of shares outstanding - diluted 4,~~319~~639,~~050~~621 4,~~257~~320,~~745~~960 ~~4,324,177 4,184,755~~ ============= ============~~= ============= =============~~

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 SOUND ADVICE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2001 AND 2000

2001 2000 ~~1999~~ ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1787,~~973,907~~600 2$ 676,~~460,905~~216 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 21,~~741~~052,~~501~~662 2865,~~605,538~~176 Gain on disposition of assets (334,~~000~~168) ~~(22,876) Deferred income taxes, net~~ -- ~~(960,000)~~ Changes in operating assets and liabilities: Decrease (increase) in: Receivables ~~20,492 694,286 Inventories~~ (3275,~~817,909~~951) (226,~~221,921~~330) ~~Prepaid~~Inventories ~~income~~6,186,348 ~~taxes~~ (~~252~~119,~~650~~968) Prepaid and other current assets ~~256~~613,~~944~~105 4630,~~916~~087 Other assets 1927,~~712~~993 (121,~~514~~846) Increase (decrease) in: -- Accounts payable (26,~~300~~432,~~220~~437) (32,~~149~~357,~~717~~275) Income tax payable (~~781~~573,~~041~~415) --432,000 Accrued liabilities 1(3,~~111~~507,~~007~~329) (1,~~000~~159,~~186~~495) Other liabilities &and deferred credits (~~103~~236,~~504~~845) (~~207~~67,~~865~~665) ------------- ------------- NET CASH ~~PROVIDED~~USED BYIN OPERATING ACTIVITIES (12,~~164~~362,~~761~~437) ~~190~~(1,~~938~~129,100) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (31,~~414~~120,~~968~~092) (2555,~~530,868~~616) Proceeds from disposition of assets ~~33,000 833,137 Acquisition of stores (~~4,~~565,000)~~168 ~~(301,938)~~ -- ------------ ------------- NET CASH USED IN INVESTING ACTIVITIES (71,~~946~~115,~~968~~924) (1555,~~999,669~~616) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on revolving credit facility ~~158~~54,~~310~~331,~~615~~253 ~~134~~36,~~186~~819,~~859~~196 Repayments on revolving credit facility (~~147~~49,~~091~~409,~~240~~903) (~~135~~33,~~414~~502,~~472~~513) Principal payments on long-term debt (1414,~~408,873~~557) (~~467~~365,~~483~~222) Increase (decrease) in cash overdraft 1107,~~176,607~~668 3(1,~~317~~662,~~580~~351) Principal payments under capital lease obligations (9944,~~359~~878) (69,~~385~~162) Proceeds from exercise of stock options 73177,~~531~~883 ~~51,375~~ -- ------------ ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 104,~~961~~747,~~281~~466 1,~~667~~279,~~474~~948 ------------- ------------- Increase (decrease) in cash 1,~~849~~269,~~552~~105 (~~141~~404,~~257~~768) Cash, beginning of period 2,094,348 564,898 ~~1,384,051~~ ------------- ------------- CASH, END OF PERIOD $ 23,~~414~~363,~~450~~453 $ 1160,~~242,794~~130 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 1510,~~005,131~~884 $ ~~913~~369,~~482~~827 ============= ============= Income taxes paid, ~~net of refunds~~ $ 21,~~633~~088,~~705~~415 $ ~~1,580,000~~-- ============= =============

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 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.

~~SUPPLEMENTAL~~THREE ~~DISCLOSURE~~MONTHS OFENDED ~~FAIR~~APRIL ~~VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED IN CONNECTION WITH ACQUISITION: Receivables 179~~30,~~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~~ -- ------------- ------------- ~~Total~~2001 ~~assets~~2000 ~~$ 10,690,479 $ 301,938 ============= ============= Accounts payable $ 2,611,982 $~~ -- ~~Customer deposits 1,216,652~~ -- ~~Accrued expenses 474,041~~ -- ~~Notes payable 509,137~~ -- -~~------------~~ ---------~~----~~ ~~Total~~Basic: ~~liabilities~~Weighted $average common shares outstanding 4,~~811~~041,~~812~~284 $3,766,394 -- =========~~====~~ =========~~====~~ ~~Less~~Diluted: Weighted average common ~~stock~~shares ~~issued~~outstanding to4,041,284 ~~seller~~3,766,394 1Dilutive effect of options and warrants 598,~~313~~337 554,~~667~~566 -- -------~~------~~ ---------~~----~~ ~~Net~~Total ~~cash used in acquistion $~~ 4,~~565~~639,~~000~~621 ~~$ 301~~4,~~938~~320,960 =========~~====~~ =========~~====~~

6 7 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 ------------------- ------------------- 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 -------------- ----------------- 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 ----------- ----------- Total 46,665,402 45,565,087 Less accumulated depreciation 28,619,910 27,694,611 ----------- ----------- 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. 7 8 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. 8 9 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. 9 10 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. 10 11 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. 11 12 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.

~~THREE~~NOMINEE ~~MONTHS~~VOTES ~~ENDED~~FOR ~~NINE~~VOTES ~~MONTHS~~AGAINST ~~ENDED~~VOTES ~~OCTOBER~~WITHHELD ~~31, OCTOBER 31,~~ -------~~-----------------~~ ---------~~---------------~~ ~~2000 1999 2000 1999~~ --------- ----~~-----~~ --------- -----~~----~~ ~~Basic:~~Herbert ~~Weighted~~A. ~~average~~Leeds ~~common shares outstanding~~ 3,~~816~~177,~~163~~355.5 3298,~~752,672~~260.0 ~~3,786,479~~0 ~~3,740,542~~William ~~=========~~F. ~~========= ========= ========= Diluted: Weighted average common shares outstanding 3~~Hagerty,~~816,163~~ ~~3,752,672~~IV 3,~~786~~177,~~479~~355.5 3298,~~740,542~~260.0 ~~Dilutive effect of options and warrants 502,887 505,073 537,698 444,213 --------- --------- --------- --------- Total 4,319,050 4,257,745 4,324,177 4,184,755 ========= ========= ========= =========~~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. 12 13 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 JUNE 14, 2001 /s/ PETER BESHOURI ------------- ----------------------------------- Peter Beshouri, Chairman of the Board, President and Chief Executive Officer Date JUNE 14, 2001 /s/ KENNETH L. DANIELSON ------------- ------------------------------------- Kenneth L. Danielson, Chief Financial and Accounting Officer 13

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