<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1998
REGISTRATION NO. 333-51015
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TWEETER HOME ENTERTAINMENT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 5731 04-3417513
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
40 HUDSON ROAD
CANTON, MASSACHUSETTS 02021
(781) 830-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOSEPH MCGUIRE, CHIEF FINANCIAL OFFICER
TWEETER HOME ENTERTAINMENT GROUP, INC.
40 HUDSON ROAD
CANTON, MASSACHUSETTS 02021
(781) 830-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
KITT SAWITSKY, ESQ. EDWIN L. MILLER, JR., ESQ.
DANIEL R. AVERY, ESQ. TESTA, HURWITZ & THIBEAULT, LLP
GOULSTON & STORRS, P.C. 125 HIGH STREET
400 ATLANTIC AVENUE BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02110
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 3,116,500 Shares $17.00 $52,980,500 $16,055
==============================================================================================================================
</TABLE>
(1) Includes 406,500 shares that the Underwriters have the right to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Previously paid by the Registrant upon its initial filing of this
Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
JULY 8, 1998
2,710,000 SHARES
TWEETER HOME ENTERTAINMENT GROUP, INC.
[TWEETER LOGO] [BRYN MAWR LOGO] [HI FI BUYS LOGO]
COMMON STOCK
------------------------
Of the 2,710,000 shares of Common Stock of Tweeter Home Entertainment
Group, Inc. (the "Company") offered hereby, 2,200,000 shares are being offered
by the Company and 510,000 shares are being offered by the Selling Stockholders
(including 259,856 shares which are being sold upon exercise of warrants which
the Underwriters are acquiring from certain Selling Stockholders). The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders." Upon completion of the
Offering, the Company's current stockholders, including certain Selling
Stockholders, will own approximately 55.4% of the Company's Common Stock and
will continue to be able to influence significantly the affairs of the Company.
See "Risk Factors -- Control by Existing Stockholders" and "Principal and
Selling Stockholders." It is currently estimated that the initial public
offering price will be between $15.00 and $17.00 per share. Application has been
made for quotation of the Common Stock on the Nasdaq National Market under the
symbol "TWTR."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY (2) STOCKHOLDERS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total (3)................. $ $ $ $
====================================================================================================================
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
406,500 additional shares of Common Stock, solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about , 1998.
BT ALEX. BROWN
PAINEWEBBER INCORPORATED
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
DESCRIPTION OF INSIDE FRONT COVER PAGE GRAPHICS:
The graphics on the inside front cover page consist of one photograph
headed by a solid field with inset text heading and three different logos, which
solid field heading and photograph are located in the top of two thirds of the
page.
The photograph (without solid field heading) measures approximately 7.675
inch (width) by 5.25 inch (length). The solid field heading measures
approximately 7.675 inch (width) by 1.875 inch (length) (based on an 8.5 inch by
11 inch page). The entire graphic is centered from side-to-side. The text in the
solid field heading reads "Tweeter Home Entertainment Group." Below the text
heading are the three logos from left to right as follows:
1. "Tweeter, etc.;"
2. "Bryn Mawr Stereo & Video;" and
3. "HiFi Buys."
The photograph is a store-deep perspective showing general store layout and
product displays with a checkout counter in the foreground where three employees
are assisting customers.
DESCRIPTION OF INSIDE FRONT COVER FOLDOUT INSERT GRAPHICS
The graphics on the inside front cover foldout insert consist of eight
photographs of various sizes which approximately measure from 1.75 inch (width)
by 1.75 inch (length) up to 4 inch (width) by 2.75 inch (length) (based on an 11
inch by 17 inch page), overlapping three black, 0.25 inch-high horizontal lines
with inset white text, equally vertically spaced, the first of which is
approximately 2.25 inch from the top of the page.
Beginning at the top third of the page, there are two photographs
overlapping the first horizontal line, one showing the exterior of a Tweeter
etc. store and one showing the showroom of the same. The text on the first
horizontal line to which these two photographs relate reads "23 Tweeter
Locations in New England."
In the second third of the page there are two photographs overlapping the
second horizontal line, one showing the exterior of a Bryn Mawr Stereo & Video
store and one showing the showroom of the same. The text on the second
horizontal line to which these two photographs relate reads "18 Bryn Mawr Stereo
& Video Locations in the Mid-Atlantic."
In the bottom third of the page there are two photographs overlapping the
third horizontal line, one showing the exterior of a HiFi Buys store and one
showing a car stereo showroom. The text on the third horizontal line to which
these two photographs relate reads "10 HiFi Buys Locations in Greater Atlanta."
Below the third horizontal line are two photographs, side-by-side, with
0.375 inch black borders, the left of which shows a large screen television, the
right of which shows a home theater room in a Company store. Above these two
photographs is the caption "Products on the Cutting Edge."
The insert has text centered at the bottom of the left half of the insert
reading "Automatic Price Protection(SM)."
DESCRIPTION OF INSIDE BACK COVER PAGE GRAPHICS:
The back cover page graphics consist of three geographic maps which measure
approximately 3.125 inch (width) by 2.75 inch (length) (based on an 8.5 inch by
11 inch page) vertically aligned to the left side of the page, three logos with
captions vertically aligned in the top-right quadrant of the page, and a fourth
geographic map, unbordered, measures approximately 2.5 inch (width) by
<PAGE> 4
3.875 inch (length) (based on an 8.5 inch by 11 inch page) in the bottom-right
quadrant of the page.
The three vertically aligned geographic maps on the left side of the page
depict the regions of the U.S.A. in which the Company has stores. Gray dots mark
store locations and states in which the Company stores are located are offset by
white fill in each of the maps the following order from top to bottom:
1. Connecticut, Massachusetts, New Hampshire and Rhode Island;
2. Delaware, Maryland, New Jersey and Pennsylvania; and
3. Georgia.
The three logos vertically aligned in the top-right quadrant of the page
read from top to bottom with captions centered below each (shown in parentheses
below) as follows:
1. "Tweeter, etc. (23 Locations);"
2. "Bryn Mawr Stereo & Video (18 Locations);" and
3. "HiFi Buys (10 Locations)."
The unbordered geographic map in the bottom-right quadrant of the page is a
composite of the other three geographic maps described above, depicting coastal
states (plus West Virginia and Vermont) from Georgia to New Hampshire, Gray dots
mark store locations and states in which Company stores are located are offset
by white fill.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
WHERE USED IN THIS REGISTRATION STATEMENT, REFERENCES TO "MID TO HIGH-END"
PRODUCTS OR THE LIKE MEAN, WHEN REFERRING TO AUDIO PRODUCTS, PRODUCTS PRIMARILY
IN THE $200 TO $4,000 RETAIL PRICE RANGE, AND WHEN REFERRING TO VIDEO PRODUCTS,
PRODUCTS PRIMARILY IN THE $500 TO $5,000 RETAIL PRICE RANGE.
"TWEETER ETC.," "TWEETER," "BRYN MAWR STEREO," "BRYN MAWR," "HIFI BUYS,"
"AUTOMATIC PRICE PROTECTION" AND "WISE BUYS" ARE SERVICE MARKS OF THE COMPANY.
SEE "BUSINESS -- INTELLECTUAL PROPERTY."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.
THE COMPANY
The Company is a specialty retailer of mid to high-end audio and video
consumer electronics products. The Company operates 51 stores under the Tweeter,
Bryn Mawr and HiFi Buys names in the New England, Mid-Atlantic and Atlanta,
Georgia markets, respectively. The Company's stores feature an extensive
selection of home and car audio systems and components, portable audio
equipment, and home video products, including large screen televisions, DVD
players, digital satellite systems, video cassette recorders and camcorders. The
Company differentiates itself by focusing on consumers who seek audio and video
products with advanced features, functionality and performance, and does not
offer personal computers or home office equipment. The Company seeks to build
name recognition and customer loyalty by combining quality products and
knowledgeable sales associates with a high level of service and competitive
prices. The Company has been recognized as the "Consumer Electronics Retailer of
the Year" in both 1996 and 1997 by Audio Video International Magazine and as the
fastest growing consumer electronics retailer in the United States in 1997 by
the TWICE Consumer Electronics Retail Registry.
The Company's goal is to become the nation's leading specialty retailer of
high quality audio and video products to its targeted customer base. To achieve
this objective, the Company has implemented an operating model that includes (i)
a deep merchandise selection focused on mid to high-end audio and video
products, including limited distribution products which accounted for
approximately 43% of sales for the six months ended March 31, 1998, (ii)
exceptional customer service based upon relationship and knowledge-based selling
that is critical to higher-end products, (iii) every day competitive pricing
featuring the Company's patented Automatic Price Protection program and (iv) a
dynamic and inviting retail environment.
The Company believes that the quality and knowledge of its sales associates
is critical to its success and represents a significant competitive advantage.
Sales consultants initially receive six weeks of intensive classroom training
and five to fifteen days of additional training per year, both in the store and
at the Company's regional training centers. The Company's relationship selling
model encourages sales associates to promote a comfortable, trusting, low
pressure sales environment that engenders long term customer loyalty. An
integral part of the Company's relationship selling model is its Automatic Price
Protection program. This program is designed to remove pricing concerns from the
purchase decision and allows customers and the sales staff to focus on product
functionality, performance and quality. Under the Automatic Price Protection
program, if a customer purchases a consumer electronics product from one of the
Company's stores and a competitor within 25 miles of the store advertises a
lower price within 30 days, the Company automatically sends a check to the
customer for the difference without requiring the customer to request the
payment. The Company believes that the success of its operating model is
evidenced by the fact that approximately 40% of the customers who purchased from
Tweeter stores in the six months ended March 31, 1998 had previously purchased
products from the Company during the prior two fiscal years.
The Company's store prototype is 10,000 square feet with brightly painted
interiors, often in pastel colors, and many stores exhibit hand painted murals
and other decorative artwork. Unlike many competitors whose stores contain
large, open spaces, the Company's stores feature individual sound rooms with
practical displays which allow customers to sample and compare the features and
functions of products in various combinations. The sound rooms are intended to
architecturally and acoustically resemble a home or car environment so the
customer can hear and see how products will perform. Each store contains a
traditional television wall, and many stores contain a movie
3
<PAGE> 6
theater room complete with theater-style seats to showcase home theater
products. Some stores display a car on the selling floor which features a
state-of-the-art car stereo system.
The Company believes that the consumer electronics industry is large,
growing and fragmented with significant consolidation opportunities. According
to Company estimates, retail sales of audio and video products were expected to
reach approximately $30 billion in 1997. The Company also estimates that between
1990 and 1997, the audio and video segments expanded at a compound annual growth
rate of 2.3%. The Company believes that new technologies such as digital
television present the possibility for accelerated growth. The expansion of
large format national chains has created competitive pressures for smaller
specialty stores that may be successfully differentiated but lack an adequate
scale of operations or purchasing power to operate on a stand-alone basis. The
Company believes that these regional specialty operators provide acquisition
opportunities for the Company.
The Company has developed an aggressive growth strategy (i) to open new
stores in current regional markets and relocate certain stores to more favorable
sites and (ii) to selectively pursue acquisitions in new regional markets and
achieve operating improvements by converting the acquired company to its core
operating model and leverage distribution, marketing and corporate
infrastructure. The Company currently intends to open five stores in fiscal
1998, three of which have been opened as of March 31, 1998, and to relocate two
other stores. In fiscal 1999, the Company intends to open 15 stores. The Company
has demonstrated its acquisition and integration capability through its purchase
of Bryn Mawr Radio & Television Centre, Inc. in May 1996 (the "Bryn Mawr
Acquisition") and HiFi Buys Incorporated in May 1997 (the "HiFi Buys
Acquisition"). To support its acquisition strategy, the Company obtained equity
investments in fiscal 1996 of $10.6 million, net of issuance costs, from a group
of investors led by Weston Presidio and Advent International (the "1996
Investors"). In May 1997, the Company raised an additional $21.5 million, net of
issuance costs, comprised of preferred stock and subordinated debt, from the
1996 Investors and several additional investors, including PNC Capital Corp.
THE BRYN MAWR ACQUISITION
In May 1996, the Company acquired the 13 store Bryn Mawr chain located in
the Mid-Atlantic market for $8.7 million, including acquisition costs. The
Company implemented strategic initiatives within the acquired stores focused on
increasing sales and store contribution. Specifically, the Company (i) increased
advertising expenditures during the quarter following the acquisition and
refocused advertising to emphasize radio, television and direct marketing rather
than print, (ii) implemented the Company's every day competitive pricing and
Automatic Price Protection programs, (iii) initiated a substantial sales
associate training program to improve product knowledge and enhance relationship
selling skills and (iv) focused the sales staff on higher margin products,
particularly audio products. These initiatives enabled the Company to generate
comparable store sales increases at Bryn Mawr of 36.9% during the period from
June 1, 1996 through September 30, 1996 as compared to the same period of the
prior year, 4.7% during fiscal 1997 and 15.0% during the six months ended March
31, 1998. On a pro forma basis assuming completion of the Bryn Mawr Acquisition
as of October 1, 1995, store contribution for Bryn Mawr improved to 6.8% in
fiscal 1997 from 3.1% in fiscal 1996.
THE HIFI BUYS ACQUISITION
In May 1997, the Company acquired the 10 store HiFi Buys chain located in
the greater Atlanta, Georgia market for $19.7 million, including acquisition
costs. Following the acquisition, the Company implemented strategic objectives
designed to increase store contribution by combining a planned decrease in
revenues with an increase in gross margin and a substantial decrease in
operating expenses. Specifically, the Company (i) adjusted the merchandise mix
to increase the
4
<PAGE> 7
proportion of mid and high-end products and reduce the number of lower margin
introductory products, (ii) altered store employee compensation to reduce the
emphasis on promotional sales and focus incentives on gross margin and store
contribution, (iii) reduced marketing expenditures and shifted marketing
emphasis from promotional advertising toward the Company's traditional
relationship selling and every day competitive price message, (iv) converted the
advertising program to emphasize electronic advertising and direct mail
marketing as opposed to print media (v) implemented the Automatic Price
Protection program and (vi) eliminated $2.4 million in overhead costs. As a
result, comparable store sales decreased 29.9% during the period from the
acquisition through September 30, 1997 and decreased 13.1% during the six months
ended March 31, 1998. At the same time, on a pro forma basis assuming completion
of the HiFi Buys Acquisition as of October 1, 1996, store contribution improved
to 10.6% in the six months ended March 31, 1998 from 8.0% in the same period for
the prior year.
The Company was organized as a Massachusetts corporation in 1972 and was
reorganized as a Delaware holding company in June, 1998 (the "Reorganization").
The Company's principal executive offices are located at 40 Hudson Road, Canton,
Massachusetts 02021. The Company's telephone number is (781) 830-3000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 2,200,000 shares
Common Stock offered by the Selling Stockholders.... 510,000 shares
-------------------
Total.......................................... 2,710,000 shares
Common Stock to be outstanding after the Offering... 6,082,690 shares(1)
Use of proceeds..................................... To repay indebtedness and other
general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol.............. TWTR
</TABLE>
- ---------------
(1) Excludes 511,808 shares of Common Stock issuable upon exercise of warrants
outstanding after the date of the Offering, with a weighted average exercise
price of $2.13 per share. Also excludes 845,059 shares of Common Stock
issuable upon exercise of options outstanding at the date of this
Prospectus, with a weighted average exercise price of $3.97 per share. See
Notes 6 and 11 of Notes to Consolidated Financial Statements of the Company,
"Capitalization," "Description of Capital Stock" and "Management -- Stock
Plans."
Unless otherwise indicated, all information in this Prospectus assumes or
gives effect to: (i) no exercise of the over-allotment option granted by the
Company to the Underwriters; (ii) the exercise of warrants to purchase 259,856
shares of Common Stock which will be sold by certain Selling Stockholders in the
Offering; and (iii) the automatic conversion of all outstanding shares of the
Company's Series A Preferred Stock and Series B Preferred Stock (the "Preferred
Stock") into an aggregate of 2,566,561 shares of Common Stock, each upon the
consummation of the Offering. Unless the context requires otherwise, the term
"Company" refers collectively to Tweeter Home Entertainment Group, Inc., a
Delaware corporation, its predecessors and its subsidiaries.
5
<PAGE> 8
- --------------------------------------------------------------------------------
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------------ ------------------
1993 1994 1995 1996(1) 1997(2) 1997 1998
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................................ $38,200 $47,401 $60,121 $80,607 $132,525 $60,583 $129,129
Gross profit................................. 13,007 16,489 20,954 28,791 46,210 21,402 44,849
Income from operations....................... 10 1,344 2,238 1,953 2,053 2,692 8,798
Interest expense............................. 631 426 629 617 1,808 513 1,610
------- ------- ------- ------- -------- ------- --------
Income before taxes.......................... (621) 918 1,609 1,336 245 2,179 7,188
Income tax expense (benefit)................. -- -- (174) (453) 99 876 2,875
------- ------- ------- ------- -------- ------- --------
Net income (loss)............................ $ (621) $ 918 $ 1,783 $ 1,789 $ 146 $ 1,303 $ 4,313
======= ======= ======= ======= ======== ======= ========
Basic earnings (loss) per share.............. $ (0.18) $ 0.27 $ 0.53 $ 0.39 $ (1.20) $ 0.24 $ 1.63
======= ======= ======= ======= ======== ======= ========
Diluted earnings (loss) per share............ $ (0.18) $ 0.27 $ 0.53 $ 0.38 $ (1.20) $ 0.23 $ 0.93
======= ======= ======= ======= ======== ======= ========
Pro forma income tax expense (benefit)
(actual in 1997 and 1998)(3)............... (248) 371 661 550 99 876 2,875
Pro forma net income (loss) before accretion
of preferred stock dividends............... $ (373) $ 547 $ 948 $ 786 $ 146 $ 1,303 $ 4,313
======= ======= ======= ======= ======== ======= ========
Pro forma net income (loss) available to
common shareholders........................ $ (373) $ 547 $ 948 $ (250) ($ 2,010) $ 401 $ 2,729
======= ======= ======= ======= ======== ======= ========
Pro forma diluted earnings per share assuming
conversion of preferred stock and
elimination of accretion of dividends on
preferred stock(4)......................... $ 0.03 $ 0.93
======== ========
Weighted average diluted shares
outstanding(4)............................. 4,425 4,616
======== ========
Supplemental pro forma diluted earnings per
common share(5)............................ $ 0.24 $ 0.74
======== ========
OTHER STORE DATA:
Store contribution(6)........................ $ 2,738 $ 3,985 $ 5,550 $ 6,798 $ 10,642 $ 6,605 $ 14,641
Stores open at beginning of period........... 13 14 16 18 33 33 47
New stores................................... 1 2 2 2 4 2 3
Relocated stores............................. 0 1 1 1 1 1 2
Closed stores................................ 0 0 0 0 0 0 0
Acquired stores.............................. 0 0 0 13 10 0 0
Stores open at end of period................. 14 16 18 33 47 35 50
COMPARABLE STORE SALES DATA:(7)
Tweeter...................................... 2.8% 11.2% 12.5% 1.6% -4.5% -7.7% 31.1%
Bryn Mawr.................................... 36.9% 4.7% 9.0% 15.0%
HiFi Buys.................................... -29.9% -13.1%
Consolidated................................. 2.8% 11.2% 12.5% 5.6% -7.2% -2.3% 8.2%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------
ACTUAL PRO FORMA(8) AS ADJUSTED(9)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $16,283 $16,283 $ 16,283
Total assets.............................................. 84,676 84,676 84,369
Long term debt, excluding current portion................. 31,308 31,308 979
Redeemable convertible preferred stock.................... 22,174 -- --
Stockholder's equity (deficit)............................ (2,939) 19,235 49,657
</TABLE>
(footnotes appear on following page)
- --------------------------------------------------------------------------------
6
<PAGE> 9
- --------------------------------------------------------------------------------
(footnotes from previous page)
- ---------------
(1) Includes results of the Bryn Mawr Acquisition from May 13, 1996, which was
accounted for using the purchase method. See Note 10 of Notes to the
Consolidated Financial Statements of the Company.
(2) Includes results of the HiFi Buys Acquisition from May 30, 1997, which was
accounted for using the purchase method. See Note 10 of Notes to the
Consolidated Financial Statements of the Company.
(3) The Company operated as an S corporation through November 1995 and was not
subject to federal and certain state corporate income taxes. In connection
with the recapitalization that occurred on November 26, 1995, the Company
revoked its S election, and became subject to taxation as a C corporation,
effective October 1, 1995. The pro forma information has been computed as if
the Company were subject to Federal and all applicable state income taxes
for each of the periods presented, assuming the Company had been taxed as a
C corporation. The Company actually recorded an income tax benefit of
$174,000 and $453,000 for the fiscal years ended September 30, 1995 and
1996, respectively.
(4) Weighted average shares outstanding includes the conversion of 1,700,136
shares of Series A Convertible Preferred Stock and 866,425 shares of Series
B Convertible Preferred Stock (the "Preferred Stock"), and also takes into
account nominal issuances of certain warrants in 1997 for both periods
presented and dilutive potential common shares (common stock options and
warrants), where applicable. Accretion of Preferred Stock dividends of
$2,157,000 and $1,584,000 for the year ended September 30, 1997 and the six
months ended March 31, 1998, respectively, has been excluded from the
calculation of "pro forma diluted earnings per share assuming conversion of
preferred stock and elimination of accretion of dividends on preferred
stock."
(5) Supplemental pro forma diluted earnings per common share is based on pro
forma net income (loss) available to common shareholders, increased to give
effect to the HiFi Buys Acquisition as if it had occurred on October 1, 1996
and the reduction in interest costs of $1,014,000 for the fiscal year ended
September 30, 1997 and $918,000 for the six months ended March 31, 1998 (net
of the applicable income taxes), which would have resulted assuming the
application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company (See "Use of Proceeds"). It also
assumes conversion of Preferred Stock as of October 1, 1996, thus
eliminating Preferred Stock dividends of approximately $2,157,000 and
$1,584,000 for the year ended September 30, 1997 and the six months ended
March 31, 1998, respectively. The denominator of the equation also reflects
the issuance of new common shares and the conversion of the Preferred Stock
to common shares.
(6) Refers to gross profit after deducting selling expenses including labor,
advertising, store level operations and pre-opening expenses. Store
contribution is presented to provide additional information about the
Company and is commonly used as a performance measurement by retail
companies. Store contribution should not be considered in isolation or as a
substitute for operating income, cash flow from operating activities and
other income or cash flow data prepared in accordance with generally
accepted accounting principles, or as a measure of the Company's
profitability or liquidity. There can be no assurance that the Company's
calculation of store contribution is comparable to similarly titled items
reported by other companies.
(7) Stores are included in the comparable store base after they are in operation
for 12 full months. Acquired stores are included if the store was open for
12 full months as of the date of acquisition and the related figures are
based on the acquired company's financial statements. Relocated stores are
excluded from the comparable store base until they have completed 12 full
months of operation from the date the store was reopened after relocation.
(8) Represents actual data pro forma to give effect to the conversion of all the
outstanding shares of Preferred Stock into 2,566,561 shares of common stock.
(9) Represents pro forma data as adjusted to give effect to the sale of
2,200,000 shares of Common Stock offered by the Company at an assumed
initial public offering price of $16.00 per share (after deducting
underwriting discounts and commission and estimated offering expenses), the
application of the estimated net proceeds therefrom and the writeoff of
approximately $307,000 of deferred financing costs in connection with the
repayment of the 1997 Notes issued in connection with the HiFi Buys
Acquisition and the accretion of debt discount of approximately $292,000.
See "Capitalization" and "Use of Proceeds."
- --------------------------------------------------------------------------------
7
<PAGE> 10
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the shares of Common Stock offered hereby. This Prospectus contains certain
forward-looking statements that involve risks and uncertainties. When used in
this Prospectus, the terms "anticipates," "expects," "estimates," "believes,"
"intends" and similar terms as they relate to the Company or management are
intended to identify such forward-looking statements. The Company's actual
results could differ materially from the results discussed in such
forward-looking statements. Factors that could cause or contribute to such a
difference include, but are not limited to, those set forth below and elsewhere
in this Prospectus.
RISKS ASSOCIATED WITH GROWTH
The Company's success will depend in large part on its ability to open, or
acquire through strategic acquisitions, new stores in both existing and new
geographic markets and to operate those stores on a profitable basis. The
opening of additional stores in existing markets could result in lower net sales
at the Company's existing stores in that market, and the opening of additional
stores in new geographic markets could present competitive and merchandising
challenges different from those currently or previously faced by the Company
within its existing geographic markets. In addition, the Company may incur
higher costs related to advertising, administration and distribution as it
enters new markets.
The Company's growth strategy is dependent upon a number of factors,
including the identification and acquisition of suitable sites and the
negotiation of acceptable leases for such sites, the identification of existing
audio and video consumer electronics retailers appropriate for strategic
acquisition by the Company and the successful consummation of such acquisitions,
the obtaining of consents, including government consents, permits and licenses,
needed to complete such acquisitions and operate such additional sites, the
hiring, training and retention of skilled personnel, the availability of
adequate management and financial resources, the adaptation of the Company's
distribution and other operational and management systems to an expanded network
of stores, the ability and willingness of the Company's vendors to supply the
Company on a timely basis at competitive prices, continued consumer demand for
the Company's products at levels that can support acceptable profit margins, and
other factors, many of which are beyond the control of the Company. There can be
no assurance that the Company will be successful with respect to any of these
factors in particular or that the Company will be successful in opening or
acquiring new stores on a schedule consistent with the Company's business plan,
if at all, or that such newly opened or acquired stores will achieve sales and
profitability levels comparable to existing stores, if they are profitable at
all, or that the Company will improve its overall market position and
profitability as a result.
In addition, the Company's rapid expansion through the opening or
acquisition of new stores will place significant demands on the Company's
management, resources, operations and information systems, and the Company will
be required to expend significant effort and additional resources to ensure the
continuing adequacy of its financial controls, operating procedures, information
systems, product purchasing and distribution systems and employee training
programs. In addition, the Company will need to attract and retain additional
qualified personnel, including new store managers. Further, the Company's
continued growth will depend on its ability to increase sales in its existing
stores. There can be no assurance that the Company will be successful in any of
these efforts, and, as a result, there can be no assurance that the Company will
achieve its planned expansion or that any new stores will be effectively
integrated into the Company's existing operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Growth Strategy."
8
<PAGE> 11
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has completed two acquisitions and is continuing to integrate
the acquired stores and to convert those stores to its operating model. There
can be no assurance that the Company will be able to integrate such stores
without significant delay or expense. For example, comparable store sales within
the stores acquired by the Company as part of the HiFi Buys Acquisition have
decreased since the consummation of the HiFi Buys Acquisition. Although the
Company will consider strategic acquisitions of other retail chains in the audio
and video consumer electronics industry, there can be no assurance that suitable
acquisition candidates will be identified, that acquisitions can be consummated
or that new stores acquired through such acquisitions can be operated profitably
or integrated successfully into the Company's operations. Previously acquired
stores have had, and newly acquired stores may have, different merchandising,
advertising, store format and operating approaches from those of the Company,
and the Company's success in integrating such stores will depend on its ability
to effect significant changes in the operations of such stores to conform to the
Company's approach in these areas. There can be no assurance that the Company
will be successful in effecting such changes without an adverse effect on the
revenues or profitability of such stores. In addition, future acquisitions by
the Company could result in potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, all of which could materially
adversely affect the Company.
POTENTIAL NEED FOR ADDITIONAL FINANCING
The Company intends to finance the opening and acquisition of new stores
during the next two years with a portion of the proceeds from the Offering, cash
flow from operations and borrowings. The average cash investment, including
pre-opening expenses for tenant fit-out, demonstration and inventory (net of
payables), required to open a store is estimated by the Company to be
approximately $855,000. However, there can be no assurance that the actual cost
of opening a store will not be significantly greater than such current
estimates, and the Company may be required to seek additional debt and/or equity
financing in order to fund its continued expansion through 1999 and beyond.
There can be no assurance that such additional financing will be available on
terms acceptable to the Company, if at all. In addition, the Company's ability
to incur additional indebtedness or issue equity or debt securities could be
limited by covenants in present and future loan agreements and debt instruments.
Additional issuances of equity by the Company may result in dilution to the
Company's stockholders.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be dependent upon the active involvement of
senior management personnel, particularly Samuel J. Bloomberg, the Company's
Chief Executive Officer and Chairman of the Board, and Jeffrey Stone, the
Company's President and Chief Operating Officer. The loss of the full-time
services of Messrs. Stone or Bloomberg or other members of senior management
could have a material adverse effect on the Company's results of operations and
financial condition. Except for employment contracts with Messrs. Stone and
Bloomberg, and with Joseph McGuire, the Chief Financial Officer and Chief
Information Officer of the Company, and David Ginsburg, a regional Vice
President of the Company, the Company does not have employment agreements with
any members of its senior management team. The Company currently maintains
key-man life insurance on the lives of Messrs. Bloomberg and Stone in the
amounts of $1,000,000 and $5,000,000, respectively. See "Business -- Business
Strategy" and "Management."
9
<PAGE> 12
RISKS ASSOCIATED WITH COMPETITION
The retail consumer electronics industry is highly competitive. The Company
currently competes against a diverse group of retailers, including several
national and regional large format merchandisers and superstores, such as
Circuit City and Best Buy, which sell, among other products, audio and video
consumer electronic products similar and often identical to those sold by the
Company. The Company also competes in particular markets with a substantial
number of retailers that specialize in one or more types of consumer electronic
products sold by the Company. Certain of these competitors have substantially
greater financial resources than the Company that may increase their ability to
purchase inventory at lower costs or to initiate and sustain predatory price
competition. In addition, the large format stores are continuing to expand their
geographic markets, and such expansion may increase price competition within
those markets. In this regard, the Company understands that Best Buy has
announced its intention to enter the New England market in 1998. A number of
different competitive factors could have a material adverse effect on the
Company's results of operations and financial condition, including increased
operational efficiencies of competitors, competitive pricing strategies,
expansion by existing competitors, entry by new competitors into markets in
which the Company is currently operating or the adoption by existing competitors
of innovative store formats or retail sales methods. See "Business -- Industry."
SEASONAL AND QUARTERLY FLUCTUATIONS IN SALES
Like many retailers, the Company's business is materially impacted by
seasonal shopping patterns. The fourth calendar quarter, which is the Company's
first fiscal quarter and which includes the December holiday shopping period,
has historically contributed, and is expected to continue to represent, a
substantial portion of the Company's operating income for its entire fiscal
year. As a result, any factors negatively affecting the Company during such
calendar quarter of any year, including adverse weather or unfavorable economic
conditions, would have a material adverse effect on the Company's results of
operations for the entire year. More generally, the Company's quarterly results
of operations also may fluctuate based upon such factors as the timing of new
store openings and new store acquisitions, the amount of store pre-opening
expenses, the amount of net sales contributed by new and existing stores, the
mix of consumer electronic products sold in its stores and profitability of
sales of particular products and other competitive factors. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results."
FLUCTUATIONS IN COMPARABLE STORE SALES
A number of factors have historically affected, and will continue to
affect, the Company's comparable store sales results including, among other
factors, competition, general regional and national economic conditions,
consumer trends, changes in the Company's product mix, timing of promotional
events, new product introductions and the Company's ability to execute its
business strategy effectively. The Company does not expect comparable store
sales to increase at historical rates, and there can be no assurance that
comparable store sales will not decrease in the future. Changes in the Company's
comparable store sales results could cause the price of the Common Stock to
fluctuate substantially. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LACK OF GEOGRAPHICAL DISPERSION
The Company currently operates 51 stores, of which 23 are operated under
the Tweeter name in the New England market, 18 are operated under the Bryn Mawr
name in the Mid-Atlantic market, and 10 are operated under the HiFi Buys name in
the Atlanta, Georgia market. The lack of wider geographical dispersion of the
Company's current stores makes the Company vulnerable to adverse events in these
markets, including weather, regional competition or unfavorable regional
economic conditions. See "Business -- Store Format and Operations."
10
<PAGE> 13
CHANGES IN CONSUMER DEMAND AND PREFERENCES
The Company's success depends on its ability to anticipate and respond in a
timely manner to consumer demand and preferences regarding audio and video
consumer electronics products and changes in such demand and preferences.
Consumer spending patterns, particularly discretionary spending for products
such as those marketed by the Company, are affected by, among other things,
prevailing economic conditions. In addition, demand for audio and video consumer
electronics products is often stimulated by or dependent upon the periodic
introduction and availability of new products and technologies at price levels
which generate wide consumer interest. Also, many products which incorporate the
newest technologies, such as DVD and high-definition television, are subject to
significant technological and pricing limitations and to the actions and
cooperation of third parties such as television broadcasters or movie
distributors. There can be no assurance that these products or other new
products will ever achieve widespread consumer acceptance. Furthermore, the
introduction or expected introduction of new products or technologies may have a
depressing effect on sales of existing products and technologies. Significant
deviations from the projected demand for products sold by the Company would have
a materially adverse effect on the Company's 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 the Company to identify and respond
to changes in consumer demand and preferences would have a material adverse
effect on the Company's results of operations and financial condition. See
"Business -- Industry," "-- Business Strategy" and "-- Merchandise."
DEPENDENCE ON SUPPLIERS
The Company's business and its growth strategy are dependent to a
significant degree upon its suppliers, particularly its brand-name suppliers of
stereo and video equipment such as Sony, Mitsubishi, Yamaha, Boston Acoustics
and Panasonic. The Company does not have any supply agreements or exclusive
arrangements with any vendors, and ordering of Company inventory typically
occurs through the issuance of individual purchase orders to vendors. In
addition, the Company relies heavily on a relatively small number of suppliers.
The Company's two largest suppliers accounted for approximately 37% of the
Company's sales during the six months ended March 31, 1998. The loss of any of
these key vendors or the failure by the Company to establish and maintain
relationships with these or other vendors could have a material adverse effect
on the Company's results of operations and financial condition and expansion.
The Company believes it currently has adequate supply sources, but there can be
no assurance, especially given the Company's growth strategy, that the Company
will be able to acquire sufficient quantities or an appropriate mix of consumer
electronic products at acceptable prices or at all. Specifically, the
establishment of additional stores in existing markets and the penetration of
new markets is dependent to a significant extent on the willingness and ability
of vendors to supply those additional stores, of which there can be no
assurance. As the Company continues to open or acquire new stores, the inability
or unwillingness of suppliers to supply some or all of their products to the
Company at acceptable prices in one or more markets could have a material
adverse effect on the Company's results of operations and financial condition.
See "Business -- Purchasing and Inventory."
INVENTORY PURCHASED FROM FOREIGN VENDORS
The Company purchases a significant portion of its inventory from overseas
vendors, particularly vendors headquartered in Japan. Changes in trade
regulations, currency fluctuations or other factors may increase the cost of
items purchased by the Company from foreign vendors or create shortages of such
items, which could in turn have a material adverse effect on the Company's
results of operations and financial condition. Conversely, significant
reductions in the cost of such items in U.S. dollars may cause a significant
reduction in retail price levels of those products and may limit or eliminate
the Company's ability to successfully differentiate itself from other
competitors, thereby resulting in an adverse effect on the Company's sales,
margin or competitive position. See "Business -- Purchasing and Inventory."
11
<PAGE> 14
MEMBERSHIP IN BUYING GROUP
The Company is a member of the Progressive Retailers Organization ("PRO"),
a volume buying group currently comprised of 14 consumer electronics retailers
located throughout the country, which provides its members with market
information and negotiates purchase terms with vendors on behalf of its members.
There can be no assurance that any future termination of the Company's
membership in this group would not have a material adverse effect on the
Company's results of operations and financial condition. In addition, rebates
paid to the Company by product manufacturers through this group depend on the
sales volumes achieved by the group's other members, as well as the Company, and
therefore decreased sales performance by these other members could reduce the
amounts of such rebates payable to the Company, which could in turn have a
material adverse effect on the Company's results of operations and financial
condition. See "Business -- Purchasing and Inventory."
INTELLECTUAL PROPERTY
The Company's "Tweeter etc." and "Bryn Mawr Stereo" service marks have been
registered with the United States Patent and Trademark Office. The Company has
not registered the "HiFi Buys" service mark and is aware that other consumer
electronics retailers use the name "HiFi Buys" outside the Company's current
geographical markets. The Company has submitted applications for registration of
certain other of its service marks, which applications are currently pending.
There can be no assurance that the Company will be able to successfully register
such service marks. In addition, there can be no assurance that any service
mark, whether registered or unregistered, or any patent will be effective to
protect the Company's intellectual property rights, or that infringement or
invalidity claims by third parties will not be asserted in the future or that
such assertions, if proven to be true, would not have a material adverse effect
on the Company's results of operations and financial condition. See
"Business -- Intellectual Property."
PLANNED RELOCATION OF COMPANY HEADQUARTERS
The Company plans to relocate to a new facility that will serve as its
corporate headquarters and New England regional distribution and service center
in the summer of 1998. The Company's corporate, financial, administrative and
marketing staff will be based at that relocated facility. The Company's
principal data processing and computer facility is located elsewhere. There can
be no assurance that such relocation will not result in a disruption to the
Company's operations. See "Business -- Properties" "Business -- Purchasing and
Inventory."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, the Company's current stockholders will
own approximately 55.4% of the Company's outstanding Common Stock. As a result,
those parties will continue to be able to influence significantly the affairs of
the Company if they were to act together. See "Principal and Selling
Stockholders."
EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation, as in
effect immediately following the consummation of the Offering (the "Charter")
and the Company's Amended and Restated By-laws, as in effect immediately
following the consummation of the Offering (the "By-laws"), as well as certain
provisions of Delaware General Corporation Law, contain provisions which may
deter, discourage or make more difficult a change in control of the Company,
even if such a change in control would be in the interest of a significant
number of Company stockholders or if such change in control would provide such
stockholders with a substantial premium for their shares over then current
market prices. For example, under the Charter, the Board of Directors of the
Company is authorized to issue one or more classes of Preferred Stock, having
such designations,
12
<PAGE> 15
rights and preferences as may be determined by the Board, and such issuances
may, among other things, have an adverse effect on the rights of holders of
Common Stock.
Stockholders of the Company have no right to take action by written consent
and are not permitted to call special meetings of stockholders. Any amendment of
the By-laws by the stockholders or certain provisions of the Charter requires
the affirmative vote of at least 75% of the shares of voting stock then
outstanding. The Charter also provides for the staggered election of directors
to serve for one, two and three-year terms, and for successive three-year terms
thereafter, subject to removal only for cause upon the vote of not less than 75%
of the shares of Common Stock represented at a stockholders' meeting. See
"Description of Capital Stock -- Delaware Law and Certain Charter and By-law
Provisions; Anti-Takeover Effects."
In addition, the Company will adopt, effective upon the consummation of the
Offering, a Stockholder Rights Plan. Under the terms of the Stockholder Rights
Plan, in general, if a person or group acquires more than 15% of the outstanding
shares of Common Stock (an "Acquiring Person"), all other stockholders of the
Company would have the right to purchase securities from the Company at a
discount to such securities' fair market value, thus causing substantial
dilution to the holdings of the Acquiring Person. The Stockholder Rights Plan
may inhibit a change in control and, therefore, could adversely affect the
stockholders' ability to realize a premium over the then-prevailing market price
for the Common Stock in connection with such a transaction. See "Description of
Capital Stock -- Stockholder Rights Plan."
SHARES ELIGIBLE FOR FUTURE SALE
The Company and its existing stockholders holding all of the Company's
outstanding capital stock prior to the Offering have agreed pursuant to lock-up
agreements (the "Lock-up Agreements") with the Underwriters, with certain
exceptions, not to sell, offer or contract to sell, sell short, engage in
certain hedging transactions with respect to, or otherwise dispose of any shares
of Common Stock for a period of 180 days after the date of this Prospectus (the
"Lock-up Period"), without the prior written consent of BT Alex. Brown
Incorporated. Following the Offering, the Company will have outstanding
6,082,690 shares of Common Stock. Of such shares, the 2,710,000 shares offered
hereby will be freely tradable by those persons who are not affiliates of the
Company and all of the remaining outstanding shares will be subject to Lock-up
Agreements for the duration of the Lock-up Period. Upon expiration of the
Lock-up Period, approximately 3,372,690 additional shares will be available for
sale in the public market, subject to the provisions of Rule 144 under the
Securities Act of 1933, as amended. As of the date of the Offering,
approximately 845,059 shares of Common Stock were issuable pursuant to options
under the Company's stock plans and 511,808 shares of Common Stock were issuable
upon the exercise of warrants. All shares issuable upon exercise of options are
subject either to Lock-up Agreements or to a lock-up period of 120 days pursuant
to the Company's stock option agreements. All shares issuable upon the exercise
of warrants are subject to Lock-up Agreements. In addition, the holders of
approximately 3,884,498 shares of Common Stock will have certain rights to
registration of their shares under the Securities Act. Sales of substantial
amounts of Common Stock in the public market following the Offering, or the
perception that such sales could occur, could have a material adverse effect on
the market price of the Common Stock after the Offering. See "Description of
Capital Stock" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC TRADING MARKET; VOLATILITY
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the Offering. The initial public
offering price of the Common Stock will be determined by negotiations between
the Company and the representatives of the Underwriters. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The initial public offering price may not necessarily be
indicative of the market price of the Common
13
<PAGE> 16
Stock after the Offering, which may be highly volatile. Factors such as
announcements of fluctuations in the Company's or its competitors' operating
results and market conditions for retail industry stocks in general could have a
material adverse effect on the market price of the Common Stock after the
Offering.
YEAR 2000 COMPLIANCE
The Company currently utilizes several computer software systems which will
require modification or upgrading to accommodate the "Year 2000" changes needed
for correct recording of dates in the year 2000 and beyond. The Company believes
that all such systems can be changed by the end of 1999, and does not expect the
cost of the changes to be material to the Company's financial condition or
results of operations. The Company does not currently have any information
concerning the compliance status of its suppliers. Any failure by the Company's
significant suppliers to successfully achieve Year 2000 compliance could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business -- Information Systems."
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on the Common
Stock for the foreseeable future. In addition, it is likely that any future
lending arrangements, including the lending arrangements currently under
discussion between the Company and its existing lender, will prohibit or limit
the payment of cash dividends. See "Use of Proceeds" and "Dividend Policy."
DILUTION
Investors participating in the Offering will incur immediate and
substantial dilution in the amount of $10.93 per share (assuming an initial
public offering price of $16.00 per share). To the extent that currently
outstanding options or warrants to purchase Common Stock are exercised, there
will be further dilution. See "Dilution."
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby are estimated to be $31,836,000 ($37,884,720 if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $16.00 per share and after deducting the estimated
underwriting discounts and commissions and expenses payable by the Company. The
Company will use all or substantially all of such proceeds to repay existing
indebtedness. Specifically, the Company intends to repay (i) approximately $14.1
million in outstanding indebtedness under its existing Credit Agreement with
BankBoston, N.A. (the "Credit Facility"); (ii) approximately $15.0 million in
outstanding indebtedness under the Senior Subordinated Promissory Notes dated
May 30, 1997 issued in connection with the HiFi Buys Acquisition (the "1997
Notes"); (iii) approximately $1.0 million in outstanding indebtedness under the
Senior Subordinated Note dated November 28, 1995 issued in connection with a
recapitalization pursuant to which the Company repurchased Common Stock from
certain of its stockholders (the "Redemption Note") plus a one-time payment of
approximately $814,000 due to these stockholders upon the consummation of the
Offering; and (iv) approximately $900,000 to repay outstanding indebtedness
under the Subordinated Note dated June 1, 1997 issued in connection with the
HiFi Buys Acquisition (the "HiFi Buys Note"). Any remaining net proceeds will be
used for general working capital purposes.
The Credit Facility matures on May 30, 2000 and bears interest at a
floating rate of interest based on the lender's base rate or LIBOR. The 1997
Notes mature on May 30, 2004 and bear interest at a rate of 12.0%. The
Redemption Note matures on December 31, 1998 and bears interest at an effective
rate of 10.8%. The HiFi Buys Note matures on June 1, 2000 and bears interest at
a rate of 9.5%. The Company has received a commitment letter from BankBoston,
N.A., as agent for itself and other potential lenders (collectively, the "New
Credit Lenders") to provide a new credit facility in the amount of $30.0 million
effective upon consummation of the Offering (the "New Credit Facility") which
will be used first to refinance any remaining indebtedness under the Credit
Facility after application of proceeds of the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pending use as described above, any remaining net proceeds of the Offering
will be invested in investment-grade, interest-bearing instruments. The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders.
DIVIDEND POLICY
Following the Offering, the Company does not anticipate paying any cash
dividends and intends to retain any earnings to finance expansion. Payment of
future dividends, if any, will depend upon the Company's results of operations,
financial condition, cash requirements and other factors deemed relevant by the
Company's Board of Directors. The Company's current Credit Facility contains,
and any future credit agreements, including the New Credit Facility, may
contain, restrictions on the payment of dividends by the Company.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of March 31, 1998, (i) on an actual basis; (ii) on a pro forma basis to
reflect the Reorganization and the automatic conversion of all outstanding
Preferred Stock into 2,566,561 shares of Common Stock upon the consummation of
the Offering and (iii) on a pro forma basis as adjusted to reflect the exercise
of warrants to purchase 259,856 shares of Common Stock upon the consummation of
the Offering and the application of the estimated net proceeds from the sale of
2,200,000 shares of Common Stock offered by the Company hereby assuming an
initial public offering price of $16.00 per share. This table should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt......................... $ 400 $ 400 $ --
======= ======= =======
Long-term debt:
Note payable to bank...................................... 15,100 15,100 979
Subordinated debt......................................... 16,208 16,208 --
------- ------- -------
Total long-term debt................................ $31,308 $31,308 $ 979
------- ------- -------
Redeemable convertible preferred stock:
Series A Convertible Preferred Stock, $.01 par value;
authorized, 4,000,000 shares; 1,700,136 shares issued
and outstanding, actual; no shares outstanding pro forma
and as adjusted (liquidation preference, $14,432,999 as
of March 31, 1998, actual).............................. 14,433 -- --
Series B Convertible Preferred Stock, $.01 par value;
authorized, 4,000,000 shares; 866,425 shares issued and
outstanding, actual; no shares outstanding pro forma and
as adjusted (liquidation preference $7,741,248 as of
March 31, 1998, actual)................................. 7,741 -- --
------- ------- -------
$22,174 $ -- $ --
------- ------- -------
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized(1), no shares issued and outstanding actual,
pro forma and as adjusted............................... $ -- $ -- $ --
Common stock, $.01 par value, 30,000,000 shares
authorized(1); 2,755,202 shares issued actual; 5,321,763
shares issued pro forma and 7,521,763 shares issued as
adjusted(2)............................................. 28 53 75
Additional paid-in capital................................ (2,732) 19,417 51,231
Retained earnings(3)(4)................................... 1,347 1,347 387
Note receivable from officer.............................. (32) (32) (32)
Treasury stock, 1,698,929 shares at cost actual and pro
forma and 1,439,073 shares as adjusted(3)(5)............ (1,550) (1,550) (2,003)
------- ------- -------
Total stockholders' equity (deficit).................... (2,939) 19,235 49,658
------- ------- -------
Total capitalization................................ $50,543 $50,543 $50,637
======= ======= =======
</TABLE>
- ---------------
(1) Reflects an increase in authorized shares to be effected prior to the
consummation of the Offering.
(2) Excludes 511,808 shares of Common Stock issuable upon exercise of warrants
outstanding at the date of this Prospectus, with a weighted average exercise
price of $2.13 per share. Also excludes 845,059 shares of Common Stock
issuable upon exercise of options outstanding at the date of this
Prospectus, with a weighted average exercise price of $3.97 per share. See
Notes 6 and 11 of Notes to Consolidated Financial Statements of the Company,
"Description of Capital Stock" and "Management -- Stock Plans."
(3) Assumes the exercise of warrants to purchase 259,856 shares of Common Stock
which the Company intends to issue from Treasury Stock.
(4) As adjusted reflects the writeoff of approximately $307,000 of deferred
financing costs in connection with the 1997 Notes and the accretion of debt
of approximately $292,000. See -- "Use of Proceeds."
(5) As adjusted reflects the impact of the $813,517 contingency payment due to
the holder of the Redemption Note upon consummation of the Offering. See
"Use of Proceeds."
16
<PAGE> 19
DILUTION
The net tangible book value of the Company's Common Stock at March 31, 1998
was a deficit of approximately $1.0 million, or approximately ($.28) per share
of Common Stock, after giving effect to the conversion of all outstanding
Preferred Stock. Net tangible book value per share is determined by dividing the
net tangible book value of the Company (total assets less goodwill and total
liabilities) by the number of outstanding shares of Common Stock (including
Preferred Stock). After giving effect to the sale of the shares of Common Stock
by the Company in the Offering, assuming an initial public offering price of
$16.00 per share and after deducting the estimated underwriting discounts and
commissions and expenses payable by the Company, the pro forma net tangible book
value of the Company as of March 31, 1998 would have been $30.8 million or $5.07
per share. This represents an immediate increase in pro forma net tangible book
value of $5.35 per share to existing stockholders and an immediate dilution to
new investors of $10.93 per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.00
Net tangible book value per share as of March 31, 1998.... $ (.28)
Increase per share attributable to new investors.......... 5.35
-------
Pro forma net tangible book value per share after the
Offering.................................................. 5.07
------
Dilution per share to new investors(1)...................... $10.93
======
</TABLE>
- ---------------
(1) If all outstanding options and warrants at March 31, 1998 to acquire 845,059
and 511,808 shares of Common Stock, respectively, were exercised, in
addition to the Underwriters' exercise of their over-allotment option, the
pro forma net tangible book value per share after the Offering would be
$4.14, resulting in an immediate dilution of $11.86 per share to new
investors.
The following table summarizes on a pro forma basis as of March 31, 1998,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price paid per share before deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company, assuming (i) the automatic conversion of the outstanding shares
of Preferred Stock into 2,566,561 shares of Common Stock and (ii) the exercise
of warrants to purchase 259,856 shares of Common Stock, each upon the
consummation of the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)....... 3,882,690 63.8% $16,430,813 31.8% $ 4.23
New investors........... 2,200,000 36.2% $35,200,000 68.2% $16.00
--------- ----- ----------- -----
Total......... 6,082,690 100% $51,630,813 100%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Of this amount, 510,000 shares will be sold in the Offering by Selling
Stockholders. Also, 259,856 of these shares will be issued upon the exercise
of existing warrants which will be sold by certain Selling Stockholders in
the Offering. Sales by Selling Stockholders in this Offering will reduce the
number of shares of Common Stock held by existing stockholders to 3,372,690,
or approximately 55.4% and will increase the number of shares held by new
investors to 2,710,000, or approximately 44.6% of the total number of shares
of Common Stock outstanding after the Offering. See "Principal and Selling
Stockholders."
The computations in the tables set forth above exclude 511,808 shares of
Common Stock issuable upon exercise of warrants outstanding at the date of this
Prospectus with a weighted average exercise price of $2.13 per share, and
exclude 845,059 shares of Common Stock issuable upon exercise of options
outstanding at the date of this Prospectus with a weighted average exercise
price of $3.97 per share. To the extent any of these warrants and options are
exercised, there will be further dilution to new investors and the percentage
ownership of new investors will decrease. See Notes 6 and 11 of Notes to
Consolidated Financial Statements of the Company, "Capitalization," "Description
of Capital Stock," and "Management -- Stock Plans."
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF STORES DATA)
Set forth below is selected financial and operating data for, and as of the
end of, each of the five years ended September 30, 1997, and for the six months
ended March 31, 1997 and March 31, 1998, respectively. The selected statement of
operations and balance sheet data for each of the five years ended September 30,
1997 have been derived from financial statements of the Company, which have been
audited by its independent auditors. The balance sheets as of September 30,
1996, September 30, 1997 and March 31, 1998, and the related statements of
income, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended September 30, 1997 and the six month period ended
March 31, 1998, and the audit report thereon, are included elsewhere in this
Prospectus. The financial data for the six months ended March 31, 1997 has been
derived from unaudited financial statements of the Company and reflect all
adjustments, consisting only of normal recurring accruals, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for this period. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------------ -------------------------
1993 1994 1995 1996(1) 1997(2) 1997 1998
------- ------- ------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue........................ $38,200 $47,401 $60,121 $80,607 $132,525 $60,583 $129,129
Cost of sales........................ 25,193 30,912 39,167 51,816 86,315 39,181 84,280
------- ------- ------- ------- -------- ------- --------
Gross profit....................... 13,007 16,489 20,954 28,791 46,210 21,402 44,849
Selling expenses..................... 10,269 12,504 15,404 21,993 35,568 14,797 30,208
Corporate, general and administrative
expenses........................... 2,663 2,576 3,247 4,716 8,102 3,793 5,387
Amortization of goodwill............. 65 65 65 129 487 120 456
------- ------- ------- ------- -------- ------- --------
Income from operations............. 10 1,344 2,238 1,953 2,053 2,692 8,798
Interest expense..................... 631 426 629 617 1,808 513 1,610
------- ------- ------- ------- -------- ------- --------
Income before taxes.................. (621) 918 1,609 1,336 245 2,179 7,188
Income tax expense (benefit)......... -- -- (174) (453) 99 876 2,875
------- ------- ------- ------- -------- ------- --------
Net income (loss).................... $ (621) $ 918 $ 1,783 $ 1,789 $ 146 $ 1,303 $ 4,313
======= ======= ======= ======= ======== ======= ========
Basic earnings (loss) per share...... $ (0.18) $ 0.27 $ 0.53 $ 0.39 $ (1.20) $ 0.24 $ 1.63
======= ======= ======= ======= ======== ======= ========
Diluted earnings (loss) per share.... $ (0.18) $ 0.27 $ 0.53 $ 0.38 $ (1.20) $ 0.23 $ 0.93
======= ======= ======= ======= ======== ======= ========
Pro forma income tax expense
(benefit) (actual in 1997 and
1998)(3)........................... (248) 371 661 550 99 876 2,875
Pro forma net income (loss) before
accretion of preferred stock
dividends.......................... $ (373) $ 547 $ 948 $ 786 $ 147 $ 1,303 $ 4,313
======= ======= ======= ======= ======== ======= ========
Pro forma net income (loss) available
to common shareholders............. $ (373) $ 547 $ 948 $ (250) $ (2,010) $ 401 $ 2,729
======= ======= ======= ======= ======== ======= ========
Pro forma diluted earnings per share
assuming conversion of preferred
stock and elimination of accretion
of dividends on preferred
stock(4)........................... $ 0.03 $ 0.93
======== ========
Weighted average dilutive shares
outstanding(4)..................... 4,425 4,616
======== ========
Supplemental pro forma diluted
earnings per common share(5)....... $ 0.24 $ 0.74
======== ========
OTHER STORE DATA:
Store contribution(6)................ $ 2,738 $ 3,985 $ 5,550 $ 6,798 $ 10,642 $ 6,605 $ 14,641
Stores open at beginning of period... 13 14 16 18 33 33 47
New stores........................... 1 2 2 2 4 2 3
Relocated stores..................... 0 1 1 1 1 1 2
Closed stores........................ 0 0 0 0 0 0 0
Acquired stores...................... 0 0 0 13 10 0 0
Stores open at end of period......... 14 16 18 33 47 35 50
BALANCE SHEET DATA:
Working capital...................... $ 1,617 $ 835 $ 1,590 $ 1,897 $ 11,857 $ 2,281 $ 16,283
Total assets......................... 9,367 12,562 15,162 38,619 78,688 42,107 84,676
Long term debt, excluding current
portion............................ 9,057 7,955 8,705 10,700 30,875 9,975 31,308
Redeemable convertible preferred..... -- -- -- 11,597 20,591 12,496 22,174
Stockholder's equity (deficit)....... (5,039) (4,122) (2,457) (3,984) (5,669) (3,580) (2,939)
</TABLE>
(footnotes following Other Store Data)
18
<PAGE> 21
OTHER STORE DATA
(IN THOUSANDS, EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TWEETER DATA:
Total revenue.................. $38,200 $47,401 $60,121 $68,577 $74,049 $40,801 $54,690
Store contribution(3).......... 2,738 3,985 5,550 7,089 6,338 4,558 7,178
Store contribution margin...... 7.2% 8.4% 9.2% 10.3% 8.6% 11.2% 13.1%
Stores open at beginning of
period....................... 13 14 16 18 20 20 22
New stores..................... 1 2 2 2 2 2 1
Relocated stores............... 0 1 1 1 1 1 2
Closed stores.................. 0 0 0 0 0 0 0
Stores open at end of period... 14 16 18 20 22 22 23
BRYN MAWR DATA:
Total revenue.................. $12,030 $35,432 $19,782 $28,359
Store contribution(3).......... (291) 2,414 2,047 2,589
Store contribution margin...... -2.4% 6.8% 10.4% 9.1%
Stores open at beginning of
period....................... 0 13 13 15
New stores..................... 0 2 0 2
Relocated stores............... 0 0 0 0
Closed stores.................. 0 0 0 0
Acquired stores................ 13 0 0 0
Stores open at end of period... 13 15 13 17
HIFI BUYS DATA:
Total revenue.................. $23,044 $46,080
Store contribution(3).......... 1,890 4,874
Store contribution margin...... 8.2% 10.6%
Stores open at beginning of
period....................... 0 10
New stores..................... 0 0
Relocated stores............... 0 0
Closed stores.................. 0 0
Acquired stores................ 10 0
Stores open at end of period... 10 10
CONSOLIDATED DATA:
Corporate, general and
administrative expenses...... $ 2,663 $ 2,576 $ 3,247 $ 4,716 $ 8,102 $ 3,793 $ 5,420
Amortization of goodwill....... 65 65 65 129 487 120 423
------- ------- ------- ------- ------- ------- -------
Income from operations......... $ 10 $ 1,344 $ 2,238 $ 1,953 $ 2,053 $ 2,692 $ 8,798
======= ======= ======= ======= ======= ======= =======
COMPARABLE STORE SALES DATA:(7)
Tweeter........................ 2.8% 11.2% 12.5% 1.6% -4.5% -7.7% 31.1%
Bryn Mawr...................... 36.9% 4.7% 9.0% 15.0%
HiFi Buys...................... -29.9% -13.1%
Consolidated................... 2.8% 11.2% 12.5% 5.6% -7.2% -2.3% 8.2%
</TABLE>
(footnotes appear on following page)
19
<PAGE> 22
(footnotes from previous page)
- ---------------
(1) Includes results of the Bryn Mawr Acquisition from May 13, 1996, which was
accounted for using the purchase method. See Note 10 of Notes to the
Consolidated Financial Statements of the Company.
(2) Includes results of the HiFi Buys Acquisition from May 30, 1997, which was
accounted for using the purchase method. See Note 10 of Notes to the
Consolidated Financial Statements of the Company.
(3) The Company operated as an S corporation through November 1995 and was not
subject to federal and certain state corporate income taxes. In connection
with the recapitalization that occurred on November 26, 1995, the Company
revoked its S election, and became subject to taxation as a C corporation.
The pro forma information has been computed as if the Company were subject
to Federal and all applicable state income taxes for each of the periods
presented, assuming the Company had been taxed as a C corporation. The
Company recorded an income tax benefit of $173,000 and $453,000 for the
fiscal years ended September 30, 1995 and 1996, respectively.
(4) Weighted average shares outstanding includes the conversion of 2,566,561
shares of Preferred Stock, and also takes into account nominal issuances of
certain warrants in 1997 for both periods presented and dilutive potential
common shares (common stock options and warrants), where applicable.
Accretion of Preferred Stock dividends of $2,157,000 and $1,584,000 for the
year ended September 30, 1997 and the six months ended March 31, 1998,
respectively, has been excluded from the calculation of "pro forma diluted
earnings per share assuming conversion of preferred stock and elimination of
accretion of dividends on preferred stock."
(5) Supplemental pro forma diluted earnings per common share is based on pro
forma net income (loss) available to common shareholders, increased to give
effect to the HiFi Buys Acquisition as if it had occurred on October 1, 1996
and the reduction in interest costs of $1,014,000 for the fiscal year ended
September 30, 1997 and $918,000 for the six months ended March 31, 1998 (net
of the applicable income taxes), which would have resulted assuming the
application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company (See "Use of Proceeds"). It also
assumes conversion of Preferred Stock as of October 1, 1996, thus
eliminating Preferred Stock dividends of approximately $2,157,000 and
$1,584,000 for the year ended September 30, 1997 and the six months ended
March 31, 1998, respectively. The denominator of the equation also reflects
the issuance of new common shares and the conversion of the Preferred Stock
to common shares.
(6) Refers to gross profit after deducting selling expenses including labor,
advertising, store level operations and pre-opening expenses. Store
contribution is presented to provide additional information about the
Company and is commonly used as a performance measurement by retail
companies. Store contribution should not be considered in isolation or as a
substitute for operating income, cash flow from operating activities and
other income or cash flow data prepared in accordance with generally
accepted accounting principles, or as a measure of the Company's
profitability or liquidity. There can be no assurance that the Company's
calculation of store contribution is comparable to similarly titled items
reported by other companies.
(7) Stores are included in the comparable store base after they are in operation
for 12 full months. Acquired stores are included if the store was open for
12 full months as of the date of acquisition and the related figures are
based on the acquired company's financial statements. Remodeled or relocated
stores are excluded from the comparable store base until they have completed
12 full months of operation from the date the remodeling was completed, or
re-opened after relocation.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a specialty retailer of mid to high-end audio and video
consumer electronics under the Tweeter, Bryn Mawr and HiFi Buys names. The
Company opened its first Tweeter store in New England in 1972. Over 26 years,
the Company has refined its retail concept to meet the needs of consumers
seeking brand name products with advanced features, functionality and
performance which the Company sells through its highly trained,
relationship-driven sales force. The Company believes that its effective
merchandising and superior customer service has enabled it to generate
substantial customer loyalty. Approximately 40% of customers who purchased from
Tweeter stores in the six months ended March 31, 1998 had previously purchased
products from the Company within the prior two fiscal years.
In 1995, the Company adopted an aggressive growth strategy (i) to open new
stores in current regional markets and relocate certain stores to more favorable
sites and (ii) to selectively pursue acquisitions in new regional markets and
achieve operating improvements by converting the acquired company to the
Company's core operating model and leveraging distribution, marketing and
corporate infrastructure. To support this growth strategy, the Company obtained
equity investments in fiscal 1996 of approximately $10.6 million, net of
issuance costs, from a group of investors led by Weston Presidio and Advent
International (the "1996 Investors"). In May 1996, the Company completed the
Bryn Mawr Acquisition. In May 1997, the Company raised an additional $21.5
million, net of issuance costs, comprised of $6.8 million of equity and $14.7
million of subordinated debt from the 1996 Investors and a new group of
investors, including PNC Capital Corp. The proceeds were used primarily to
finance the HiFi Buys Acquisition. Both acquisitions were accounted for by the
purchase method of accounting. By December 31, 1997, the Company had grown to 50
stores.
The Company seeks to increase sales, profitability and asset productivity
at acquired companies by converting them to the Company's standard operating
model with enhanced training for sales personnel, superior customer service,
improved merchandising focused on higher-end audio and video products and more
stringent operating controls. The Company has aggressively expanded its
corporate infrastructure over the past two years to support anticipated higher
levels of growth, including expanding its management team with the addition of
senior financial, information systems and buying personnel. Enhancements were
also made to its management information systems with the addition of a new
mainframe and operating platform, and to its distribution and administrative
infrastructure to enable the Company to support all three regions on an
integrated basis.
Prior to their acquisition by the Company, both Bryn Mawr and HiFi Buys
operated at substantially lower store contribution margins than the Company's
existing operations. Consequently, the Company's results were adversely impacted
in fiscal 1996 and 1997 following each of these acquisitions as the Company
converted acquired stores to its operating model. The impact was exacerbated by
the timing of the acquisitions that resulted in the peak, holiday sales period
being excluded from the operations of the acquired stores during the year of the
acquisition.
BRYN MAWR
Subsequent to the Bryn Mawr Acquisition, the Company implemented a variety
of strategic initiatives to convert Bryn Mawr to its core operating model. These
initiatives were primarily focused on increasing sales and gross margin, rather
than reducing operating expenses, in order to improve store contribution. These
initiatives included: (i) increasing advertising expenditures during the quarter
following the acquisition and refocusing advertising to emphasize radio,
television and direct marketing rather than print, (ii) implementing the
Company's every day competitive pricing and Automatic Price Protection programs,
(iii) initiating a substantial sales associate training
21
<PAGE> 24
program to improve product knowledge and enhance relationship selling skills and
(iv) focusing the sales staff on higher margin products, particularly audio
products.
Primarily as a result of these initiatives, comparable store sales
increased 36.9% at Bryn Mawr during the period from the acquisition, May 13,
1996, through September 30, 1996 versus the same period for the prior year.
Comparable store sales at Bryn Mawr increased 4.7% during fiscal 1997 and 15.0%
during the six months ended March 31, 1998. On a pro forma basis, assuming the
completion of the Bryn Mawr Acquisition as of October 1, 1995, store
contribution increased to 6.8% in fiscal 1997 from 3.1% in fiscal 1996. Bryn
Mawr store contribution margin fell to 9.1% in the six months ended March 31,
1998 from 10.4% in the prior year period primarily due to preopening expenses
incurred to open two new stores in the six months ended March 31, 1998 as well
as start up sales levels at those two stores and two additional stores opened in
May and June of 1997. The Company incurred preopening expenses of approximately
$68,900 in connection with the two stores opened in the six months ended March
31, 1998. Excluding preopening expenses, store contribution margin for the 13
stores open throughout both periods rose to 10.8% in the six months ended March
31, 1998.
The following table sets forth total revenues in thousands and store
contribution as a percentage of total revenues for Bryn Mawr on a stand-alone
basis:
<TABLE>
<CAPTION>
PRO FORMA SIX MONTHS ENDED
12 MONTHS ENDED 12 MONTHS ENDED -------------------------------
SEPTEMBER 30, 1996(1) SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1998
--------------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C>
Total revenue............ $33,525 $35,432 $19,782 $28,359
Store contribution....... 3.1% 6.8% 10.4% 9.1%
</TABLE>
- ---------------
(1) The pro forma results are presented as if the Bryn Mawr Acquisition had
occurred on October 1, 1995 and reflect the results of Bryn Mawr for a
period under prior ownership. The pro forma results are based upon available
information from the prior owner's financial statements and certain
assumptions that the Company believes are reasonable under the
circumstances. The pro forma results are not necessarily indicative of what
the Company's results would have been for the period had the Company
completed the Bryn Mawr Acquisition as of the date indicated.
HIFI BUYS
As with the Bryn Mawr Acquisition, the Company initiated a series of
strategic initiatives subsequent to the HiFi Buys Acquisition. In contrast to
Bryn Mawr, these initiatives combined a planned decrease of revenue with a
planned increase in gross margin and a substantial decrease in operating
expenses to generate increased store contribution. Specifically, the Company (i)
adjusted the merchandise mix to increase the proportion of mid and high-end
products and reduce the number of lower margin introductory products, (ii)
altered store employee compensation to reduce the emphasis on promotional sales
and focus incentives on gross margin and store contribution, (iii) reduced
marketing expenditures and shifted marketing emphasis from promotional
advertising toward the Company's traditional relationship selling and every day
competitive price message, (iv) converted the advertising program to emphasize
electronic advertising and direct mail marketing as opposed to print media, (v)
implemented the Automatic Price Protection program and (vi) eliminated $2.4
million of overhead by centralizing accounting, purchasing and other support
infrastructure.
Primarily as a result of these initiatives, the Company experienced a
planned decline in comparable store sales of 29.9% during the period from the
acquisition, May 30, 1997, through September 30, 1997 versus the same period for
the prior year. In addition to the elimination of lower-end items from the
product mix and reduced advertising, the comparable store sales decline was
exacerbated by a relatively high sales level during June to September 1996 due
to the Olympic Games in Atlanta. Comparable store sales declined 13.1% in the
six months ended March 31, 1998 at HiFi Buys, and the Company expects such
declines to continue through at least the quarter ended December 31, 1998 as it
implements its operating strategy. Pro forma for the HiFi Buys Acquisition
22
<PAGE> 25
as of October 1, 1996, store contribution improved to 10.6% in the six months
ended March 31, 1998 from 8.0% in the prior year period.
The following table sets forth total revenues in thousands and store
contribution as a percentage of total revenues for HiFi Buys on a stand-alone
basis:
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1997(1) MARCH 31, 1998
----------------- -----------------
<S> <C> <C>
Total revenue................................... $52,450 $46,080
Store contribution.............................. 8.0% 10.6%
</TABLE>
- ---------------
(1) The pro forma results are presented as if the HiFi Buys Acquisition had
occurred on October 1, 1996 and reflect the results of HiFi Buys for a
period under prior ownership. The pro forma results are based upon available
information from the prior owner's financial statements and certain
assumptions that the Company believes are reasonable under the
circumstances. The pro forma results are not necessarily indicative of what
the Company's results would have been for the period had the Company
completed the HiFi Buys Acquisition as of the date indicated.
RESULTS OF OPERATIONS
The following table is derived from Selected Financial Data and sets forth,
for the periods indicated, the actual amounts, in thousands, of certain income
and expense items and their percentages relative to total revenue:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------- -------------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenue............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 65.1% 64.3% 65.1% 64.7% 65.3%
Gross profit............................................ 34.9% 35.7% 34.9% 35.3% 34.7%
Selling expenses.......................................... 25.6% 27.3% 26.8% 24.4% 23.4%
Corporate, general and administrative expenses............ 5.4% 5.9% 6.1% 6.3% 4.2%
Amortization of goodwill.................................. 0.1% 0.2% 0.4% 0.2% 0.3%
----- ----- ----- ----- -----
Income from operations.................................. 3.7% 2.4% 1.5% 4.4% 6.8%
Interest expense.......................................... 1.0% 0.8% 1.4% 0.8% 1.2%
----- ----- ----- ----- -----
Income before income taxes................................ 2.7% 1.7% 0.2% 3.6% 5.6%
Income tax expense (benefit).............................. -0.3% -0.6% 0.1% 1.4% 2.2%
----- ----- ----- ----- -----
Net income................................................ 3.0% 2.2% 0.1% 2.2% 3.3%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 AS COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Total Revenue. Total revenue includes delivered sales, completed service
center work orders, insurance replacement and corporate sales. Total revenue
increased $68.5 million, or 113.1%, to $129.1 million in the six months ended
March 31, 1998 from $60.6 million for the six months ended March 31, 1997. The
increase was mainly comprised of $46.1 million from the HiFi Buys Acquisition,
$7.9 million from other new stores, and $13.5 million comparable store sales
growth. Comparable store sales increased by 8.2%, made up of a 31.1% increase at
Tweeter, a 15.0% increase at Bryn Mawr and a planned 13.1% decrease at HiFi
Buys. The exit from the New England market of certain competing retail chains
has had a favorable impact on comparable store sales at Tweeter, while the
increase at Bryn Mawr primarily resulted from the conversion to the Company's
operating model. The decrease in HiFi Buys comparable store sales was primarily
due to the planned elimination of entry level products and a decrease in
associated promotional advertising.
Gross Profit. Cost of sales includes merchandise, net delivery costs,
distribution costs, purchase discounts and vendor volume rebates. Cost of sales
increased $45.1 million, or 115.1%, to $84.3 million in the six months ended
March 31, 1998 from $39.2 million in the six months ended March 31, 1997. Gross
profit increased $23.4 million, or 109.6%, to $44.8 million in the six months
ended March 31, 1998 from $21.4 million for the six months ended March 31, 1997.
The gross margin decreased to 34.7% of total revenues in the six months ended
March 31, 1998 from 35.3% for
23
<PAGE> 26
the prior year period. The decrease was primarily due to the inclusion of HiFi
Buys' insurance replacement and corporate sales business, which operates at a
lower margin than the Company's core retail product sales. The insurance
replacement business provides merchandise replacement services for the customers
of major insurance companies and also includes a corporate sales department that
sells in bulk quantity to institutions such as hospitals and hotels.
Additionally, this business acts as an order fulfillment house for catalog
companies. For the six months ended March 31, 1998, insurance replacement
revenues were $5.9 million with a gross margin of 14.7%. This was offset by an
increase in volume-related vendor rebates. Excluding the HiFi Buys insurance
replacement and corporate sales business, gross margin for the Company would
have been 35.6%. Gross margin increased at Tweeter and Bryn Mawr in the six
months ended March 31, 1998 over the prior year period.
Selling Expenses. Selling expenses include the compensation of store
personnel, occupancy, store level depreciation, advertising, preopening expenses
and bank fees and exclude corporate overhead. Selling expenses increased $15.4
million, or 104.1%, to $30.2 million in the six months ended March 31, 1998 from
$14.8 million for the six months ended March 31, 1997. The increase was
principally associated with advertising, commissions related to increased sales,
fees related to third party private label credit card promotions, rent and
personnel costs associated with the stores acquired in the HiFi Buys
Acquisition. As a percentage of total revenue, selling expenses declined to
23.4% for the six months ended March 31, 1998 from 24.4% in the prior year
period. This decline was primarily the result of increased revenue at Tweeter
and the inclusion of the HiFi Buys stores which have lower advertising expenses
as a percentage of revenue than the Company's other stores due to their
concentration in the Atlanta, Georgia market. Also, the HiFi Buys insurance
replacement business generates significant revenues with reduced store level
expenses.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses include the costs of purchasing, accounting, information
systems, human resources, training, executive officers and related support
functions. Corporate, general and administrative expenses for the six months
ended March 31, 1998 increased 42.0% to $5.4 million from $3.8 million for the
six months ended March 31, 1997. As a percentage of total revenue, corporate,
general and administrative expenses decreased to 4.2% for the six months ended
March 31, 1998 from 6.3% for the prior year period as the Company benefited from
a larger sales base. The Company believes that corporate, general and
administrative expenses as a percentage of total revenue in future comparable
periods will be consistent with the results achieved during the most recent six
months.
Amortization of Goodwill. Amortization of goodwill increased to $455,913
for the six months ended March 31, 1998 from $119,562 for the six months ended
March 31, 1997. This increase is attributable to the additional goodwill
recorded in connection with the HiFi Buys Acquisition.
Interest Expense. Interest expense increased to $1.6 million for the six
months ended March 31, 1998 from $513,520 for the six months ended March 31,
1996 due primarily to the increased debt incurred to fund the HiFi Buys
Acquisition.
Income Taxes. For a discussion of changes in the Company's effective tax
rate, see Note 9 to Consolidated Financial Statements of the Company.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 AS COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996
Total Revenue. Total revenue increased $51.9 million, or 64.4%, to $132.5
million in fiscal 1997 from $80.6 million in fiscal 1996. The increase was due
to $23.0 million in revenues associated with the HiFi Buys Acquisition as well
as a full year of revenue from stores acquired in May 1996 in the Bryn Mawr
Acquisition. Additionally comparable store sales increased 4.7% at the Company's
Bryn Mawr stores. Total revenue increased 8.0% at the Tweeter stores, all of
which came from new stores as comparable store sales decreased 4.5% during
fiscal 1997 versus the prior year. The Company believes that the decline in
comparable store sales was due to general weakness in the consumer electronics
industry and a less effective marketing campaign for the first half of the
fiscal year.
24
<PAGE> 27
Gross Profit. Cost of sales increased $34.5 million, or 66.6%, to $86.3
million in fiscal 1997 from $51.8 million in fiscal 1996. Gross profit increased
$17.4 million, or 60.5%, to $46.2 million in fiscal 1997 from $28.8 million in
fiscal 1996. Gross margin declined to 34.9% in fiscal 1997 from 35.7% in fiscal
1996. The decline was due to the impact of the gross margin at HiFi Buys, which
was lower than the gross margin at the Tweeter and Bryn Mawr stores. The Company
also incurred lower gross margin at Tweeter due to a reduction in vendor rebates
resulting from lower than expected sales volume and an increase in the
percentage of lower margin video products sold. Gross margin increased at Bryn
Mawr as the Company converted the stores to its operating model.
Selling Expenses. Selling expenses increased $13.6 million, or 61.7%, to
$35.6 million in fiscal 1997 from $22.0 million in fiscal 1996. As a percentage
of total revenue, selling expenses decreased to 26.8% in fiscal 1997 from 27.3%
in fiscal 1996. The improvement in selling expenses as a percentage of revenue
is a result of having the Bryn Mawr stores for the full year including the peak
holiday selling season.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses increased $3.4 million, or 71.8%, to $8.1 million in
fiscal 1997 from $4.7 million in fiscal 1996. The increase was the result of
investment in corporate infrastructure including the addition of purchasing,
accounting and information systems staff in conjunction with the Bryn Mawr and
HiFi Buys acquisitions and the Company's accelerated growth strategy. As a
percentage of total revenue, corporate general and administrative expenses
increased to 6.1% in fiscal 1997 from 5.9% in fiscal 1996 due to lower than
anticipated sales and the timing of the HiFi Buys Acquisition.
Amortization of Goodwill. Amortization of goodwill increased to $487,084
for fiscal 1997 from $129,273 for fiscal 1996. This increase is attributable to
the additional goodwill recorded in connection with the HiFi Buys Acquisition,
as well as a full year of goodwill amortization from the Bryn Mawr Acquisition.
Interest Expense. Interest expense for fiscal 1997 increased $1.2 million
to $1.8 million in fiscal 1997 from $616,879 in fiscal 1996. This increase was
due to the issuance of the $15.0 million senior subordinated notes, the proceeds
of which were used for the HiFi Buys Acquisition, as well as increased
borrowings on the Company's revolving line of credit. As a percentage of total
revenue, interest expense increased to 1.4% in fiscal 1997 from 0.8% in fiscal
1996.
Income Taxes. For a discussion of changes in the Company's effective tax
rate see Note 9 to Consolidated Financial Statements of the Company.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 AS COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1995
Total Revenue. Total revenue increased $20.5 million, or 34.1%, to $80.6
million in fiscal 1996 from $60.1 million in fiscal 1995. Approximately $12.0
million of the increase was due to the inclusion of a partial year of revenues
associated with the Bryn Mawr Acquisition. Revenue increased $8.5 million, or
14.1%, at the Tweeter stores, principally due to revenue from new stores.
Comparable store sales increased 1.6% at the Tweeter stores due primarily to the
general weakness of the consumer electronics industry. Comparable store sales
increased 36.9% at the Bryn Mawr stores following the Bryn Mawr Acquisition.
Gross Profit. Cost of sales increased $12.6 million, or 32.3%, to $51.8
million in fiscal 1996 from $39.2 million in fiscal 1995. Gross profit increased
$7.8 million, or 37.4%, to $28.8 million in fiscal 1996 from $21.0 million in
fiscal 1996. Gross margin increased to 35.7% in fiscal 1996 from 34.9% in fiscal
1995 principally due to the vendor rebates earned from the increased volume and
the leveraging of distribution costs.
Selling Expenses. Selling expenses increased $6.6 million, or 42.8%, to
$22.0 million in fiscal 1996 from $15.4 million in fiscal 1995. As a percentage
of sales, selling expenses increased to 27.3% in fiscal 1996 from 25.6% in
fiscal 1995. The increase was due to the continued growth in the number of
Tweeter stores, as well as the timing of the Bryn Mawr Acquisition.
25
<PAGE> 28
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses increased $1.5 million, or 45.3% to $4.7 million in
fiscal 1996 from $3.2 million in fiscal 1995. The increase was due to investment
in infrastructure to support the Company's growth strategy including additions
to its purchasing, training and accounting staff. The Company also entered into
an operating lease for new information systems equipment. As a percentage of
total revenue, corporate, general and administrative expense increased to 5.9%
in fiscal 1996 from 5.4% in fiscal 1995. In addition to investment in
infrastructure, the Company incurred expenses in anticipation of and following
the Bryn Mawr Acquisition, while not benefiting from inclusion of revenue from
the acquired stores during the peak holiday selling season.
Amortization of Goodwill. Amortization of goodwill increased to $129,273
for fiscal 1996 from $65,268 for fiscal 1995. This increase is attributable to
the additional goodwill recorded in connection with the Bryn Mawr Acquisition.
Interest Expense. Interest expense remained constant at $616,879 in fiscal
1996 and $628,700 in fiscal 1995. Interest expense as a percentage of total
revenues decreased to 0.8% in fiscal 1996 from 1.0% in fiscal 1995 as the
Company leveraged expenses over a larger revenue base.
Income Taxes. For a discussion of changes in the Company's effective tax
rate see Note 9 to Consolidated Financial Statements of the Company.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal variations. Historically, the
Company has realized a significant portion of its total revenue and net income
for the year during the first and fourth fiscal quarters, with a majority of net
income for such quarters realized in the first fiscal quarter. Due to the
importance of the holiday shopping season, any factors negatively impacting the
holiday selling season could have a material adverse effect on the Company's
financial condition and results of operations. The Company's quarterly results
of operations may also fluctuate significantly due to a number of factors,
including the timing of new store openings and acquisitions and unexpected
changes in volume-related rebates from manufacturers. In addition, operating
results may be negatively affected by increases in merchandise costs, price
changes in response to competitive factors and unfavorable local, regional or
national economic developments that result in reduced consumer spending.
The following tables set forth certain quarterly financial data in
thousands and percentages of total revenue for the ten quarters ended March 31,
1998. The quarterly information is unaudited but has been prepared on the same
basis as the audited financial statements included elsewhere in this Prospectus.
In the opinion of management, all necessary adjustments (consisting only of
normal recurring adjustments) have been included to present fairly the unaudited
quarterly results when read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this
Prospectus. The results of operations for any quarter are not necessarily
indicative of the results for any future period. See "Risk
Factors -- Seasonality and Quarterly Fluctuations."
26
<PAGE> 29
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
DECEMBER 31, MARCH 31,
1997 1998
--------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.................. $74,617 100.0% $54,512 100.0%
Cost of sales.................. 49,236 66.0% 35,044 64.3%
------- ----- ------- -----
Gross profit................. 25,381 34.0% 19,468 35.7%
Selling expenses............... 16,390 22.0% 13,818 25.3%
Corporate, general and
administrative expenses...... 2,617 3.5% 2,771 5.1%
Amortization of goodwill....... 221 0.3% 235 0.4%
------- ----- ------- -----
Income from operations....... 6,153 8.2% 2,644 4.9%
Interest expense............... 865 1.2% 745 1.4%
------- ----- ------- -----
Income before income taxes..... 5,288 7.0% 1,899 3.5%
Income tax expense............. 2,115 2.8% 760 1.4%
------- ----- ------- -----
Net income..................... $ 3,173 4.2% $ 1,139 2.1%
======= ===== ======= =====
Stores open at beginning of
period....................... 47 50
New stores..................... 3 0
Relocated stores............... 2 0
Closed stores.................. 0 0
Acquired stores................ 0 0
Stores open at end of period... 50 50
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997(1) 1997(1)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.................. $34,988 100.0% $25,595 100.0% $28,211 100.0% $43,731 100.0%
Cost of sales.................. 22,688 64.8% 16,493 64.4% 18,552 65.8% 28,582 65.4%
------- ----- ------- ----- ------- ----- ------- -----
Gross profit................. 12,300 35.2% 9,102 35.6% 9,659 34.2% 15,149 34.6%
Selling expenses............... 7,927 22.7% 6,870 26.8% 8,160 28.9% 12,611 28.8%
Corporate, general and
administrative expenses...... 1,775 5.0% 2,018 8.0% 2,069 7.4% 2,240 5.1%
Amortization of goodwill....... 60 0.2% 60 0.2% 122 0.4% 245 0.6%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from
operations................. 2,538 7.3% 154 0.6% (692) -2.5% 53 0.1%
Interest expense............... 274 0.8% 239 0.9% 473 1.7% 822 1.9%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before income
taxes........................ 2,264 6.5% (85) -0.3% (1,165) -4.2% (769) -1.8%
Income tax expense (benefit)... 914 2.6% (38) -0.1% (467) -1.7% (310) -0.7%
------- ----- ------- ----- ------- ----- ------- -----
Net income (loss).............. $ 1,350 3.9% $ (47) -0.2% $ (698) -2.5% $ (459) -1.1%
======= ===== ======= ===== ======= ===== ======= =====
Stores open at beginning of
period....................... 33 35 35 47
New stores..................... 2 0 2 0
Relocated stores............... 0 1 0 0
Closed stores.................. 0 0 0 0
Acquired stores................ 0 0 10 0
Stores open at end of period... 35 35 47 47
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996(2) 1996(2)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue..................... $22,991 100.0% $15,640 100.0% $18,004 100.0% $23,972 100.0%
Costs of sales.................... 14,718 64.0% 9,905 63.3% 11,446 63.6% 15,747 65.7%
------- ------- ------- -------
Gross profit.................... 8,273 36.0% 5,735 36.7% 6,558 36.4% 8,225 34.3%
Selling expenses.................. 4,917 21.4% 4,367 27.9% 5,698 31.6% 7,011 29.2%
Corporate, general and
administrative expenses......... 793 3.4% 854 5.5% 1,418 7.9% 1,651 6.9%
Amortization of goodwill.......... 16 0.1% 16 0.1% 32 0.2% 65 0.3%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from operations... 2,547 11.1% 498 3.2% (590) -3.3% (502) -2.1%
Interest expense.................. 155 0.7% 108 0.7% 125 0.7% 229 1.0%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before income
taxes........................... 2,392 10.4% 390 2.5% (715) -4.0% (731) -3.1%
Income tax expense (benefit)(3)... (26) -0.1% 160 1.0% (292) 1.6% (295) -1.2%
------- ----- ------- ----- ------- ----- ------- -----
Net income (loss)................. $ 2,418 10.5% $ 230 1.5% $ (423) -2.4% $ (436) -1.9%
======= ===== ======= ===== ======= ===== ======= =====
Stores open at beginning of
period.......................... 18 19 19 32
New stores........................ 1 0 0 1
Relocated stores.................. 0 1 0 0
Closed stores..................... 0 0 0 0
Acquired stores................... 0 0 13 0
Stores open at end of period...... 19 19 32 33
</TABLE>
- ---------------
(1) Includes results of the HiFi Buys Acquisition from May 30, 1997, which was
accounted for using the purchase method.
(2) Includes results of the Bryn Mawr Acquisition from May 13, 1996, which was
accounted for using the purchase method.
(3) The Company operated as an S Corporation through November 1995 and was not
subject to federal and certain state corporate income taxes. In connection
with the recapitalization that occurred on November 26, 1995, the Company
revoked its S election and became subject to taxation as a C Corporation,
effective October 1, 1995. This resulted in a deferred tax benefit of $1.0
million, which was recorded in the three months ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily for working capital to support its
inventory requirements, selling and administrative expenses and capital
expenditures, pre-opening expenses and beginning inventory for new or relocated
stores. Additionally, the Company pursues an active acquisition strategy, and
capital needs arise as acquisition opportunities are pursued.
Historically, the Company's primary sources of financing have been net cash
from operations and borrowings under the Credit Facility. The Company's
acquisitions have also been funded through the sale of equity or subordinated
notes. At March 31, 1998 and March 31, 1997, the Company's working capital was
$16.3 million and $2.3 million, respectively. Cash provided by operations was
$1.8 million for the six months ended March 31, 1998, as compared to a use of
$400,000 in cash from operations in the six months ended March 31, 1997. This
increase is a result of $4.3 million in net income and an increase in accounts
payable and accrued expenses of $2.4 million, offset by increases in inventory
of $4.3 million and accounts receivable of $1.9 million.
At September 30, 1997 and September 30, 1996, working capital was $11.9
million and $1.9 million, respectively. During fiscal 1997, cash used in
operations was $6.2 million, principally due to a $6.5 million increase in
inventory and a $1.3 million increase in accounts receivable. These increases
were primarily due to the opening of new stores and relocation of existing
stores. Cash generated by operations in fiscal 1996 and 1995 was $500,000 and
$2.1 million, respectively. In these years, $2.4 million and $300,000,
respectively, was used to increase inventory levels.
Net cash used in investing activities during the six months ended March 31,
1998 and March 31, 1997 was approximately $1.3 million and $1.4 million,
respectively. During fiscal 1997, net cash used
28
<PAGE> 31
in investing activities was $23.5 million, including $19.5 million for the HiFi
Buys Acquisition. In addition, the Company used $4.0 million of cash in capital
expenditures, mainly to open four new stores and relocate one store. During
fiscal 1996, net cash used in investing activities was $11.2 million. Of that
amount, $8.4 million was used in the Bryn Mawr Acquisition and $2.9 million was
used to purchase property and equipment mainly associated with the opening of
two new stores and the relocation of one store. On March 25, 1998 the Company
entered into a purchase and sale agreement for a facility in Massachusetts that
will serve as its new corporate headquarters, service center and distribution
center in Massachusetts. The Company expects the purchase price and related
building improvements to be approximately $5.3 million, and expects to finance
the purchase with a mortgage of $4.0 million. There are no other material
commitments for capital expenditures other than new store openings and
remodeling or relocating existing stores in the next 12 months. Capital
expenditures for new store openings and for remodeling or relocation of existing
stores currently averages $855,100.
In connection with a redemption of Common Stock from certain stockholders
of the Company and the Bryn Mawr Acquisition in fiscal 1996, the Company sold
shares of preferred stock for net proceeds of approximately $10.6 million and
issued the $1.0 million Redemption Note to its redeeming stockholders. In
connection with the HiFi Buys Acquisition in fiscal 1997, the Company sold
shares of preferred stock for net proceeds of approximately $6.8 million, issued
$15.0 million of 1997 Notes and issued the $1.2 million HiFi Buys Note, in
addition to increasing the borrowing limit under its Credit Facility. See Notes
6 and 11 to the Consolidated Financial Statements of the Company and "Certain
Transactions." At March 31, 1998, the Company had outstanding approximately
$15.1 million under its Credit Facility, approximately $1.0 million under the
Redemption Note, approximately $15.0 million under the 1997 Notes and
approximately $900,000 under the HiFi Buys Note. Substantially all of such
indebtedness will be paid in full upon the consummation of the Offering.
In connection with the issuance of the 1997 Notes, the Company issued
warrants to purchase an aggregate of 629,566 shares of Common Stock, with a
ten-year term and an exercise price of $.002 (the "1997 Warrants"). An
accredited, independent appraiser determined that, as of the issue date of May
31, 1997, the fair value of the 1997 Warrants was $0.517 per share, based on an
appraised fair value of the Common Stock of $0.72 per share. Accordingly, the
Company placed an aggregate value on the 1997 Warrants of $325,383.
The appraised value of the Common Stock was based upon a discounted cash
flow analysis. Risk factors contributing to the determination of the discount
rate at the issue date included the following:
- The consumer electronics industry is highly cyclical in nature, due
partially to the introduction, or lack thereof, of new product offerings.
The consumer electronics industry outlook at the issue date was relatively
flat, and featured high competition among retailers of radio, television,
and computers.
- The Company's actual profits for the eight months ended May 31, 1997
were 36% lower than for the same period ending May 31, 1996. This period
included the Christmas season, which is normally the Company's most
profitable period of its fiscal year. In addition, at the time of the HiFi
Buys Acquisition, HiFi Buys, as a stand-alone entity, showed declines in
net income from the previous year of over 28% to approximately 1% of total
sales.
- The Company's Preferred Stock carried significant rights separate
and apart from those associated with the Common Stock, including rights
relating to voting and director representation, conversion provisions,
dividend privileges, redemption rights, and preemptive ownership rights.
The liquidation preference of Preferred Stock at the issue date exceeded
the total book
29
<PAGE> 32
value of shareholders' equity by $4.5 million, resulting in a negative book
value available to holders of Common Stock.
- The Company acquired HiFi Buys at a substantial premium over book
value with funds generated almost entirely from the 1997 Notes and other
subordinated debt, which carried higher interest rates than typical senior
debt. The issuance of this debt caused the Company's debt to equity ratios
to increase to a level that was much higher than any of the eleven public
companies screened for potential comparability. Higher debt to equity
ratios increase risk significantly.
Based upon these factors, the appraiser applied a discount rate of 14.17%
to cash flows at May 31, 1997, yielding a total capital value of $54.6 million,
which was allocated $33.5 million to interest bearing debt, $20.0 million to
Preferred Stock liquidation equity and $1.0 million to Common Stock equity, or
an equivalent of $0.99 per share of Common Stock. Further reductions in this per
share value were necessary to reflect the fact that the 1997 Warrants were not
exercisable into a controlling interest in the Company and the lack of an active
trading market for the Common Stock. The discounts for lack of control and
marketability were 4% and 25%, respectively, yielding a net value per share of
Common Stock of $0.72. The fair value of the 1997 Warrants were then determined
in accordance with the Statement of Financial Accounting Standards No. 123 (FASB
123), resulting in a value of $0.517 for each of the 1997 Warrants.
The 1997 Notes have a stated interest rate of 12%. The effective interest
rate, however, was 12.5% after the accretion of the 1997 Warrant discount. The
average coupon rate of "Single B Rated High Yield Transactions" issued from
April 1, 1997 through June 30, 1997 was 10.2%.
As of the effective date of the Offering, assuming an offering price of
$16.00 per share and including coupon interest and return on the 1997 Warrants
themselves, the annualized return on investment for holders of the 1997 Notes,
which will be paid off upon the consummation of the Offering, would be 71.7%.
The net dollar gain on investment excluding coupon interest for the lenders of
the 1997 Notes would be approximately $10.0 million. Additionally, the Company
expects to record an extraordinary charge of approximately $600,000 for the
early payment of this debt in the fourth fiscal quarter ending September 30,
1998. In addition, assuming an offering price of $16.00 per share, the total
annualized return to the holders of the Company's Series A Preferred Stock and
Series B Preferred Stock would be 60.9% and 87.7%, respectively. The net dollar
gain in investment for the Series A Preferred Stock and Series B Preferred Stock
would be approximately $16.0 million and $6.8 million, respectively.
The Credit Facility currently has a maximum availability of $20.0 million
and a maturity date of June 1, 2000, and is secured by the inventory of the
Company and certain other assets. The Company intends to obtain the New Credit
Facility, in the amount of $30.0 million, effective upon the consummation of the
Offering. The New Credit Facility will be used to refinance any remaining
indebtedness under the Credit Facility (after application of proceeds of the
Offering) and for general working capital and other corporate purposes.
The Company has received a commitment letter (the "Commitment Letter") from
the New Credit Lenders to provide the New Credit Facility. The Commitment Letter
contemplates a three-year $30.0 million revolving line of credit in favor of the
Company, secured by assets of the Company (including pledges of stock in certain
affiliates). At the Company's election, interest accrues on borrowings at either
(i) the higher of BankBoston's Base Rate or the Federal Funds rate plus 0.50% or
(ii) the London Interbank Offered Rate ("LIBOR") plus an applicable margin
varying from 100 to 175 basis points. Interest, but not principal, is payable
during the term of the loan. The credit agreement will contain various financial
covenants, including a maximum ratio of debt to EBITDA (as defined therein),
cash flow and interest coverage tests, and a minimum net worth test, and also
will provide for limitations on other indebtedness, liens, capital expenditures,
mergers, payment of dividends, and certain other matters. The Commitment Letter
provides that the closing of the New
30
<PAGE> 33
Credit Facility is conditioned upon certain events, including due diligence and
final approval and completion of mutually satisfactory loan documentation.
The Company believes that the net proceeds that it will receive from the
Offering, together with the cash expected to be generated from operations and
available borrowings under the New Credit Facility, will be sufficient to
finance its working capital and capital expenditure requirements, exclusive of
acquisitions, for at least the next 12 months.
IMPACT OF INFLATION
Management does not believe that inflation has had a material adverse
effect on the Company's results of operations. However, the Company cannot
predict accurately the effect of inflation on future operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," SFAS No.
130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," and SFAS No. 132, "Employer's
Disclosures About Pensions and Other Post Retirement Benefits".
SFAS No. 128 changes the method of calculating earnings per share and is
effective for interim and annual periods ending after December, 1997. It
requires a dual presentation of basic and diluted earnings per share. The
Company adopted SFAS No. 128 during fiscal year 1998. The Company had not
previously reported earnings per share as it was not a public company.
SFAS Nos. 130, 131 and 132 will be implemented during fiscal year 1999.
Management does not expect that the adoption of these statements will have a
material impact on the consolidated financial statements.
RECENT EVENTS
For the quarter ended June 30, 1998, the Company's total revenue increased
76.1% to $49.7 million, from $28.2 million for the quarter ended June 30, 1997.
Comparable store sales for the quarter ended June 30, 1998 increased 18.0%
compared to the quarter ended June 30, 1997.
31
<PAGE> 34
BUSINESS
OVERVIEW
The Company is a specialty retailer of mid to high-end audio and video
consumer electronics products. The Company operates 51 stores under the Tweeter,
Bryn Mawr and HiFi Buys names in the New England, Mid-Atlantic and Atlanta,
Georgia markets, respectively. The Company's stores feature an extensive
selection of home and car audio systems and components, portable audio
equipment, and home video products including large screen televisions, DVD
players, digital satellite systems, video cassette recorders and camcorders. The
Company differentiates itself by focusing on consumers who seek audio and video
products with advanced features, functionality and performance, and does not
offer personal computers or home office equipment. The stores display products
in an inviting retail environment averaging 10,000 square feet and are staffed
with attentive, knowledgeable sales personnel. The Company seeks to build
customer loyalty by combining a high level of service with competitive prices
backed by its patented Automatic Price Protection program. The Company has been
recognized as the "Consumer Electronics Retailer of the Year" in 1996 and 1997
by Audio Video International Magazine and the fastest growing consumer
electronics retailer in the United States in 1997 by the TWICE Consumer
Electronics Retail Registry.
The Company opened its first store in 1972 in Boston under the Tweeter
name, and over the next two decades grew exclusively through new store openings
in New England, expanding to 18 stores by 1995. In 1995, the Company adopted an
aggressive growth strategy (i) to open new stores in its existing regional
markets and relocate certain stores to more favorable sites and (ii) to
selectively pursue acquisitions in new regional markets and achieve operating
improvements by converting acquired stores to the Company's core operating model
and leveraging distribution, marketing and corporate infrastructure. The Company
completed the Bryn Mawr Acquisition in May 1996 and the HiFi Buys Acquisition in
May 1997.
INDUSTRY
According to Company estimates, retail sales of audio and video products
were expected to reach approximately $30 billion in 1997. The Company also
estimates that between 1980 and 1997, the audio and video segment expanded at a
compound annual growth rate of 4.3%, with faster growth of 5.6% from 1980 to
1990 due to new product introductions, including compact disc players and video
cassette recorders, and more modest growth of 2.3% between 1990 and 1997 as
product categories matured.
The Company believes that the following trends in the consumer electronics
industry create significant opportunities for a specialty retailer of audio and
video products such as the Company:
POSITIONING OF LARGE FORMAT, HIGH VOLUME RETAILERS
In the 1990s, consumer electronics retailing has become increasingly
dominated by large format stores, including superstores and mass merchandisers.
These stores typically rely on high sales volumes by marketing a wide variety of
products to a broad segment of consumers, with an emphasis on introductory level
products. Many of these retailers have sought to capitalize on the growth of
certain product categories within the overall consumer electronics industry,
including personal computers, software, home office equipment and
telecommunications equipment, which the Company believes has contributed to a
decrease in emphasis by those stores on audio and video products. According to
Company estimates, audio and video products accounted for 31% of total sales of
consumer electronic products in 1997 versus 44% in 1990. The Company believes
that because of their emphasis on high volume across broad product categories,
these large format stores are unable to match the product knowledge, service and
shopping environment of a specialty audio and video retailer such as the
Company.
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<PAGE> 35
CONSOLIDATION OF CONSUMER ELECTRONICS RETAILERS
The retail consumer electronics industry is highly fragmented, and the
Company estimates that the two largest superstore chains accounted for less than
25% of the total sales attributable to the 100 largest retailers in 1996. The
Company believes that the expansion of large format chains has precipitated
consolidation of the industry during the 1990s by placing competitive pressure
on (i) regional broadline consumer electronics retailers with strategies
undifferentiated from consumer electronics superstores and mass merchandisers,
and (ii) smaller specialty retailers that may be successfully differentiated but
which operate at a disadvantage due to limited scale, media inefficiencies,
reduced purchasing power and lack of management depth. The Company believes that
regional specialty retailers with strong consumer name recognition 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 scale advantages to increase market
share.
ADVENT OF NEW TECHNOLOGIES
Growth in the audio and video consumer electronics market has historically
been accelerated by the introduction of new products based on technological
innovations. For example, the proliferation of video cassette recorders and
compact disc players helped to accelerate growth in the 1980s. The Company
believes that a new generation of technology offers the prospect of increased
industry sales with the introduction of digital video products such as DVD
players and high definition televisions, as well as direct broadcast satellite
systems and internet-ready televisions. According to statistics provided by DVD
Video Group, approximately 500,000 DVD players were shipped within the first
year after the product's release in March 1997, and over 1,000,000 players are
projected to be shipped in 1998. The Company believes 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 such products achieve market
acceptance.
BUSINESS STRATEGY
The Company's goal is to become the leading specialty retailer of high
quality audio and video products. The key elements of the Company's business
strategy are as follows:
EXTENSIVE SELECTION OF MID TO HIGH-END AUDIO AND VIDEO PRODUCTS
The Company concentrates on mid to high-end audio and video consumer
electronics products. This focus differentiates it from larger format
superstores and mass merchandisers, which offer a broad array of consumer
electronics and non-electronics products with a higher emphasis on products
priced at introductory price levels. The Company's emphasis on higher-end
products positions it attractively to manufacturers seeking to sell more
advanced or limited distribution products as part of their distribution
strategy. Limited distribution products accounted for 43% of product sales for
the Company for the six months ended March 31, 1998. As a result of its
higher-end product focus, a historical early adopter customer base and its
extensively trained sales force, the Company is often among the earliest
retailers to offer new product innovations on behalf of manufacturers. In
addition, the Company believes that its focused product offering allows for
higher gross margin opportunities, appeals to a more service-conscious consumer
and results in enhanced brand awareness of its regional names.
EXCEPTIONAL CUSTOMER SERVICE
The Company believes that the quality and knowledge of its sales associates
is critical to its success and represents a significant competitive advantage.
The Company's relationship selling model encourages sales associates to promote
a comfortable, trusting, low pressure environment. The Company provides its new
sales associates with five weeks of intensive classroom training, and
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<PAGE> 36
all sales associates receive five to fifteen days of additional training per
year, both at the store and at the Company's regional training centers. The
sales force receives technical product and sales training prior to the Company's
introduction of significant new products. The Company believes that the success
of its operating model has enabled it to engender long term customer loyalty.
Approximately 40% of customers who purchased from Tweeter stores in the six
months ended March 31, 1998 had previously purchased products from the Company
during the prior two fiscal years.
DYNAMIC, INVITING STORES
The Company's stores display products in a dynamic and inviting setting
intended to encourage the customer to view and hear products in sound rooms
architecturally and acoustically designed to simulate the customer's home or car
environment. The store prototype is brightly painted, often in pastel colors,
with many stores exhibiting hand-painted murals and other decorative artwork.
Innovative and interactive product displays enable customers to sample and
compare a variety of products. Each store contains a television wall displaying
an extensive selection of televisions and related products, and many stores
contain a movie theater room, complete with theater-style seats, which showcases
the Company's home theater products.
EVERY DAY COMPETITIVE PRICING
The Company utilizes an "every day competitive pricing" strategy with fixed
prices clearly marked on its products. Store managers regularly visit local
competitors to ensure that the Company's pricing remains competitive within the
store's local market. In addition, all product sales are backed by the Company's
patented Automatic Price Protection program. Under this program, if a customer
purchases a consumer electronics product from one of the Company's stores and a
competitor within 25 miles of the store advertises a lower price within 30 days
of purchase, the Company automatically sends a check to the customer for the
difference without requiring the customer to request the payment. The Automatic
Price Protection program is designed to remove pricing concerns from the
purchase decision and, as a result, allows customers and the sales staff to
focus on product functionality, performance and quality.
GROWTH STRATEGY
The Company's growth strategy is (i) to open new stores in current regional
markets and relocate certain stores to more favorable sites and (ii) to
selectively pursue acquisitions in new regional markets and achieve operating
improvements by converting the acquired company to its core operating model and
leveraging distribution, marketing and corporate infrastructure.
NEW STORES
The Company intends to open new stores and relocate a limited number of
stores within existing markets in order to increase penetration and leverage
regional advertising, distribution, and operating efficiencies. During fiscal
1997, the Company opened two Tweeter stores and two Bryn Mawr stores, and
relocated one Tweeter store. The Company currently intends to open five stores
in fiscal 1998, comprised of two at Tweeter and three at Bryn Mawr, and to
relocate two additional stores. Four of the five new stores planned for fiscal
1998 have been opened as of June 1, 1998. The Company intends to open 15 stores,
and to relocate three stores, in fiscal 1999. The Company believes that its Bryn
Mawr Acquisition and HiFi Buys Acquisition have provided it with platforms from
which to open new stores within and around their respective markets.
STRATEGIC ACQUISITIONS
The Company believes that it has obtained, and can continue to obtain,
significant benefits from the consummation of strategic acquisitions of existing
specialty retailers with a similar product mix
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<PAGE> 37
and strong consumer reputation in geographic markets in which the Company does
not currently operate. The Company believes that it can leverage the performance
of an acquisition candidate by (i) applying its sales management and sales
incentive strategies, (ii) adjusting the product mix to be compatible with its
emphasis on higher margin audio and video products, (iii) applying its
advertising and marketing strategies and programs, including Automatic Price
Protection and every day competitive pricing, (iv) implementing its relationship
selling and customer service philosophies and (v) utilizing its purchasing and
distribution capabilities and administrative infrastructure.
The Company believes that acquisition opportunities are created by the
fragmented nature of the consumer electronics industry, the limited exit
strategies available to owners of local and regional specialty retailers, the
competitive pressures presented by larger format superstores and mass
merchandisers on those retailers, and the difficulties faced by local and
regional specialty retailers in raising capital necessary to support inventory,
advertising or expansion. The Company believes that it is a well positioned
consolidator because the Company (i) is known within the industry as a leading
specialty retailer, (ii) utilizes a store size and concept which can be readily
adapted to acquired stores, (iii) has successfully consummated two strategic
acquisitions, (iv) has developed an operational, administrative and marketing
infrastructure with the proven capability to successfully integrate
acquisitions, (v) enjoys experienced and proven senior management, having an
average of 13 years of tenure with the Company and (vi) would seek to offer
employment and managerial opportunities within the consolidated enterprise to
qualified employees of the acquired retailer.
RECENT ACQUISITIONS
ACQUISITION OF BRYN MAWR
In May 1996, the Company completed the Bryn Mawr Acquisition. Like the
Tweeter stores, the Bryn Mawr stores enjoyed considerable name recognition and
targeted similar service-oriented customers. Since the Bryn Mawr stores offered
a product mix similar to the Tweeter stores, the Company consummated the Bryn
Mawr Acquisition with the goal of realizing increased revenues and store
contribution through the application of the Company's established operational
strategies to the acquired stores. Towards that goal, the Company adopted a
series of strategic initiatives including (i) increasing advertising
expenditures during the quarter following the acquisition and refocusing
advertising to emphasize radio, television and direct marketing rather than
print, (ii) implementing the Company's every day competitive pricing and
Automatic Price Protection programs, (iii) initiating a substantial sales
associate training program to improve product knowledge and enhance relationship
selling skills and (iv) focusing the sales staff on higher margin products,
particularly audio products.
ACQUISITION OF HIFI BUYS
In May 1997, the Company completed the HiFi Buys Acquisition. Like Tweeter
and Bryn Mawr, HiFi Buys had created a strong reputation among consumers as a
specialty retailer of high quality audio and video products. The HiFi Buys
stores, at an average size of 15,000 square feet, are larger than the average
Tweeter or Bryn Mawr stores. However, the HiFi Buys stores carried a broader
product mix, including more entry level product offerings and marketed heavily
through promotional newspaper advertising. The Company's integration strategy in
the HiFi Buys Acquisition has been to increase store contribution by converting
the HiFi Buys product mix to one compatible with the Company's and managing a
planned decrease in sales while increasing gross margin and reducing operating
expenses. Specifically, following the HiFi Buys Acquisition, the Company (i)
adjusted the merchandise mix to increase the proportion of mid and high-end
products and reduce the number of lower margin introductory products, (ii)
altered store employee compensation to reduce the emphasis on promotional sales
and focus incentives on gross margin and store contribution, (iii) reduced
marketing expenditures and shifted marketing emphasis from promotional
advertising toward the Company's traditional relationship selling and every day
competitive
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<PAGE> 38
pricing strategy, (iv) converted the advertising program to emphasize electronic
advertising and direct mail marketing as opposed to print media, (v) implemented
the Automatic Price Protection program and (vi) eliminated $2.4 million of
overhead by centralizing accounting, purchasing and other support
infrastructure.
STORE FORMAT AND OPERATIONS
STORE FORMAT
The Company currently operates 51 stores, comprised of 23 Tweeter stores in
New England, 18 Bryn Mawr stores in the Mid-Atlantic market, and 10 HiFi Buys
stores in the greater Atlanta, Georgia market. While the Company's stores vary
in size, the current prototype is 10,000 square feet, with approximately 70% of
square footage devoted to selling space. Many stores utilize mezzanine level
storage space to reduce occupancy expense.
The Company's store concept is intended to combine the comfort of the home
environment with practical displays enabling consumers to sample and compare the
features and functions of products in various combinations. The store prototype
is brightly painted, often in pastel colors, with many stores exhibiting hand
painted murals and other decorative artwork. Unlike many of the stores of the
Company's competitors, which contain large, open spaces in which many different
audio and video products are tested and sampled, the Company's stores feature
individual sound rooms. The sound rooms are intended to architecturally and
acoustically resemble a home or car environment to enable the customer to see
and hear how products will perform, and allow the customer to listen to and
compare various combinations of receivers, CD players, tape decks and speakers.
In addition, each store contains a traditional television wall displaying an
extensive selection of televisions and related products, and many stores contain
a movie theater room, complete with theater-style seats, which showcases the
Company's home theater products. Other displays, such as the "big red button,"
allow the customer to change, by pushing a button, mono television sound into a
five speaker or surround sound experience. Each store also features a camcorder
gallery which allows customers to sample different camcorders and shoot videos
of their children within the adjacent children's play area. Some stores display
a car on the selling floor which features a state-of-the-art car stereo system
and serves to exhibit the Company's installation capabilities. Most stores
provide car stereo installation through on-premises installation bays.
STORE OPERATIONS
Stores are typically staffed with a store manager, an assistant manager, 12
sales associates and two mobile electronics installers. The Company provides new
sales associates with five weeks of intensive classroom training, and all sales
associates receive five to fifteen days of additional training per year, both at
the store and at the Company's regional training centers. The sales force
receives technical product and sales training prior to the introduction of
significant new products. Most stores are open seven days a week.
STORE ECONOMICS
The Company believes that it benefits from attractive store level
economics. The average investment by the Company for the eight new stores opened
in the 24 months ended March 31, 1998, including leasehold improvements,
equipment, the cost of inventory (net of payables), and preopening expenses was
$855,000. The average net sales and store level cash flow, which excludes any
preopening expenses, allocated corporate overhead, depreciation and interest,
but includes occupancy expense and advertising, for the 12 months ended March
31, 1998 was $3,389,000 and $317,000, respectively, for stores owned by the
Company throughout the period.
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<PAGE> 39
SITE SELECTION
The Company's stores average approximately 10,000 square feet and are
typically located in free-standing buildings or strip shopping centers within
high traffic shopping areas. New store sites are selected on the basis of
several factors, including physical location, demographic characteristics of the
local market, proximity to competitors, access to highways or other major
roadways and available lease terms. The Company looks for co-tenants, such as
bookstores, that are likely to draw customers who would otherwise be targeted by
the Company within the site's relevant market and believes that close proximity
to large format competitors is a positive factor due to increased customer
traffic. All of the Company's stores are leased.
Set forth below is a table summarizing the locations, opening years, and
years of relocation where specified, of the Company's stores as of March 31,
1998:
<TABLE>
<CAPTION>
TWEETER BRYN MAWR HIFI BUYS
- ---------------------------- --------------------------------- ----------------------------
YEAR OPENED/ YEAR OPENED/ YEAR OPENED/
LOCATION RELOCATED LOCATION RELOCATED LOCATION RELOCATED
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Boston, MA 1972 Bryn Mawr, PA 1946 Norcross, GA 1990
Cambridge, MA 1974 / Maple Shade, NJ 1978 Alpharetta, GA 1991
1998 Abington, PA 1981 Athens, GA 1991
Newton, MA 1976 / Allentown, PA 1982 Buckhead, GA 1993
1995 Montgomeryville, PA 1984 Southlake, GA 1993
Burlington, MA 1978 / Wilmington, DE 1985 / Tucker, GA 1993
1996 1992 Kennesaw, GA 1995
Dedham, MA 1980 Harrisburg, PA 1986 / Smyrna, GA 1995
Framingham, MA 1983 1994 Northlake, GA 1995
Hyannis, MA 1983 / Wilmington, DE 1987 Gwinnett, GA 1996
1994 Allentown, PA 1987
New London, CT 1985 / Baltimore, MD 1990
1998 Timonium, MD 1990
Hanover, MA 1986 King of Prussia, PA 1995
Danbury, CT 1986 / Glen Burnie, MD 1995
1997 Princeton, NJ 1997
Seekonk, MA 1988 Lancaster, PA 1997
Warwick, RI 1989 Reading, PA 1997
Newington, CT 1990 York, PA 1997
Avon, CT 1993 Deptford, NJ 1998
Peabody, MA 1993
Manchester, NH 1994
Salem, NH 1994
Boston, MA 1995
Milford, CT 1995
Holyoke, MA 1996
Portsmouth, NH 1996
Nashua, NH 1996
Attleboro, MA 1997
</TABLE>
MERCHANDISE
The Company's stores feature home and car audio systems and components,
video products such as large screen televisions, digital satellite systems,
video cassette recorders, camcorders, DVD players and other consumer electronics
products such as cellular phones and portable audio equipment. The Company
offers custom home and car stereo installation services and provides warranty
and non-warranty repair services through all of its stores. The Company also
offers insurance replacement services to insurance companies, providing
replacement products to policyholders of such companies. Additionally, the
Company has a corporate sales division which markets
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<PAGE> 40
and sells Company products to businesses, institutions and other organizations.
The Company's emphasis on mid to high-end products enables it to offer limited
distribution products and to be among the earliest retailers to offer new
product innovations on behalf of manufacturers. Limited distribution products
accounted for 43% of the Company's sales during the six months ended March 31,
1998.
The Company stocks products from over 75 vendors, including Adcom, Aiwa,
Alpine, Bose, Boston Acoustics, Denon, Eclipse, Kenwood, Klipsch, Mirage,
Mitsubishi, Monster Cable, Panasonic, Pioneer, ProScan, Rockford Fosgate, Sony
and Yamaha. The Company seeks to manage its product mix to maximize gross
margin. Historically, the Company's video products have yielded lower gross
margin than audio products. Total sales of video products have increased at
rates faster than the increases in audio product sales during the last several
years as a result of the increased consumer interest in big screen televisions.
Accordingly, the Company has adopted a "Sell Audio with Video" strategy in order
to enhance overall gross margin through increases in sales of higher margin
audio products.
The table below sets forth the approximate percentages of revenues for each
of the Company's primary product categories for its fiscal years ended September
30, 1996 and September 30, 1997 and for the six months ended March 31, 1997 and
March 31, 1998. The percentage of revenues represented by each product category
may be affected by, among other factors, competition, economic conditions,
consumer trends, the introduction into the market of new products, changes in
the Company's product mix, and the timing of marketing events. The percentages
are also impacted by acquisitions of stores offering a different product mix. In
particular, the increase in the percentage of revenue represented by video
products in the year ended September 30, 1997 and six months ended March 31,
1998 versus the prior year periods was primarily driven by the inclusion of
stores acquired in the HiFi Buys Acquisition. Video products represent a greater
percentage of revenues at HiFi Buys than at the other Company stores. The
historical percentages set forth below may not be indicative of revenue
percentages for future periods:
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
PRODUCT CATEGORY SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1998
- ----------------------- ------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Audio Equipment(1)..... 35% 33% 37% 31%
Video Equipment(2)..... 36% 36% 38% 41%
Mobile Equipment and
Other(3)............. 29% 31% 25% 28%
</TABLE>
- ---------------
(1) Includes speakers, cassette decks, receivers, turntables, compact disc
players, mini disc players, amplifiers, preamplifiers, and portable audio
equipment.
(2) Includes video cassette players, camcorders, televisions, projection
televisions, DVD players, and satellite dishes.
(3) Includes car decks, amplifiers and speakers, car security products,
navigation equipment, cellular phones, audio and video accessories, and
extended performance guaranties.
PURCHASING AND INVENTORY
The Company's purchasing and inventory control functions are based at its
executive offices in Canton, Massachusetts. Purchasing decisions are made by the
Company's buying team, which has primary responsibility for product selection,
stocking levels and pricing. This process is facilitated by the Company's
information systems which analyze stocking levels and product sell-through. The
purchasing group continuously reviews new and existing products with a view
towards maintaining a wide range of high quality, brand-name consumer
electronics products within the Company's product mix. In order to remain
current with new and developing products, the Company regularly hosts
presentations by its major suppliers.
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<PAGE> 41
In addition to making direct purchases, the Company is a member of PRO, a
volume-buying group of 14 specialty electronics retailers across the country.
This affiliation often provides the Company with opportunities to obtain
additional vendor rebates, product discounts and promotional products. The
Company is not obligated to make purchases through PRO. The Company's President
serves on the Board of Directors of PRO.
The Company sources products from more than 75 vendors, the largest of whom
accounted for 24% of fiscal 1997 purchases. The Company does not maintain long
term commitments or exclusive contracts with any particular vendor, but instead
considers numerous factors, including price, credit terms, distribution, quality
and compatibility with the Company's existing product mix, when making
purchasing decisions. The Company utilizes a sophisticated automatic
replenishment system for store inventory, maintaining stock levels and
minimizing total dollars invested in inventory. The Company believes that its
relationship with its large vendors is excellent and that its focused
merchandising and high degree of customer service makes it an important
distribution channel for its suppliers, particularly for the introduction of new
products.
The Company distributes products to stores through three regional
distribution and service centers. The Canton, Massachusetts facility is
approximately 32,000 square feet and currently serves as the Company's
headquarters and distribution and service center for the Tweeter stores. The
Company will be relocating this facility to a new 80,000 square foot facility
two miles from its existing facility in August 1998. The King of Prussia,
Pennsylvania distribution center is approximately 50,000 square feet and
services the Bryn Mawr stores. The Atlanta, Georgia facility is approximately
80,000 square feet and services the HiFi Buys stores. The Company believes that
these facilities are sufficient to handle the Company's planned expansion
through at least the year 2000.
ADVERTISING AND MARKETING
The Company targets consumers seeking informed advice concerning product
selection and system integration of audio and video consumer electronics
products. The Company's marketing strategy differs from its major competitors in
that it relies substantially on electronic media, primarily radio, and an
extensive direct marketing effort. The Company believes advertising on specific
radio stations and at specific times allows it the flexibility to tailor its
marketing message. The Company's radio advertising campaigns seek to generate
name recognition and to reinforce identification of the Company as a source of
high quality products at competitive prices, staffed with a knowledgeable,
attentive sales force. This radio strategy is complemented with television
advertisements and, less frequently, with print advertisements. The specific
allocation of the Company's committed advertising dollars among the various
types of advertising media is reviewed from time to time by Company management
and, if necessary, adjusted to reflect the Company's assessment of advertising
results and market conditions.
The Company also relies on a sophisticated direct marketing campaign to its
customers. The Company has developed a comprehensive database marketing program
to attempt to match past customer purchasing history to the next logical
purchase option for that customer. For example, the Company has distributed
direct mail regarding surround sound products to customers who recently
purchased large screen televisions. The Company also distributes an
award-winning 100 page Buyer's Guide three times a year and a smaller catalog
nine times per year. Management believes that its relatively inexpensive direct
mail activities leverage and complement its general media advertising campaigns.
The Company believes that its commitment to providing competitive pricing
on its products is a critical component of its marketing and advertising
strategy. In 1993, the Company abandoned its promotional marketing approach and
adopted an every day competitive pricing strategy, with fixed prices clearly
marked on its products. Store managers regularly visit the local competition to
ensure the store's pricing remains competitive. At the same time, the Company's
competitive prices are backed by its Automatic Price Protection program. Under
the Automatic Price Protection program, if a customer purchases a consumer
electronics product from one of the Company's stores and a
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<PAGE> 42
competitor within 25 miles of that store advertises a lower price within 30 days
of the customer's purchase, the Company automatically sends a check to the
customer for the difference. Unlike other price guarantee programs in place
within the industry, the refund process does not require the customer to call or
return to the store to request a price match refund. The Automatic Price
Protection program is intended to be hassle-free, customer friendly and viewed
as a reflection of the Company's commitment to customer service. Most recently,
in fiscal 1997, the Company began its "Wise Buys" program. Under this program,
the Company's buyers identify special, reduced-priced items, often closeouts or
last year's top-of-the-line models, which are purchased from the manufacturer
and offered to the consumer at a substantial discount from the original retail
price. The Company believes that the pricing of the Wise Buys items represents
substantial value to the consumer with little or no negative impact to gross
margin. The Company's advertisements frequently describe or refer to the
Automatic Price Protection and Wise Buys programs.
INFORMATION SYSTEMS
The Company utilizes a sophisticated, fully integrated mainframe-based
management information system which updates after every transaction, and is
accessible on a real-time basis to Company management, sales associates and
product buyers. Extensive sales reporting and sales tracking is provided
real-time on screen to store managers and individual sales associates which
tracks category sales and benchmarks key sales data for the Company. This system
enables management and store managers to review sales volume, gross margin and
product mix on a per store or per sales associate basis, allows for the viewing
of open orders, inventory value and mix, and tracks sales by product category,
by sales associate and by store. The Company provides ongoing training and
support in the use of this system and compensates and benchmarks the store
managers based upon this information.
The Company currently utilizes several software systems which will require
modification or upgrading to accommodate the "Year 2000" changes needed for
correct recording of dates in the year 2000 and beyond. The Company believes
that all such systems can be changed by the end of 1999 and does not expect the
cost of such changes to be material to the Company's financial condition or
results of operations. The Company does not, however, currently have any
information concerning Year 2000 compliance status of its suppliers. See "Risk
Factors -- Year 2000 Compliance."
EMPLOYEES
As of March 15, 1998, the Company had 979 employees, comprised of 910
full-time and 69 part-time employees. None of the Company's employees are
covered by collective bargaining agreements, and the Company believes its
relations with its employees are good. See "Risk Factors -- Dependence on Key
Personnel."
INTELLECTUAL PROPERTY
The Company's "Tweeter etc.," "Bryn Mawr Stereo," "The Place for Bass," and
"Wise Buys" service marks have been registered with the United States Patent and
Trademark Office. The Company has not registered the "HiFi Buys" service mark.
The Company has submitted applications for registration of certain other of its
service marks, which applications are currently pending. See "Risk
Factors -- Intellectual Property."
PROPERTIES
In addition to the Company's stores, all of which are leased, the Company
also leases three distribution and office facilities in Canton, Massachusetts,
King of Prussia, Pennsylvania, and Atlanta, Georgia, with lease terms expiring
in 2001, 2011 and 2008, respectively. On March 25, 1998 the Company entered into
a purchase and sale agreement for a facility in Canton, Massachusetts that will
40
<PAGE> 43
serve as its new corporate headquarters, service and distribution center in
Massachusetts. The Company expects the purchase price and related building
improvements to be approximately $5.3 million, and expects to finance the
purchase with a mortgage of $4.0 million.
LITIGATION
From time to time, the Company is involved in litigation in the ordinary
course of the Company's business. In the opinion of management, no such
litigation is likely to have a material adverse effect on the Company's results
of operations or financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information with respect to
executive officers, directors and certain other key employees of the Company
immediately following the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Samuel Bloomberg................. 46 Chairman, Chief Executive Officer and Director
Jeffrey Stone.................... 41 President, Chief Operating Officer, Treasurer and
Director
Joseph McGuire................... 37 Vice President, Chief Financial Officer and Chief
Information Officer
Jeffrey Bloomberg(1)............. 51 Director
Matthew Bronfman(2).............. 38 Director
Michael Cronin(1)(2)............. 44 Director
Steven Fischman.................. 56 Director
KEY EMPLOYEES
Roy Bertalotto................... 45 Vice President, New Store Development
Linda Christman.................. 43 Vice President, Human Resources
David Ginsburg................... 47 Vice President, Southeastern Region
Dori Ginsburg.................... 40 Vice President, Insurance Replacement
Albert Gordon.................... 38 Vice President, Operations and Corporate Finance
Noah Herschman................... 35 Vice President, Marketing
Bernard Sapienza................. 35 Vice President, Purchasing
Paul Shindler.................... 42 Vice President, Training
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Samuel Bloomberg is a co-founder of the Company and has served as director
and/or officer since its inception. Mr. Bloomberg has been Chief Executive
Officer of the Company since September 1983 and Chairman of the Board since
1986. Mr. Bloomberg is the brother of Jeffrey Bloomberg.
Jeffrey Stone has served as President and Chief Operating Officer,
Treasurer and director of the Company since October 1990. From 1987 to 1990 Mr.
Stone served as the Executive Vice President of Bread & Circus, a specialty
natural foods supermarket chain and from 1983 to 1987 served as Vice President
of Human Resources and Training for Scandinavian Design, a specialty furniture
retailer. Mr. Stone is a Director of PRO, the buying group of specialty consumer
electronics retailers of which the Company is a member.
Joseph McGuire has been a Vice President, Chief Financial Officer and Chief
Information Officer of the Company since May 1996. Prior to joining the Company,
Mr. McGuire was the Chief Financial Officer of Bryn Mawr Radio & Television
Centre, Inc. from 1987 to 1996.
Jeffrey Bloomberg has served as director of the Company from 1989 to the
present. From 1994 to the present, Mr. Bloomberg has also served as President of
Bloomberg Associates, Inc., an investment banking company. Prior to that, from
1985 to 1993, Mr. Bloomberg served as Senior Managing Director at Bear Stearns &
Co., Inc., specializing in corporate finance and mergers and acquisitions. Mr.
Bloomberg is the brother of Samuel Bloomberg.
Matthew Bronfman has served as director of the Company since 1989. In 1990
Mr. Bronfman served as director, and from 1991 to 1994 Mr. Bronfman served as
Chairman and Chief Executive
42
<PAGE> 45
Officer of Sterling Cellular Holdings, L.P., a private cellular telephone
company. From 1994 to the present, Mr. Bronfman founded and has served as
Chairman and Chief Executive Officer of Perfumes Isabell, a fragrance and gift
company.
Michael Cronin has served as director of the Company since November, 1995.
From 1991 to the present Mr. Cronin has served as Managing Partner of Weston
Presidio Capital. Mr. Cronin also serves as director of Tekni-plex, Inc. and
Casella Waste Systems, Inc.
Steven Fischman will serve as a director of the Company commencing upon the
closing of the Offering. Since 1992, Mr. Fischman has been the President of New
England Development ("NED"), a regional mall developer based in New England.
Since 1996, Mr. Fischman has also served as Vice-Chairman of WellsPark Group
Limited Partnership, a mall management company formed by NED and an unrelated
partner. Prior to joining NED, Mr. Fischman was a director and shareholder in
the Boston law firm of Goulston & Storrs, P.C., which firm is counsel to the
Company. Mr. Fischman is also Chairman of the Board of Trustees of
Newton-Wellesley Hospital.
Roy Bertalotto has served as Vice President, New Store Development of the
Company since 1992. Prior to that, Mr. Bertalotto served as a District Sales
Manager from 1986 to 1988 and as Regional Vice President, Sales for eight
southern New England stores from 1988 to 1992.
Linda Christman has served as Vice President, Human Resources of the
Company since 1997. Prior to that time, she served as the Director of Human
Resources since 1987.
David Ginsburg has served as Vice President, Southeastern Region of the
Company since May 1997. Prior to joining the Company, Mr. Ginsburg served as a
Vice President of HiFi Buys Incorporated.
Dori Ginsburg has served as Vice President, Insurance Replacement of the
Company since May 1997. Prior to joining the Company, Ms. Ginsburg served as
Vice President, Insurance Replacement of HiFi Buys Incorporated.
Albert Gordon has served as Vice President, Operations and Corporate
Finance of the Company since 1995. From 1990 to 1994, Mr. Gordon served as Chief
Financial Officer of Boston Publishing Co., Inc. From 1987 to 1991, Mr. Gordon
held several management positions at The Westwood Group, a restaurant holding
company, most recently as Vice President of Marketing and as Chief Financial
Officer of its catalog business. From 1981 to 1983 Mr. Gordon served on the
audit staff at KPMG Peat Marwick and from 1985 to 1987 Mr. Gordon was a member
of brand management at Procter & Gamble.
Noah Herschman has served as Vice President, Marketing of the Company since
1994. Prior to that, Mr. Herschman served as a Senior Product Buyer and
Marketing Director from 1990 to 1994 and served as a sales consultant for the
Company from 1988 to 1990.
Bernard Sapienza has served as Vice President, Purchasing of the Company
since 1994. Prior to that, from 1989 to 1994, Mr. Sapienza served as a Senior
Product Buyer of the Company.
Paul Shindler has served as Vice President, Training of the Company since
1994. Prior to that, Mr. Shindler served as Regional Vice President of Sales for
the northern region and Training Director of the Company from 1991 to 1994 and
served in various sales and training capacities for the Company from 1977 to
1987.
43
<PAGE> 46
BOARD COMPOSITION
REORGANIZATION OF BOARD
The Company currently has five directors, comprised of Samuel Bloomberg,
Jeffrey Stone, Jeffrey Bloomberg, Mathew Bronfman and Michael Cronin. Mr. Cronin
has been appointed to the Board pursuant to the terms of the Company's
outstanding Preferred Stock, which will be converted into Common Stock effective
upon consummation of the Offering. Mr. Fischman will become a director upon the
closing of the Offering. Effective upon the consummation of the Offering, the
Board of Directors will be reorganized by dividing the Board into three
staggered classes consisting of two Class I directors (Messrs. Bronfman and
Fischman), two Class II directors (Messrs. Samuel Bloomberg and Cronin) and two
Class III directors (Messrs. Stone and Jeffrey Bloomberg). The initial terms of
the three classes will expire in 1999, 2000 and 2001, respectively. Beginning in
1999, directors of each class will be chosen for three-year terms upon the
expiration of their current terms and each year one class of directors will be
elected by Company stockholders. The Company believes that classification of the
Board of Directors will help facilitate continuity and stability of the
Company's business strategies and policies as determined by the Board of
Directors. Holders of Common Stock will have no right to cumulative voting in
the election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of the Common Stock will be able to elect all of the
successors of the class of directors whose terms expire at that meeting.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors makes recommendations
concerning the engagement of independent public accountants, reviews the plans
for and results of the audit engagement with the independent public accountants,
approves professional services provided by the independent public accountants
and review the adequacy of the Company's internal accounting controls. The Audit
Committee consists of Jeffrey Bloomberg and Michael Cronin.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors establishes and
implements compensation policies and programs for the Company's executive
officers and exercises all powers of the Board of Directors in connection with
the Company's incentive compensation and benefit plans. The Compensation
Committee of the Board consists of Mathew Bronfman and Michael Cronin. In
January 1996, the members of the Board of Directors who were not members of the
Compensation Committee approved the grant to Mathew Bronfman of non-qualified
stock options to purchase 107,584 shares of the Company's Common Stock at an
exercise price of $1.524 per share. Such options, by their terms, were fully
vested on the date of grant.
DIRECTORS' COMPENSATION
The Company pays each director $1,875 per quarter, provided such director
attends the meetings of the directors scheduled for such quarter. All directors
are reimbursed for reasonable expenses incurred in attending meetings. Upon the
consummation of the Offering and upon each subsequent election or re-election,
each director who is not also an employee or affiliate of the Company will be
granted options exercisable into 1,750 shares of Common Stock, with an exercise
price equal to fair market value of the Common Stock at the date of grant
pursuant to the 1998 Plan. See "Management -- Stock Plans."
44
<PAGE> 47
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and each of the other executive officers of the Company
(the "Named Executives") for services rendered in all capacities to the Company
during the fiscal year ended September 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION(1) SECURITIES
------------------------------------ UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2) (#) COMPENSATION(3)
- --------------------------- -------- ------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Samuel Bloomberg.......... $204,876 $20,000 $1,960 66,240 $65,818
Chairman and Chief
Executive Officer
Jeffrey Stone............. $204,037 $20,000 $1,448 48,610 $ 5,288
President and Chief
Operating Officer
Joseph McGuire............ $150,244 $ 5,300 $ 466 2,624 --
Vice President, Chief
Financial Officer and
Chief Information Officer
</TABLE>
- ---------------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Executives which are
available generally to all salaried employees of the Company.
(2) Represents amounts contributed by the Company under the Company's 401(k)
Plan to the accounts of the Named Executives.
(3) Represents amount distributed to cover personal tax liability from the
Company's prior status as a Subchapter 'S' corporation for federal income
tax purposes. On November 25, 1995, as part of a recapitalization, the
Company elected to be treated as a 'C' corporation for federal income tax
purposes.
The following table sets forth information relating to grants of stock
options made during the fiscal year ended September 30, 1997 to each of the
Named Executives under the Company's existing stock option plan:
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL OPTIONS GRANT
SECURITIES GRANTED TO EXERCISE DATE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE DATE VALUE(1)
---- --------------- ------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Samuel Bloomberg.......... 13,350 5.7% $7.10 2007 $ 267
52,890 22.7 $8.08 2007 1,058
------ ---- ------
66,240 28.4% $1,325
Jeffrey Stone............. 13,350 5.7% $6.46 2007 $ 267
35,260 15.2 $7.24 2007 705
------ ---- ------
48,610 20.9% $ 972
Joseph McGuire............ 2,624 1.1% $7.24 2007 $ 52
</TABLE>
- ---------------
(1) The fair value of each stock option granted in fiscal 1997 under the
Company's existing stock option plan was estimated on the date of grant
using the Black-Scholes option pricing model assuming an expected volatility
of 55%, a risk-free interest rate of 6%, an expected life of 4 years and no
dividend payments. See Note 11 of Notes to Consolidated Financial Statements
of the Company.
45
<PAGE> 48
The following table sets forth certain information regarding stock option
exercises during the fiscal year ended September 30, 1997 and stock options held
at such year end by the Named Executives. No options were exercised during such
fiscal year by the Named Executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ---- -------------------------- --------------------
<S> <C> <C>
Samuel Bloomberg.............................. 208,916/0 $2,526,691/0
Jeffrey Stone................................. 114,978/0 $1,343,651/0
Joseph McGuire................................ 8,397/15,220 $ 110,187/188,265
</TABLE>
EMPLOYMENT AGREEMENTS
The summaries of the various employment agreements set forth below are
qualified in their entirety by reference to such agreements, which are exhibits
to the Registration Statement of which this Prospectus is a part.
BLOOMBERG AND STONE AGREEMENTS
Effective upon the consummation of the Offering, the Company will enter
into five-year employment agreements with Samuel Bloomberg, to serve as Chairman
of the Board and Chief Executive Officer of the Company, and with Jeffrey Stone,
to serve as President and Chief Operating Officer of the Company (the
"Employment Agreements"). The Employment Agreements provide that Messrs.
Bloomberg and Stone will each receive a base salary of $300,000 per year through
September 30, 1998, $325,000 from October 1, 1998 to September 30, 1999, and
thereafter at the annual rate of at least $325,000, plus such increases as may
be determined by the Compensation Committee of the Board of Directors. Each of
Messrs. Bloomberg and Stone will have the opportunity to earn incentive bonuses
based upon certain performance criteria, to be determined by the Compensation
Committee, and the opportunity to receive stock options and other incentive
awards under the Company's 1998 Stock Option and Incentive Plan.
The Employment Agreements provide for continued employment until
termination by either party. The Company, however, may terminate either
Employment Agreement with or without cause at any time. If either executive's
employment is terminated by the Company without cause, the Company is obligated
to pay the respective executive an amount equal to such executive's unvested
accrued benefits under any stock option plan, incentive plan or retirement plan
plus severance pay calculated as follows: (i) if the executive is terminated in
during the first three years of the agreement, he will receive an amount equal
his annual base salary in effect in the year of termination for three years
following termination; (ii) if the executive is terminated in the fourth year,
he will receive an amount equal to two times his annual base salary in effect in
the year of termination for two years following termination; and (iii) if the
executive is terminated in the fifth or any subsequent year of the agreement, he
will receive an amount equal to his annual base salary in the year of
termination. The Employment Agreements also provide that if the Company and
Messrs. Bloomberg and Stone do not renew the Agreements upon expiration, the
Company may elect to pay such executives two years severance in exchange for a
two-year non-competition arrangement.
46
<PAGE> 49
MCGUIRE EMPLOYMENT AGREEMENT
Effective upon the consummation of the Offering the Company will enter into
an employment agreement with Joseph McGuire to serve as Chief Financial Officer
and Chief Information Officer of the Company. Under the terms of this three-year
agreement, Mr. McGuire will earn a base annual salary of $185,000 and will have
the opportunity to earn yearly incentive bonuses based on performance criteria
(determined by the Compensation Committee). Mr. McGuire is also entitled to
receive stock options and other incentive awards under the Company's stock
option and incentive plans. The Company may elect, upon the expiration and
non-renewal of the agreements, to pay Mr. McGuire two years of severance pay in
exchange for a two-year non-competition agreement from Mr. McGuire. If Mr.
McGuire's employment is terminated by the Company without cause, the Company is
obligated to pay Mr. McGuire an amount equal to his base salary in the year of
termination, and shall permit his options and incentives to continue to vest for
one year following termination.
INSURANCE
The Company intends to obtain a directors' and officers' liability
insurance policy in the aggregate amount of $5.0 million. The directors' and
officers' insurance will insure the (i) directors and officers of the Company
from any claim arising out of an alleged wrongful act by the directors and
officers in their respective capacities as directors and officers and (ii)
Company to the extent that it has indemnified a director or officer for such
loss.
STOCK PLANS
1995 STOCK OPTION PLAN
On November 28, 1995, the Company adopted its 1995 Stock Option Plan (the
"1995 Stock Option Plan"). The 1995 Stock Option Plan allowed the Company to
issue (i) options to purchase Common Stock which qualify as incentive stock
options ("ISOs") under Section 422A(b) of the Internal Revenue Code of 1986 to
Company employees and (ii) options to purchase Common Stock which do not qualify
as ISOs ("Non-Qualified Options") to directors, officers, employees and
consultants of the Company. Payment of the exercise price may be made in cash,
shares of Common Stock, a combination of cash or stock or by any other method
approved by the Board or the Compensation Committee. Options are not assignable
or transferable except by will or the laws of descent and distribution. On June
1, 1998, the Board of Directors of the Company voted to terminate the 1995 Stock
Option Plan effective on, and subject to, the consummation of the Offering. As
of the date of this Prospectus, the Company had outstanding under the 1995 Stock
Option Plan ISOs exercisable into 737,475 shares of Common Stock and
Non-Qualified Options exercisable into 107,584 shares of Common Stock.
1998 STOCK OPTION AND INCENTIVE PLAN
The Company adopted the 1998 Stock Option and Incentive Plan (the "1998
Plan") on June 1, 1998 to provide incentives to attract and retain executive
officers, directors, key employees and consultants. The summary of the 1998 Plan
set forth below is qualified in its entirety by reference to the 1998 Plan,
which is included as an exhibit to the Registration Statement of which this
Prospectus is a part.
The aggregate number of shares of Common Stock issuable under the 1998 Plan
is equal to 19.6% of the total shares of Common Stock that will be issued and
outstanding, on a fully diluted basis, upon completion of the Offering. In
addition, the number of shares of Common Stock issuable under the 1998 Plan will
increase, on each anniversary date of the adoption of the 1998 Plan, to that
number of shares equal to the lesser of (i) 2% of the total number of shares of
Common Stock that are issued and outstanding on a fully diluted basis on each
such anniversary date or (ii) 150,000 shares of Common Stock. As options granted
under the 1998 Plan are exercised, the number of
47
<PAGE> 50
shares represented by such previously outstanding options will again become
available for issuance under the 1998 Plan up to a maximum of 100,000 shares of
Common Stock annually.
The 1998 Plan will expire five years following its adoption. Awards made
thereunder and outstanding at the expiration of the 1998 Plans will survive in
accordance with their terms.
The 1998 Plan will be administered by the Compensation Committee of the
Board of Directors, and will allow the Company to issue one or more of the
following: stock options (ISOs and non-qualified options), restricted stock
awards, stock appreciation rights, common stock in lieu of certain cash
compensation, dividend equivalent rights, performance shares and performance
units (collectively, "Plan Awards").
In any plan year, no more than 25% of the shares reserved for issuance
under the 1998 Stock Plan, may be used for Plan Awards consisting of restricted
stock. All grants of restricted stock under the 1998 Stock Plan will be subject
to vesting over seven years, subject, however, at the Administrator's
discretion, to acceleration of vesting upon the achievement of specified
performance goals.
The 1998 Plan will also provide for the grant or issuance of Plan Awards to
directors of the Company who are not employees of the Company. These options
will vest over a period of three years; provided such non-employee director is
not removed before the end of his or her term.
On June 1, 1998, the Board of Directors authorized the grant of options
("June 1998 Options") under the 1998 Plan, exercisable for a total of 209,988
shares of Common Stock, to certain officers, directors and employees of the
Company, including a grant of options to purchase 23,038 shares of Common Stock
to Samuel Bloomberg, a grant of options to purchase 29,000 shares of Common
Stock to Jeffrey Stone, a grant of options to purchase 8,000 shares of Common
Stock to Joseph McGuire and grant of options to purchase 1,750 shares of Common
Stock to each of Jeffrey Bloomberg, Matthew Bronfman, Michael Cronin and Steven
Fischman.
All such June 1998 Options will be granted upon the consummation of the
Offering, and the exercise price for all such June 1998 Options will be the
initial public offering price for the Common Stock.
INCENTIVE BONUS PLAN
The Company maintains an Incentive Bonus Plan (the "Bonus Plan") for its
senior employees and executives, pursuant to which cash bonuses may be paid to
such employees and executives based on achievement of pre-established
performance criteria. The Compensation Committee of the Board of Directors
administers the Bonus Plan, and determines the applicable performance criteria
and amounts issuable under this Plan on an annual basis.
48
<PAGE> 51
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale by the Company and the Selling Stockholders of the
shares of Common Stock offered hereby (assuming no exercise of the Underwriters'
over-allotment option), by (i) each person (or group of affiliated persons)
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock (assuming conversion of all outstanding Preferred Stock
and the exercise of warrants to purchase 259,856 shares of Common Stock), (ii)
each of the Company's Named Executives and directors, (iii) all of the Company's
executive officers and directors as a group and (iv) the Selling Stockholders.
Except as otherwise indicated in the footnotes to this table, the Company
believes that the persons named in this table have sole voting and investment
power with respect to all the shares of Common Stock indicated.
<TABLE>
<CAPTION>
SHARES NUMBER OF SHARES
BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE BEING AFTER THE
OFFERING(1) OFFERED OFFERING(1)
------------------- --------- -------------------
NAME OF BENEFICIAL OWNER:(2) NUMBER PERCENT NUMBER NUMBER PERCENT
---------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Advent International Group(3).............. 883,871 22.7% -- 883,871 14.6%
Weston Presidio Offshore Capital C.V.(4)... 646,558 16.7 -- 646,558 10.6
PNC Capital Corp(5)........................ 457,403 11.2 -- 457,403 7.3
Exeter Venture Management Corp.(6)......... 333,632 8.6 333,632 -- *
BNP Venture Holding Corp.(7)............... 286,401 7.4 -- 286,401 4.7
Seacoast Capital Partners, L.P.(8)......... 209,855 5.2 50,000 159,855 2.6
Samuel Bloomberg(9)........................ 912,362 22.3 85,119 827,243 13.1
Jeffrey Stone(10).......................... 321,618 8.0 16,473 305,145 4.9
Joseph McGuire(11)......................... 12,595 * -- 12,595 *
Jeffrey Bloomberg(12)...................... 291,059 7.5 17,478 273,581 4.5
Matthew Bronfman(13)....................... 112,143 2.8 -- 112,143 1.8
Michael Cronin(14)......................... 646,558 16.7 -- 646,558 10.6
Armin Biller(15)........................... 14,529 * 7,298 7,231 *
All executive officers and directors as a
group (6 persons)(16).................... 2,296,335 52.9% 119,070 2,177,265 33.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes the number of shares and percentage ownership represented by such
shares determined to be beneficially owned by a person in accordance with
the rules of the Securities and Exchange Commission. The number of shares
beneficially owned by a person includes shares of Common Stock that are
subject to (a) options held by that person that are currently exercisable
or exercisable within 60 days of the date of this Prospectus or (b)
warrants that are currently exercisable or that will be exercisable upon
consummation of the Offering. Such exercisable options and warrants are
described in the footnotes to this table for each such person. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of each other person.
(2) Unless otherwise specified, the address of all persons who are executive
officers or directors of the Company is in care of the Company, 40 Hudson
Road, Canton, Massachusetts 02021.
(3) Includes 642,040 shares held by Global Private Equity II Limited
Partnership (including 12,281 shares issuable upon exercise of outstanding
warrants) and 241,831 shares held by Advent Direct Investment Program
Limited Partnership (including 4,627 shares issuable upon exercise of
outstanding warrants). Its address is 101 Federal Street, Boston,
Massachusetts 02110.
(4) Includes 11,832 shares issuable upon exercise of outstanding warrants. Its
address is One Federal Street, Boston, Massachusetts 02110.
(5) Includes 209,855 shares issuable upon exercise of outstanding warrants. Its
address is One PNC Plaza, Pittsburgh, Pennsylvania 15222.
(6) Includes 166,816 shares held by Exeter Venture Lenders, L.P. (including
104,928 shares issuable upon exercise of outstanding warrants) and 166,816
shares held by Exeter Equity Partners, L.P. (including 104,928 shares
issuable upon exercise of outstanding warrants). The 333,632 shares sold by
Exeter Venture Management Corp. include 166,816
49
<PAGE> 52
shares sold by Exeter Venture Lenders, L.P. and 166,816 shares sold by
Exeter Equity Partners, L.P. Its address is 10 East 53rd Street, New York,
New York 10022.
(7) Includes 3,383 shares issuable upon exercise of outstanding warrants. Its
address is Banexi/12 Rue Chauchat, 75009 Paris, France.
(8) Consists of 209,855 shares issuable upon exercise of outstanding warrants.
Its address is 55 Ferncroft Road, Danvers, Massachusetts 01923.
(9) Includes 48,912 shares held, in the aggregate, by the Samuel Bloomberg
Family Trusts for the benefit of Mr. Bloomberg's children and 24,774 shares
held by Carolina Bloomberg, the wife of Mr. Bloomberg. Carolina Bloomberg's
24,774 shares include 313 shares issuable upon exercise of outstanding
warrants. Mr. Bloomberg expressly disclaims beneficial ownership of the
shares held by the Samuel Bloomberg Family Trusts and Carolina Bloomberg.
Also includes 208,916 shares subject to options granted by the Company to
Mr. Bloomberg exercisable within 60 days of the date of this Prospectus.
The 85,119 shares sold by Mr. Bloomberg include 17,234 shares sold by
Carolina Bloomberg and 16,182 shares sold, in the aggregate, by the Samuel
Bloomberg Family Trusts. After the Offering, Carolina Bloomberg will hold
7,540 shares (including 313 shares issuable upon the exercise of warrants)
and the Samuel Bloomberg Family Trusts will hold, in the aggregate, 32,730
shares.
(10) Includes 26,240 shares held by trusts for the benefit of Mr. Stone's
children. Mr. Stone expressly disclaims beneficial ownership of these
shares. Also includes 114,978 shares subject to options granted by the
Company to Mr. Stone exercisable within 60 days of the date of this
Prospectus.
(11) Includes 12,595 shares subject to options granted by the Company
exercisable within 60 days of the date of this Prospectus.
(12) Includes 8,083 shares held, in the aggregate, by trusts for the benefit of
Mr. Bloomberg's children. Mr. Bloomberg expressly disclaims beneficial
ownership of these shares. Also includes 48,912 shares held, in the
aggregate, by the Samuel Bloomberg Family Trusts, of which Mr. Bloomberg is
a trustee. Mr. Bloomberg expressly disclaims beneficial ownership of these
shares. Also includes 6,560 shares subject to options granted by the
Company to Mr. Bloomberg exercisable within 60 days of the date of this
Prospectus and 609 shares issuable upon exercise of outstanding warrants.
The 17,478 shares sold by Mr. Bloomberg do not include 16,182 shares sold,
in the aggregate, by the Samuel Bloomberg Family Trusts. After the
Offering, the Samuel Bloomberg Family Trusts will hold, in the aggregate,
32,730 shares.
(13) Includes 107,584 shares subject to options granted by the Company
exercisable within 60 days of the date of this Prospectus and 84 shares
issuable upon exercise of outstanding warrants.
(14) Includes shares held by Weston Presidio Offshore Capital C.V. ("Weston
Presidio"). See Note 4 above. Mr. Cronin is a general partner of WP Capital
Management, L.P., the general partner of Weston Presidio, and as such, may
be deemed to share voting and investment power with respect to all shares
held by Weston Presidio. Mr. Cronin expressly disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
therein.
(15) Includes 313 shares issuable upon exercise of outstanding warrants.
(16) See Notes 9 through 14 above.
50
<PAGE> 53
CERTAIN TRANSACTIONS
CERTAIN FINANCING TRANSACTIONS
On November 28, 1995, the Company sold an aggregate of 911,787 shares of
its Series A Preferred Stock in a private venture capital financing at a price
of $6.46 per share. Among the purchasers in the initial closing of this
financing were Weston Presidio Offshore Capital, C.V. and BNP Venture Holding
Corp., each 5% stockholders of the Company, and Matthew Bronfman and Jeffrey
Bloomberg, directors of the Company, and Armin Biller and Harriet Bloomberg,
family members of directors and executive officers of the Company. In connection
with such transaction, Bloomberg Associates, Inc., of which Jeffrey Bloomberg, a
director of the Company, is President, received $150,000 in consulting fees in
connection with a capital restructuring of the Company. At the same time, the
Company repurchased its outstanding Common Stock of the Company then held by
Matthew Bronfman (a director of the Company) and certain of his family members,
for approximately $550,000 in cash and a $1.0 million subordinated promissory
note accruing interest at an effective rate of 10.8% per annum (the "Redemption
Note"). The Redemption Note must be repaid in full upon the closing of the
Offering, together with an additional payment of approximately $814,000 due to
such redeeming stockholders upon the consummation of the Offering.
On May 13, 1996, in connection with the Bryn Mawr Acquisition, the Company
sold an additional 788,349 shares of Series A Preferred Stock for net proceeds
of $5.1 million to Advent Direct Investment Program Limited Partnership and
Global Private Equity II Limited Partnership, each a 5% stockholder of the
Company, and to Carolina Bloomberg, the spouse of Samuel Bloomberg.
On March 7, 1997, and in connection with a $2.0 million bridge loan from a
predecessor of BankBoston, the Company's existing lender ("BankBoston"), the
Company entered into a Warrant and Debenture Commitment with certain of its
stockholders including Global Private Equity II Limited Partnership, Weston
Presidio Offshore Capital, C.V., Advent Direct Investment Program Limited
Partnership, BNP Venture Holding Corp., Jeffrey Bloomberg, Matthew Bronfman,
Carolina Bloomberg, Harriet Bloomberg and Armin Biller. Pursuant to the terms of
the Warrant and Debenture Commitment, the participating stockholders agreed,
upon a put by BankBoston or at the request of the Company, to purchase 10%
Convertible Debentures in an aggregate amount of $2.0 million (the
"Debentures"). In consideration for this obligation, the Company issued to the
participating stockholders warrants to purchase 37,138 shares of Common Stock at
an exercise price of $6.46 per share. The Debentures were never issued because
the bridge loan was paid in full on May 30, 1997.
On May 30, 1997, in connection with the HiFi Buys Acquisition, the Company
sold an aggregate of 866,425 shares of its Series B Preferred Stock to
additional and existing investors at $8.08 per share. Among such investors were
Weston Presidio Offshore Capital, C.V., Advent Direct Investment Program Limited
Partnership, BNP Venture Holding Corp., PNC Capital Corp, Jeffrey Bloomberg,
Matthew Bronfman, Carolina Bloomberg and Harriet Bloomberg. At the same time,
the Company issued $15 million in Senior Subordinated Notes (the "Senior Notes")
and detachable warrants to purchase an aggregate of up to 629,566 shares of
Common Stock with an exercise price of $.002 per share to PNC Capital Corp,
Seacoast Capital Partners, L.P., Exeter Venture Lenders, L.P., and Exeter Equity
Partners, L.P. (the "Exeter Entities"), each a 5% stockholder of the Company.
Each of PNC Capital Corp and Seacoast Capital Partners, L.P. holds $5.0 million
of the Senior Notes and warrants to purchase 209,856 shares of Common Stock, and
each of the Exeter Entities holds $2.5 million of the Senior Notes and Warrants
to purchase 104,928 shares of Common Stock. Each Exeter Entity is selling all
104,928 shares of Common Stock issuable upon exercise of such warrants as a
Selling Stockholder in the Offering. Seacoast Capital Partners, L.P. is selling
50,000 shares of Common Stock issuable upon partial exercise of its warrants as
a Selling Stockholder in the Offering.
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OTHER TRANSACTIONS AND RELATIONSHIPS
In May 1996, in connection with the Bryn Mawr Acquisition, the Company
entered into a consulting agreement with Fred Lokoff, the former owner of Bryn
Mawr and a former director of the Company. This consulting agreement was amended
as of April 23, 1997 and currently has a term of four years (the "Consulting
Period") expiring May 2000. Pursuant to the amended agreement, the Company is
obligated to pay Mr. Lokoff out-of-pocket expenses plus a monthly payment of
$20,833 for each month during the first year of the Consulting Period, and
$4,167 for each month during years three and four of the Consulting Period. The
Company also entered into a 15 year lease of its King of Prussia, Pennsylvania
distribution facility with an affiliate of Mr. Lokoff and agreed to sublease a
portion in this distribution facility back to another affiliate of Mr. Lokoff at
no rental charge. During fiscal 1997, the Company paid approximately $276,000 in
total rent under such lease.
The Company leases space for its Crystal Mall store in Waterford,
Connecticut from an affiliate of NED. This mall is managed by WellsPark Group
Limited Partnership. Steven Fischman, who will serve as director of the Company
commencing upon the consummation of the Offering, is the President of NED and
the Vice Chairman of WellsPark Group Limited Partnership. The Company paid such
lessor $167,043 in rent and related charges during fiscal 1997, and $204,594 in
rent and related charges in fiscal 1998 through May 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
Effective upon the consummation of the Offering, the authorized capital
stock of the Company will consist of 30,000,000 shares of Common Stock, $.01 par
value, and 10,000,000 shares of Preferred Stock, $.01 par value. Prior to the
Offering, there were outstanding an aggregate of 1,700,136 shares of Series A
Preferred Stock and 866,425 shares of Series B Preferred Stock which will
automatically convert into an aggregate of 2,566,561 shares of Common Stock upon
the consummation of the Offering. In addition, prior to the Offering, there were
outstanding warrants to purchase an aggregate of 771,664 shares of Common Stock
at a weighted average exercise price of $1.42. Of these, warrants to purchase
259,856 shares of Common Stock will be exercised immediately prior to the
closing of the Offering and these shares will be sold by Selling Stockholders in
the Offering.
The following summary description of the Company's capital stock is not
intended to be complete and is qualified in its entirety by reference to the
provisions of applicable law and to the Company's Amended and Restated
Certificate of Incorporation (the "Charter") and Amended and Restated By-laws
(the "By-laws"), filed as exhibits to the Registration Statement of which this
Prospectus is a part. The Charter and By-laws will be effective upon the
consummation of the Offering.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock which the Company may designate and issue in the
future. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding Preferred Stock. Holders of
Common Stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of Common Stock are, and the shares offered by the
Company in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future.
PREFERRED STOCK
Under the terms of the Charter, the Board of Directors is authorized,
subject to any limitations prescribed by law, without stockholder approval, to
issue shares of Preferred Stock in one or more series. Each such series of
Preferred Stock shall have such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors. The purpose of authorizing the Board of Directors to issue
Preferred Stock and determine its rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of Preferred
Stock, but the Company will, effective upon the consummation of the Offering,
authorize and reserve shares of Series A Junior Preferred Stock for issuance in
connection with the Rights Plan discussed below. See "Risk Factors -- Effect of
Certain Charter and By-law Provisions; Antitakeover Provisions."
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DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or the business combination is approved in a
prescribed manner, or certain other conditions are satisfied. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The By-laws provide that (i) the number of directors shall be determined
from time to time by resolution adopted by a majority of the Board of Directors,
(ii) vacancies on the Board of Directors must be filled by the Board unless and
until filled by the stockholders, and (iii) directors may be removed only for
cause by the vote of the holders of at least 75% of the shares then entitled to
vote at an election of directors.
The By-laws provide for a classified Board of Directors consisting of three
classes of directors having staggered terms of three years each, with each of
the classes being as nearly equal as possible. A single class of directors will
be elected each year at the Company's annual meeting of stockholders. Subject to
transition provisions, each director elected at each such meeting will serve for
a term ending on the date of the third annual meeting of stockholders after his
election and until his successor has been elected and duly qualified. See
"Management -- Board Composition."
The Charter empowers the Board of Directors, when considering a tender
offer or merger or acquisition proposal, to take into account any factors that
the Board of Directors determines to be relevant, including, without limitation,
(i) the interests of the Company's stockholders, including the possibility that
these interests might be best served by the continued independence of the
Company, (ii) whether the proposed transaction might violate federal or state
laws, (iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the outstanding
capital stock of the Company, but also the market price for the capital stock of
the Company over a period of years, the estimated price that might be achieved
in a negotiated sale of the Company as a whole or in part or through orderly
liquidation, the premiums over market price for the securities of other
corporations in similar transactions, current political, economic and other
factors bearing on securities prices and the Company's financial condition and
future prospects, and (iv) the social, legal and economic effects upon
employees, suppliers, customers, creditors and others having similar
relationships with the Company, upon the communities in which the Company
conducts its business and upon the economy of the state, region and nation.
Under the By-laws, special meetings of the stockholders may be called only
by 51% of the Board of Directors then in office, or by the Chairman of the Board
or the Chief Executive Officer, and only matters set forth in the notice calling
any such meeting may be considered at the meeting. The Charter provides that
stockholder actions must be taken at a meeting at which a quorum of stockholders
is present in person or by proxy and that stockholders will not be entitled to
take action by written consent in lieu of a meeting. The By-laws provide that
the Board of Directors may postpone a scheduled stockholders' meeting, and the
Chairman of the Board may adjourn a stockholders' meeting even if a quorum is
present. Nominations for election to the Board of Directors may be made either
by the Board or by holders of at least 1% of the issued and outstanding voting
shares of the Company who have held such stock for at least one year.
Stockholder nominations of director nominees who are not nominated by the Board
of Directors must be submitted to the Secretary of the Company not less than 120
days prior to the date when the Corporation first mailed to the stockholders its
proxy statement for the previous year's annual meeting.
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The foregoing provisions could have the effect of delaying until the next
annual stockholders meeting stockholder actions which are favored by the holders
of a majority of the then outstanding voting securities of the Company. These
provisions may also discourage another person or entity from making a tender
offer for the Company's Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders' meeting, and not by
written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Charter requires the affirmative vote of the holders of at least 75% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions. A 75% vote of stockholders is required for the stockholders
to adopt, amend or repeal any By-law provisions. The By-laws may also be amended
or repealed by a majority vote of the Board of Directors subject to any
limitations set forth in the By-laws.
STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors will adopt, effective upon the
consummation of the Offering, a Stockholder Rights Plan (the "Rights Plan"). The
adoption of the Rights Plan by the Board is likely to make it more difficult for
a third party to acquire the Company or large portions of its Common Stock. Set
forth below is a general summary of the Rights Plan. Such summary is qualified
in its entirety by reference to the Rights Plan, a copy of which is included as
an exhibit to the Registration Statement of which this Prospectus is a part.
One preferred stock purchase right (a "Right") will be distributed, by way
of dividend for each outstanding share of Common Stock, to stockholders of
record as of a day prior to the effectiveness of the Registration Statement of
which this Prospectus is a part (the "Record Date"). In addition, one Right will
automatically attach to each share of Common Stock issued between the Record
Date and the Distribution Date (as hereinafter defined). Each Right entitles the
holder thereof to purchase one one-thousandth of one share (each, a "Unit") of
the Company's Series A Junior Participating Cumulative Preferred Stock, $.01 par
value (the "Junior Preferred Stock") at a cash purchase price per Unit of $100,
subject to adjustment. The Rights and their exercise price will be adjusted to
take into account certain dilutive events.
The Junior Preferred Stock shall rank prior and senior to the Common Stock
with respect to dividends and distributions but junior to any series or class of
Preferred Stock that is designated as senior to the Junior Preferred Stock. The
holders of the Junior Preferred Stock shall be entitled to receive quarterly
dividends when, as and if declared by the Board of Directors, commencing on the
first day of March, June, September or December occurring after the first
issuance of a share or fraction of a share of the Junior Preferred Stock, in an
amount per share equal to the greater of (i) $1.00, or (ii) 1,000 times the
aggregate per share amount of all dividends declared on the Common Stock.
Dividends shall accrue and be cumulative but shall not accrue interest. Except
as otherwise provided by law or set forth below, the holders of shares of Junior
Preferred Stock shall vote together with the Common Stock, and any other capital
stock of the Company having general voting rights, as one class. Each share of
Junior Preferred Stock shall entitle the holder thereof to 1,000 votes on all
matters submitted to a vote.
Whenever dividends payable on any shares of Junior Preferred Stock shall be
in arrears in an amount equal to two full quarterly dividends (whether or not
declared and whether or not consecutive), the holders of the Junior Preferred
Stock, voting separately as a single class, shall have the right to elect two
directors of the Company at a special meeting of the stockholders or at the
Company's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders. In such event, the size of the Board shall be increased
accordingly and the vacancies
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created thereby shall be filled by the vote of the holders of the Junior
Preferred Stock. Such election right shall terminate at such time as all arrears
in dividends shall have been paid or declared and set apart for payment,
whereupon the terms of office of all Junior Preferred Directors shall terminate.
Upon the earlier to occur of (i) the tenth calendar day after the
announcement that an "Acquiring Person" has acquired beneficial ownership of
more than 15% of the outstanding shares of Common Stock (such date being the
"Stock Acquisition Date"), or (ii) the tenth business day following the
announcement of a tender offer or exchange offer that, upon consummation, would
result in a person or group becoming the beneficial owner of more than 15% of
the outstanding shares of Common Stock (such date being the "Tender Offer
Date"); the rights shall separate from the Common Stock and become exercisable
(such earlier date of the Stock Acquisition Date and the Tender Offer Date being
the "Distribution Date"). An "Acquiring Person" shall be defined as a person or
group of affiliated or associated persons that has acquired more than 15% of the
outstanding shares of Common Stock, but shall not be deemed to include any
underwriters in their capacities as such. No person who is a stockholder of the
Company immediately prior to the consummation of the Offering will be an
Acquiring Person unless that person acquires beneficial ownership of both (i)
more than 20% of the outstanding Common Stock (other than Common Stock issuable
upon exercise of stock options granted under an incentive plan approved by the
Board of Directors), and (ii) a greater percentage of the then outstanding
Common Stock than the percentage held by such person as of the consummation of
the Offering.
At any time after a Distribution Date, the Board may, in its discretion,
exchange all or any part of the then outstanding and exercisable Rights for
shares of Common Stock or Units of Junior Preferred Stock. The exchange ratio
shall be one share of Common Stock or one Unit of Junior Preferred Stock for
each Right. However, the Board will not have the authority to effect such an
exchange after any person becomes the beneficial owner of 50% or more of the
Common Stock of the Company. The Rights may be redeemed in whole but not in
part, at a price of $0.001 per Right by the Board of Directors only until the
earlier of (i) the tenth calendar year after a Distribution Date, or (ii) the
expiration date of the Rights Plan. The Board in its sole discretion may amend
the Rights Plan until a Distribution Date. After a Distribution Date, the Board
may make certain amendments to the Rights Agreement but none that will adversely
affect the interests of Rights holders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in certain circumstances involving certain wrongful acts, such as (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
(iv) for any transaction from which the director derives an improper personal
benefit. These provisions do not limit or eliminate the rights of the Company or
any stockholder to seek non-monetary relief, such as an injunction or
rescission, in the event of a breach of a director's fiduciary duty. These
provisions will not alter a director's liability under federal securities laws.
The Charter also contains provisions indemnifying the directors and officers of
the Company to the fullest extent permitted by the DGCL. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
BankBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurances with respect to the effect, if any, that public
sales of shares or the availability of shares will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market following the Offering, or the perception that
such sales may occur, could adversely affect the market price of the Common
Stock and could impair the Company's future ability to obtain capital through an
offering of equity securities. See "Risk Factors -- Shares Eligible for Future
Sale."
As of March 31, 1998, the Company had outstanding 3,882,690 shares of
Common Stock (assuming conversion of all outstanding Preferred Stock into an
aggregate of 2,566,561 shares of Common Stock and the exercise of warrants to
purchase 259,856 shares of Common Stock) held of record by 23 stockholders. Upon
completion of the Offering, the Company will have 6,082,690 shares of Common
Stock outstanding (assuming no exercise of outstanding options or warrants other
than warrants exercisable into 259,856 shares of Common Stock being sold by a
Selling Stockholder in the Offering, but assuming conversion of all outstanding
Preferred Stock into 2,566,561 shares of Common Stock, each of which will occur
upon consummation of the Offering). Of these outstanding shares, the 2,710,000
shares of Common Stock being sold in the Offering will be freely tradable
without restriction or further registration under the Securities Act, except for
shares acquired by an "affiliate" or "affiliates" of the Company (as that term
is used in Rule 144 promulgated under the Securities Act, "Affiliate" or
"Affiliates"), which may generally only be sold in compliance with the
limitations of Rule 144 as described below.
SALES OF RESTRICTED SHARES
The remaining 3,372,690 shares of Common Stock were issued and sold by the
Company prior to the Offering in private transactions and therefore constitute
"restricted securities" under Rule 144. As a result, such shares may not be
resold unless they are registered under the Securities Act or are sold pursuant
to an applicable exemption from registration, such as Rule 144. The Company and
its existing stockholders holding all of the Preferred Stock and Common Stock
outstanding immediately prior to the Offering have agreed pursuant to lock-up
agreements ("Lock-Up Agreements") not to sell, offer or contract to sell, sell
short, engage in certain hedging transactions or otherwise dispose of, with
certain exceptions, any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of BT Alex. Brown
Incorporated. See "Underwriting."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned
"restricted" shares (as defined under Rule 144) for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock or (ii) the average weekly trading volume of the Common Stock
reported through the Nasdaq Stock Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. In addition, a stockholder who is not deemed an
Affiliate at any time during the 90 days preceding a sale and who has
beneficially owned his shares for at least two years, is entitled to sell such
shares under Rule 144(k) without regard to volume limitations, manner of sale
provisions, notice requirements or the availability of current public
information concerning the Company.
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OPTIONS
The Company has granted options to purchase an aggregate of 845,059 shares
of Common Stock to certain directors, officers and employees pursuant to the
1995 Stock Option Plan and, upon the consummation of the Offering, will grant
options to purchase 209,988 shares of Common Stock to certain directors,
officers and employees pursuant to the 1998 Plan. All shares issuable upon
exercise of options are subject to Lock-up Agreements or to a lock-up period of
120 days pursuant to the Company's stock option agreements.
WARRANTS
As of the date of this Prospectus, warrants to purchase an aggregate of
511,808 shares of Common Stock were outstanding, at an average weighted exercise
price of $2.13 per share, excluding warrants to purchase 259,856 shares which
will be exercised and sold in the Offering. All of these warrants were issued by
the Company between March 7, 1997 and May 30, 1997. All of the shares issuable
pursuant to such warrants are subject to Lock-up Agreements.
REGISTRATION RIGHTS
The Company has entered into registration rights agreements with certain of
its stockholders owning an aggregate of 3,884,498 shares of Common Stock, which
provide those stockholders with prescribed rights, subject to certain conditions
and limitations, to require the Company to register the sale of shares of Common
Stock held by such stockholders under the Securities Act or to include such
shares in a registered offering being effected by the Company for its own
account. Copies of such registration rights agreements are included as exhibits
to the Registration Statement of which this Prospectus is a part. All of the
shares entitled to the benefits of such registration rights agreements are
subject to Lock-up Agreements.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated, PaineWebber Incorporated and Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated ("Dain Rauscher Wessels") have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES(1)
----------- -----------
<S> <C>
BT Alex. Brown Incorporated.................................
PaineWebber Incorporated....................................
Dain Rauscher Wessels.......................................
-----------
Total............................................. 2,710,000
===========
</TABLE>
- ---------------
(1) Includes 259,856 shares being sold upon the exercise of warrants which the
Underwriters are acquiring from certain Selling Stockholders.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the initial public offering, the
public offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 406,500
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,710,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,710,000 shares are being offered.
The Company and Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Shareholders of the Company, holding in the aggregate 3,298,892 shares of
Common Stock and warrants to purchase 510,869 shares of Common Stock, have
agreed not to offer, sell or otherwise dispose of any such Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated. BT Alex. Brown Incorporated. See "Shares
Eligible for Future Sale."
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In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market in accordance with Regulation M under the
Exchange Act. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with the Offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the Common Stock; and syndicate short positions involve the sale by the
Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Selling Shareholders in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the securities sold
in the Offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize or maintain or otherwise affect the
market price of the Common Stock, which may be higher than the price that might
otherwise prevail in the open market. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations are prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalization and stages of development
of other companies which the Company and the Representatives of the Underwriters
believed to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
LEGAL MATTERS
An opinion will be delivered by Goulston & Storrs, P.C., Boston,
Massachusetts, to the effect that the shares of Common Stock being offered
hereby will, when issued as contemplated by this Prospectus, be validly issued,
fully paid and non-assessable. Effective upon the closing of the Offering, Kitt
Sawitsky will serve as Secretary of the Company and Daniel Avery will serve as
Assistant Secretary of the Company. Mr. Sawitsky and Mr. Avery are both
directors and shareholders of Goulston & Storrs, P.C., counsel to the Company.
Certain legal matters related to the Offering will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company as of September 30,
1996 and 1997, for each of the years in the three-year period ended September
30, 1997, and for the six month period ended March 31, 1998 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report of Deloitte & Touche LLP given upon the authority
of said firm as experts in accounting and auditing.
The financial statements of HiFi Buys Incorporated for the years ended
December 31, 1996, 1995 and 1994, included in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report of Deloitte & Touche LLP given upon the authority of said firm as experts
in accounting and auditing.
The combined financial statements of Bryn Mawr Radio and Television Centre,
Inc. and affiliate for the year ended August 31, 1995, included in this
Prospectus have been audited by Deloitte &
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Touche LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report of Deloitte &
Touche LLP given upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 under the Securities Act relating to
the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission (the "Commission") in Washington, D.C. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions having been
omitted from this Prospectus in accordance with the rules and regulations of the
Commission. Statements contained in this Prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, the exhibits thereto and the financial statements,
notes and schedules filed as a part thereof. The Registration Statement may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549, and at the
Commission's regional offices located at Seven World Trade Center, New York, NY
10048 and at 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials, including the Registration Statement, can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, DC
20549 at prescribed rates. The Commission also maintains a World Wide Web site
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission. The site and
this Registration Statement may be accessed at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements certified by its independent accountants and
make available quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year.
61
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
TWEETER HOME ENTERTAINMENT GROUP, INC.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of September 30, 1996 and
1997 and March 31, 1998................................ F-3
Consolidated Statements of Income for the Years Ended
September 30, 1995, 1996 and 1997, and the Six Months
Ended March 31, 1997 (unaudited) and March 31, 1998.... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended September 30, 1995, 1996 and 1997,
and the Six Months Ended March 31, 1998................ F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1996 and 1997, and the Six Months
Ended March 31, 1997 (unaudited) and March 31, 1998.... F-6
Notes to Consolidated Financial Statements................ F-7
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(unaudited)............................................ F-23
HIFI BUYS INCORPORATED
Independent Auditors' Report.............................. F-26
Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994 and the Three Months Ended March
31, 1997 (unaudited) and March 31, 1996 (unaudited).... F-27
Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994 and the Three Months Ended March
31, 1997 (unaudited) and March 31, 1996 (unaudited).... F-28
Notes to Financial Statements............................. F-29
BRYN MAWR RADIO AND TELEVISION CENTRE, INC.
Independent Auditors' Report.............................. F-32
Combined Statement of Operations for the Year Ended August
31, 1995 and the Six Months Ended February 29, 1996
(unaudited) and the Six Months Ended February 28, 1995
(unaudited)............................................ F-33
Combined Statement of Cash Flows for the Year Ended August
31, 1995 and the Six Months Ended February 29, 1996
(unaudited) and the Six Months Ended February 28, 1995
(unaudited)............................................ F-34
Notes to Financial Statements............................. F-35
</TABLE>
F-1
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Tweeter Home Entertainment Group, Inc.
We have audited the accompanying consolidated balance sheets of Tweeter
Home Entertainment Group, Inc. as of September 30, 1996 and 1997 and March 31,
1998, and the related statements of income, stockholders' equity (deficit), and
cash flows for each of the three years in the period ended September 30, 1997
and the six month period ended March 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 1996 and
1997 and March 31, 1998, and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 1997 and the six
month period ended March 31, 1998 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 5, 1998
F-2
<PAGE> 66
TWEETER HOME ENTERTAINMENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
YEARS ENDED SIX MONTHS SIX MONTHS
SEPTEMBER 30, ENDED ENDED
------------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 438,607 $ 1,156,837 $ 1,138,808
Accounts receivable, net of allowance for doubtful
accounts of $440,000 at September 30, 1996, $631,000 at
September 30, 1997 and $600,000 at March 31, 1998
(unaudited)............................................. 2,791,993 5,472,779 7,396,312
Inventory................................................. 15,352,307 31,160,043 35,471,117
Deferred tax assets....................................... 596,454 1,220,481 1,276,020
Prepaid expenses and other current assets................. 308,867 822,904 649,138
----------- ----------- -----------
Total current assets................................ 19,488,228 39,833,044 45,931,395
PROPERTY AND EQUIPMENT -- Net............................... 13,490,304 17,967,504 17,889,050
DEFERRED TAX ASSET.......................................... 754,464 59,397 108,605
OTHER ASSETS -- Net......................................... -- 331,870 496,970
GOODWILL -- Net............................................. 4,886,287 20,496,115 20,249,636
----------- ----------- -----------
TOTAL............................................... $38,619,283 $78,687,930 $84,675,656
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ -- $ 400,000 $ 400,000
Amount due to bank........................................ 1,880,743 4,948,702 4,044,346
Accounts payable.......................................... 11,252,458 11,456,967 7,378,773
Accrued expenses.......................................... 3,138,991 8,392,505 14,866,368
Customer deposits......................................... 851,089 1,255,024 1,629,154
Deferred warranty revenue................................. 468,418 1,509,481 1,329,757
----------- ----------- -----------
Total current liabilities........................... 17,591,699 27,962,679 29,648,398
----------- ----------- -----------
LONG-TERM DEBT:
Note payable to bank...................................... 9,700,000 14,500,000 15,100,000
Subordinated debt......................................... 1,000,000 16,387,816 16,207,614
----------- ----------- -----------
Total long-term debt................................ 10,700,000 30,887,816 31,307,614
----------- ----------- -----------
OTHER LONG-TERM LIABILITIES:
Rent related accruals..................................... 2,063,887 2,421,082 2,670,423
Deferred warranty......................................... 650,750 2,175,577 1,555,710
Other long-term liabilities............................... -- 318,780 258,720
----------- ----------- -----------
Total other long-term liabilities................... 2,714,637 4,915,439 4,484,853
Total liabilities................................... 31,006,336 63,765,934 65,440,865
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A Convertible Preferred Stock, $.01 par value;
authorized, 4,000,000 shares; 1,700,136 shares issued
and outstanding in 1998, 1997 and 1996 (liquidation
preference, $14,432,999 as of March 31, 1998); no shares
outstanding pro forma in 1998........................... 11,596,868 13,399,386 14,432,999 --
Series B Convertible Preferred Stock, $.01 par value;
authorized, 4,000,000 shares; 866,425 shares issued and
outstanding in 1998 and 1997 (liquidation preference
$7,741,248 as of March 31, 1998); no shares outstanding
pro forma in 1998....................................... -- 7,191,221 7,741,248 --
----------- ----------- ----------- -----------
Total: 11,596,868 20,590,607 22,174,247 --
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding actual and
pro forma...............................................
Common stock, $.01 par value, authorized: 30,000,000
shares; 2,755,202 shares issued in 1996, 1997 and 1998
(5,321,763 shares issued pro forma in 1998)............. 27,552 27,552 27,552 53,218
Additional paid-in capital................................ (3,057,683) (2,732,300) (2,732,300) 19,416,281
Retained earnings (deficit)............................... 627,727 (1,382,346) 1,346,809 1,346,809
Note receivable from officer.............................. (31,500) (31,500) (31,500) (31,500)
----------- ----------- ----------- -----------
Total............................................... (2,433,904) (4,118,594) (1,389,439) 20,784,808
Less treasury stock: 1,698,929 shares at cost............. (1,550,017) (1,550,017) (1,550,017) (1,550,017)
----------- ----------- ----------- -----------
Total stockholders' equity (deficit)................ (3,983,921) (5,668,611) (2,939,456) $19,234,791
----------- ----------- ----------- -----------
TOTAL............................................... $38,619,283 $78,687,930 $84,675,656
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 67
TWEETER HOME ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
------------------------------------------ ---------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total revenue.................. $ 60,121,370 $ 80,606,727 $132,525,037 $ 60,582,539 $129,129,712
Cost of sales.................. 39,167,031 51,816,041 86,314,918 39,180,469 84,280,356
------------ ------------ ------------ ------------ ------------
Gross profit................... 20,954,339 28,790,686 46,210,119 21,402,070 44,849,356
Selling expenses............... 15,404,513 21,993,070 35,567,940 14,797,225 30,207,653
Corporate, general and
administrative expenses...... 3,246,443 4,715,697 8,102,190 3,792,702 5,387,351
Amortization of goodwill....... 65,268 129,273 487,084 119,562 455,913
------------ ------------ ------------ ------------ ------------
Income from operations......... 2,238,115 1,952,646 2,052,905 2,692,581 8,798,439
Interest expense............... 628,700 616,879 1,807,660 513,520 1,610,446
------------ ------------ ------------ ------------ ------------
Income before income taxes..... 1,609,415 1,335,767 245,245 2,179,061 7,187,993
Income tax expense (benefit)... (173,498) (453,448) 98,962 876,337 2,875,198
------------ ------------ ------------ ------------ ------------
NET INCOME..................... $ 1,782,913 $ 1,789,215 $ 146,283 $ 1,302,724 $ 4,312,795
============ ============ ============ ============ ============
Accretion of preferred stock... -- 1,035,942 2,156,356 901,261 1,583,640
------------ ------------ ------------ ------------ ------------
Net income (loss) available to
common shareholders.......... 1,782,913 753,273 (2,010,073) 401,463 2,729,155
============ ============ ============ ============ ============
Basic earnings (loss) per
share........................ $ 0.53 $ 0.39 $ (1.20) $ 0.24 $ 1.63
============ ============ ============ ============ ============
Weighted average shares
outstanding.................. 3,371,435 1,940,272 1,672,506 1,672,506 1,672,506
============ ============ ============ ============ ============
Diluted earnings (loss) per
share........................ $ 0.53 $ 0.38 $ (1.20) $ 0.23 $ 0.93
============ ============ ============ ============ ============
Weighted average shares
outstanding.................. 3,371,435 1,983,137 1,672,506 1,714,911 4,615,999
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 68
TWEETER HOME ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED NOTE TREASURY STOCK
------------------- PAID-IN EARNINGS RECEIVABLE -----------------------
SHARES AMOUNT CAPITAL (DEFICIT) FROM OFFICER SHARES AMOUNT
--------- ------- ----------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994...... 2,755,202 $27,552 $ -- $(4,117,777) $(31,500) $ -- $ --
Net income.................. -- 1,782,913 --
Subchapter S
distributions............. -- (118,615) --
--------- ------- ----------- ----------- -------- --------- -----------
BALANCE, SEPTEMBER 30, 1995... 2,755,202 27,552 -- (2,453,479) (31,500) -- --
Treasury stock acquired..... -- 1,698,929 (1,550,017)
Reclassification of
undistributed losses upon
Subchapter S revocation... (3,057,683) 3,057,683
Subchapter S
distributions............. -- (729,750) --
Accretion of Series A
Convertible Preferred
Stock..................... -- (1,035,942) --
Net income.................. -- 1,789,215 --
--------- ------- ----------- ----------- -------- --------- -----------
BALANCE, SEPTEMBER 30, 1996... 2,755,202 27,552 (3,057,683) 627,727 (31,500) 1,698,929 (1,550,017)
Issuance of warrants in
connection with
subordinated debt
offering.................. -- 325,383 --
Accretion of Series A
Convertible Preferred
Stock..................... -- (1,802,520) --
Accretion of Series B
Convertible Preferred
Stock..................... -- (353,836) --
Net income.................. -- 146,283 --
--------- ------- ----------- ----------- -------- --------- -----------
BALANCE, SEPTEMBER 30, 1997... 2,755,202 27,552 (2,732,300) (1,382,346) (31,500) 1,698,929 (1,550,017)
Accretion of Series A
Convertible Preferred
Stock..................... -- (1,033,613) --
Accretion of Series B
Convertible Preferred
Stock..................... -- (550,027) --
Net income.................. -- 4,312,795 --
--------- ------- ----------- ----------- -------- --------- -----------
BALANCE, MARCH 31, 1998....... 2,755,202 $27,552 $(2,732,300) $ 1,346,809 $(31,500) 1,698,929 $(1,550,017)
========= ======= =========== =========== ======== ========= ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
BALANCE, OCTOBER 1, 1994...... $(4,121,725)
Net income.................. 1,782,913
Subchapter S
distributions............. (118,615)
-----------
BALANCE, SEPTEMBER 30, 1995... (2,457,427)
Treasury stock acquired..... (1,550,017)
Reclassification of
undistributed losses upon
Subchapter S revocation...
Subchapter S
distributions............. (729,750)
Accretion of Series A
Convertible Preferred
Stock..................... (1,035,942)
Net income.................. 1,789,215
-----------
BALANCE, SEPTEMBER 30, 1996... (3,983,921)
Issuance of warrants in
connection with
subordinated debt
offering.................. 325,383
Accretion of Series A
Convertible Preferred
Stock..................... (1,802,520)
Accretion of Series B
Convertible Preferred
Stock..................... (353,836)
Net income.................. 146,283
-----------
BALANCE, SEPTEMBER 30, 1997... (5,668,611)
Accretion of Series A
Convertible Preferred
Stock..................... (1,033,613)
Accretion of Series B
Convertible Preferred
Stock..................... (550,027)
Net income.................. 4,312,795
-----------
BALANCE, MARCH 31, 1998....... $(2,939,456)
===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 69
TWEETER HOME ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 1,782,913 $ 1,789,215 $ 146,283 $ 1,302,724 $ 4,312,795
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 950,132 1,383,235 2,798,404 1,099,537 1,928,655
Loss on disposal of equipment...................... 63,467 -- 18,845 --
Deferred income tax provision (benefit)............ (173,498) (1,177,420) 71,040 58,683 (104,747)
Changes in operating assets and liabilities, net of
effects from acquisition of businesses:
Increase in accounts receivable.................. (286,912) (631,945) (1,251,986) (1,071,793) (1,923,533)
Increase in inventory............................ (306,172) (2,411,139) (6,534,336) (2,226,461) (4,311,074)
(Increase) decrease in prepaid expenses and other
current assets................................. (2,512) (250,391) (277,537) 29,738 (231,810)
Increase (decrease) in accounts payable and
accrued expenses............................... (399,485) 848,630 (936,490) 521,238 2,395,675
Increase (decrease) in customer deposits......... 422,184 (329,713) (242,565) 5,038 374,130
Increase in deferred rent........................ 29,867 1,441,315 357,195 139,597 249,341
Decrease in deferred warranty revenue............ -- (157,113) (710,610) (254,465) (799,591)
Increase (decrease) in other liabilities......... -- -- 318,780 -- (60,060)
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in) operating
activities................................... 2,079,984 504,674 (6,242,977) (396,164) 1,829,781
----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (2,620,885) (2,865,784) (3,972,465) (1,404,026) (1,343,454)
Proceeds from sale of property and equipment......... 19,614 -- -- -- --
Acquisition of business; net of cash deferred........ -- (8,368,208) (19,539,800) -- --
----------- ------------ ------------ ----------- -----------
Net cash used in investing activities.......... (2,601,271) (11,233,992) (23,512,265) (1,404,026) (1,343,454)
----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount due to bank................................... 333,270 390,000 3,067,959 498,544 (904,356)
Proceeds from bridge loan............................ -- -- -- 2,000,000 --
Proceeds from long-term borrowings, net of debt issue
costs.............................................. 1,400,000 1,994,594 20,668,128 5,950,000 600,000
Payments of debt..................................... (850,000) (100,000) (6,675,000) (200,000)
Subchapter S distributions........................... (118,615) (729,750) -- -- --
Issuance of preferred stock.......................... -- 10,560,926 6,837,385 -- --
Treasury stock acquired.............................. -- (1,550,017) -- -- --
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in) financing
activities................................... 764,655 10,665,753 30,473,472 1,773,544 (504,356)
----------- ------------ ------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 243,368 (63,565) 718,230 (26,646) (18,029)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........... 258,804 502,172 438,607 438,607 1,156,837
----------- ------------ ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR................. $ 502,172 $ 438,607 $ 1,156,837 $ 411,961 $ 1,138,808
=========== ============ ============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................... $ 602,643 $ 538,718 $ 1,538,077 $ 522,647 $ 1,880,120
=========== ============ ============ =========== ===========
Taxes.............................................. $ -- $ 860,541 $ 358,000 $ 355,000 $ 1,080,496
=========== ============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 70
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
1. BUSINESS OF THE COMPANY
New England Audio Co., Inc. ("NEA") was organized as a Massachusetts
corporation in 1972. On June 1, 1998 NEA effected a 1 for 1.524 reverse stock
split. On June 5, 1998 NEA was reorganized as a Delaware holding company,
whereby all of the holders of capital stock, options, and warrants of NEA
exchanged their NEA securities for identical securities of Tweeter Home
Entertainment Group, Inc., a Delaware corporation ("TWEETER"), on a 1 for 1
basis. All share data in these consolidated financial statements reflect the
impact of the reverse stock split and the reorganization. The consolidated
financial statements include the accounts of NEA, the wholly owned subsidiary of
TWEETER, and NEA Delaware Inc., a Delaware corporation, the wholly owned
subsidiary of NEA (collectively referred to as the "Company"). As discussed in
Note 11, the redeemable convertible preferred stock will automatically convert
into 2,566,561 shares of common stock upon the completion of an initial public
offering. The accompanying pro forma balance sheet gives effect to this
conversion as if it had occurred on March 31, 1998.
The Company sells home audio, video, entertainment and electronic products
through a chain of 50 retail stores in New England, Mid-Atlantic and Atlanta,
Georgia markets. The Company operates under the names "Tweeter, Etc.," "Bryn
Mawr Stereo & Video" and "HiFi Buys." The Company operates in a single business
segment of retailing audio and video consumer electronic products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The accompanying consolidated statements of income
and cash flows for the six months ended March 31, 1997 are unaudited. In the
opinion of management, these financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments consisting only of normal recurring adjustments necessary for the
fair presentation, in accordance with generally accepted accounting principles,
of financial data for such periods. The results of operations and cash flows for
the six months ended March 31, 1997 and 1998 are not necessarily indicative of
results that would be expected for a full year. The data disclosed in these
notes to the consolidated financial statements for the six month period ended
March 31, 1997 is also unaudited.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with maturities of three months or less to be cash
equivalents for balance sheet and cash flow statement purposes.
INVENTORIES -- Inventories, which consist primarily of goods for resale,
are stated at the lower of cost (average cost basis) or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are computed by the straight-line method over the
estimated useful lives of the respective assets. Amortization of improvements to
leased properties is based upon the remaining terms of the leases or the
estimated useful lives of such improvements, whichever is shorter. Furniture and
fixtures are depreciated between three and seven years. Automobiles and trucks
are depreciated over three years. Leasehold interests are amortized over the
remaining life of the leases.
GOODWILL -- Goodwill and other acquisition costs are being amortized on a
straight-line basis over periods from 15 to 25 years.
F-7
<PAGE> 71
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS -- Other assets include deferred financing costs that are
being amortized over the term of the financing, using the straight-line method,
which approximates the interest method.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS -- The fair value of the
Company's assets and liabilities which constitute financial instruments as
defined in Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosure about Fair Value of Financial Instruments," approximates their
recorded value.
LONG-LIVED ASSETS -- On an ongoing basis, the Company evaluates the
carrying value of its long-lived assets based upon estimated future undiscounted
cash flows relying on a number of factors, including operating results, business
plans and certain economic projections. In addition, the Company's evaluation
considers nonfinancial data such as changes in the operating environment,
competitive information, market trends and business relationships.
ACCOUNTING FOR ESTIMATES -- In the process of preparing its consolidated
financial statements, the Company estimates the appropriate carrying value of
certain assets and liabilities that are not readily apparent from other sources.
The primary estimates underlying the Company's consolidated financial statements
include allowances for potential bad debts, obsolete inventory, goodwill, the
useful lives of its long-lived assets, the recoverability of deferred tax assets
and other matters. Management bases its estimates on certain assumptions, which
they believe are reasonable in the circumstances, and do not believe that any
change in those assumptions in the near term would have a significant effect on
the consolidated financial position or results of operations. Actual results
could differ from these estimates.
REVENUE RECOGNITION -- Revenue from merchandise sales is recognized upon
shipment or delivery of goods. Service revenue is recognized when the repair
service is completed.
EXTENDED WARRANTY SERVICE CONTRACTS -- Except as noted in the following
paragraphs, the Company offers extended warranty service contracts on behalf of
an unrelated third party on most of its products. These contracts are on a
nonrecourse basis to the Company. The Company includes revenue from the sale of
extended warranty contracts in net sales and records as cost of goods sold the
amounts due to the third party for the cost for such contracts at the time of
sale as the earnings process has been completed.
AUTOMATIC PRICE PROTECTION -- Under this program, if a customer purchases a
consumer electronics product from one of the Company's stores and a competitor
within 25 miles of the store advertises a lower price within 30 days, the
Company automatically sends a check to the customer for the difference. The
Company records the cost of its Automatic Price Protection policy to costs of
goods sold, and carries a reserve based on management's estimate of future
liability under the program.
DEFERRED WARRANTY REVENUE -- On May 13, 1996 the Company acquired
substantially all of the assets, and assumed some of the liabilities, of Bryn
Mawr Radio and Television, Inc. and affiliate ("Bryn Mawr"). Bryn Mawr sold
extended warranty contracts beyond the normal manufacturer's warranty period,
usually with terms of coverage (including the manufacturer's warranty period)
between 12 and 60 months. All revenue from the sale of extended warranty
contracts sold through July 31, 1996 was deferred and the revenue is being
amortized on a straight-line basis over the contract period. All costs related
to the contracts are charged to expense when incurred. On
F-8
<PAGE> 72
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
August 1, 1996, the Company changed Bryn Mawr's warranty sales to a third-party
provider, in conformance with the Company's practice of selling extended
warranties. As part of the purchase, the Company assumed the liability for the
deferred warranty on Bryn Mawr's books as of the transaction date, and the sales
that continued through July 31, 1996.
On May 30, 1997 the Company acquired certain assets and assumed certain
liabilities of HiFi Buys, Inc. ("HiFi Buys"). HiFi Buys sold extended warranty
contracts beyond the normal manufacturer's warranty period, usually with terms
of coverage (including the manufacturer's warranty period) between 12 and 60
months. All revenue from the sale of extended warranty contracts sold through
August 7, 1997 was deferred and the revenue is being amortized on a
straight-line basis over the contract period. Sales commission costs related to
the contracts were also deferred and the cost is being amortized on a
straight-line basis over the contract period. On August 8, 1997, the Company
changed HiFi Buys' warranty sales to a third-party provider, in conformance with
the Company's practice of selling extended warranties. As part of the purchase,
the Company assumed the liability for the deferred warranty on HiFi Buys' books
as of the transaction date, and the sales that continued through August 7, 1997.
INCOME TAXES -- Effective September 1, 1987, the stockholders elected to
have the Company taxed as an S Corporation for federal and certain state
corporate income tax purposes.
As part of a recapitalization that occurred on November 28, 1995, the
Company revoked the election made by it under Section 1362(a) of the Internal
Revenue Code. Upon revocation, the Corporation was changed from tax treatment as
an S Corporation to tax treatment as a C Corporation. As such, the Company
became responsible for federal and certain state income taxes which were
formerly the responsibilities of its stockholders.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax liabilities or assets are recognized for the
estimated tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities and for loss carryforwards based on
enacted tax laws and rates.
STORE OPENING COSTS -- Costs of noncapital nature incurred prior to store
openings are expensed as incurred.
STOCK-BASED COMPENSATION -- The Company, for the purposes of presentation
in its financial statements, follows the precepts set forth in Accounting
Principles Board Opinion No. 25 for computing compensatory aspects of
stock-based compensation. In compliance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has disclosed the required Pro Forma
effect on net income in Note 11.
DEFERRED RENT AND RENTAL EXPENSE -- Minimum rent expense is recorded using
the straight-line method over the related lease term. The difference between
current payments required and rent expense is reflected as deferred rent.
ADVERTISING -- Net costs for advertising, including electronic media,
newspaper, buyer's guides and catalogs, which are expensed as incurred, amounted
to $1,402,310, $2,574,340 and $3,561,573 for the years ended September 30, 1995,
1996 and 1997, respectively, and $1,437,306 and $2,397,219 for the six-month
periods ended March 31, 1997 and 1998, respectively.
F-9
<PAGE> 73
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE -- The Company computed earnings (loss) per share
in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings (loss) per
share is calculated based on the weighted average number of common shares
outstanding, adjusted for the nominal issuance of certain warrants. Diluted
earnings (loss) per share is based on the weighted average number of common
shares outstanding, adjusted for the nominal issuance of certain warrants,
shares of Series A Redeemable Convertible Preferred Stock and Series B
Redeemable Convertible Preferred Stock (the "preferred stock") outstanding, when
dilutive, and dilutive potential common shares (common stock options and
warrants).
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER
SHARE ("EPS")
Numerator:
Net Income................. $1,782,913 $1,789,215 $ 146,283 $1,302,724 $4,312,795
Accretion of Preferred
Stock Dividends......... -- 1,035,942 2,156,356 901,261 1,583,640
---------- ---------- ----------- ---------- ----------
Net Income (Loss) Available
to Common Shareholders..... 1,782,913 753,273 (2,010,073) 401,463 2,729,155
Denominator:
Weighted Average Common
Shares Outstanding...... 2,755,200 1,324,037 1,056,272 1,056,272 1,056,272
Nominal Issuances of
Warrants................ 616,235 616,235 616,235 616,235 616,235
---------- ---------- ----------- ---------- ----------
Weighted Average Shares
Outstanding................ 3,371,435 1,940,272 1,672,507 1,672,507 1,672,507
---------- ---------- ----------- ---------- ----------
Basic EPS.................... $ 0.53 $ 0.39 $ (1.20) $ 0.24 $ 1.63
========== ========== =========== ========== ==========
DILUTED EARNINGS (LOSS) PER
SHARE
Numerator.................... $1,782,913 $ 753,273 $(2,010,073) $ 401,463 $4,312,795
Denominator:
Weighted Average Shares
Outstanding............. 3,371,435 1,940,272 1,672,507 1,672,507 1,672,507
Potential Common Stock
Outstanding............. -- 42,865 -- 42,404 2,943,493
---------- ---------- ----------- ---------- ----------
Total........................ 3,371,435 1,983,137 1,672,507 1,714,911 4,616,000
---------- ---------- ----------- ---------- ----------
Diluted EPS.................. $ 0.53 $ 0.38 $ (1.20) $ 0.23 $ 0.93
========== ========== =========== ========== ==========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS -- The Financial Accounting Standards
Board recently issued SFAS No. 130, "Reporting Comprehensive Income," SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" and
SFAS No. 132, "Employees' Disclosures About Pensions and Other Post Retirement
Benefits." The effect of adopting these Statements is not expected to be
material to the Company's consolidated financial position or results of
operations.
F-10
<PAGE> 74
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION -- Various financial statement amounts for 1995, 1996 and
1997 have been reclassified to conform to the classifications used in the March
31, 1998 financial statements.
3. PROPERTY AND EQUIPMENT
Major classifications of property and equipment are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- -----------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements..................... $13,927,021 $17,050,196 $18,251,993
Furniture and equipment.................... 5,804,643 8,380,734 8,901,791
Automobiles and trucks..................... 208,266 247,950 302,663
Construction in progress................... 1,161,038 865,503 431,390
Leasehold interests........................ -- 165,000 165,000
----------- ----------- -----------
21,100,968 26,709,383 28,052,837
Less accumulated depreciation and
amortization............................. 7,610,664 8,741,879 10,163,787
----------- ----------- -----------
$13,490,304 $17,967,504 $17,889,050
=========== =========== ===========
</TABLE>
Depreciation and amortization (excluding amortization of goodwill) for the
fiscal years ended September 30, 1995, 1996 and 1997 aggregated $884,864,
$1,226,109 and $2,258,121, respectively. Depreciation and amortization
(excluding amortization of goodwill) for the six-month periods ended March 31,
1998 and March 31, 1997 aggregated $1,421,908 and $983,924, respectively.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------ -----------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Merchandise received not invoiced......... $ 472,799 $1,576,413 $ 2,579,884
Federal income taxes payable.............. 151,114 605,031 2,974,071
Fringe benefits........................... 376,557 660,790 1,525,548
Sales taxes payable....................... 513,543 616,764 1,027,987
Advertising............................... 342,308 900,952 1,540,767
Group insurance........................... 246,500 220,826 220,826
Compensation.............................. 845,577 1,422,106 2,118,208
Other..................................... 190,593 2,389,623 2,879,077
---------- ---------- -----------
$3,138,991 $8,392,505 $14,866,368
========== ========== ===========
</TABLE>
5. DEFERRED WARRANTY REVENUE
As part of the acquisition of Bryn Mawr in May of 1996, the Company assumed
deferred warranty revenue on Bryn Mawr's books at that time. Amortization of
deferred warranty revenue for the six months ended March 31, 1998 and March 31,
1997 was $179,724 and $254,465, respectively. Amortization of deferred warranty
revenue for the years ended September 30, 1996 and 1997 was $253,529 and
$468,418, respectively (See Note 2). Self-funded extended warranty contract
sales were $96,416 in the year ended September 30, 1996.
F-11
<PAGE> 75
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
5. DEFERRED WARRANTY REVENUE (CONTINUED)
As part of the acquisition of HiFi Buys on May 30, 1997, the Company
assumed the deferred warranty revenue and expense related to the sale of
self-funded extended warranty contracts on HiFi Buys' books at the date of the
acquisition. Amortization of deferred warranty revenue was $709,425 for the six
months ended March 31, 1998, and $478,145 for the year ended September 30, 1997
(See Note 2). Self-funded extended warranty contract sales were $276,720 in the
year ended September 30, 1997.
6. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Subordinated debt.......................... $ 1,000,000 $16,787,816 $16,607,614
Revolving term bank loan................... 9,700,000 14,500,000 15,100,000
----------- ----------- -----------
Subtotal................................... 10,700,000 31,287,816 31,707,614
Less current portion....................... -- 400,000 400,000
----------- ----------- -----------
$10,700,000 $30,887,816 $31,307,614
=========== =========== ===========
</TABLE>
On November 28, 1995, the Company entered into a loan agreement with a
bank. The agreement established a line of credit with a maximum balance of
$6,000,000 dependent upon the Company's inventory levels. Amounts outstanding
under the agreement bear interest at either the lender's base rate plus 1/4% or
the Eurodollar rate plus 2 1/4%, dependent upon the amount of advance
notification the Company gives to the bank.
On November 28, 1995, as part of a recapitalization, the Company
repurchased approximately 1,698,929 shares equalling 60% of its common stock
from the Company's then principal stockholder for cash and subordinated debt of
$550,017 and $1,000,000, respectively. The subordinated debt (the "Redemption
Note") carries interest at an effective rate of 10.8% and is due on the earlier
of December 31, 1998 or the consummation of the Company's initial public
offering. Interest is payable on a quarterly basis. The terms of the Redemption
Note also require that upon the closing of an initial public offering by the
Company an additional payment of $650,000 plus an amount equal to 9% interest
per annum accruing on such amount from November 28, 1995 to the date of such
offering be made (approximately $814,000 at the estimated time of the effective
date of the Offering). Also on November 28, 1995, $363,590 of long-term debt due
to officers and related parties was converted to Series A Redeemable Convertible
Preferred Stock ("Series A Preferred Stock") as part of the recapitalization. On
May 13, 1996, the remaining balance of the long-term debt due to officers and
related parties was converted to Series A Preferred Stock as part of the
recapitalization.
On May 13, 1996, in order to partially finance the acquisition of Bryn
Mawr, the Company amended its loan agreement with the bank. Among other things,
this amendment changed (a) the maximum balance from $6,000,000 to $12,000,000,
(b) the maturity date from September 30, 1997 to April 30, 1998, and (c) certain
financial covenants, the most restrictive of which continued to be the
maintenance of certain debt coverage and leverage ratios.
F-12
<PAGE> 76
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
6. DEBT (CONTINUED)
On March 7, 1997, the Company amended its loan agreement with the bank, and
entered into a Warrant and Debenture Commitment with certain of its
stockholders. This financing enabled the Company to borrow from the bank an
additional "Bridge Loan" of up to $2,000,000 due July 7, 1997. The proceeds of
these borrowings were used to fund store expansion. As a condition of providing
the Bridge Loan, the bank required a commitment from a third party to purchase
the Bridge Loan prior to maturity. Certain participating stockholders of the
Company entered into a Bridge Note Purchase Agreement with the bank, agreeing to
purchase, upon a put by the bank or upon the Company's request, 10% Convertible
Subordinated Debentures due 2000 (the "Debentures"), in an aggregate amount of
$2,000,000. The Debentures were never issued because the related Bridge Loan was
paid in full by the Company on May 30, 1997.
To induce the participating stockholders to enter into the Warrant and
Debenture Commitment, the Company issued warrants to the participating
stockholders for each month that they remained obligated to purchase the
Debentures under the Warrant and Debenture Commitment. During the time that this
commitment was in effect, the Company issued warrants to purchase an aggregate
of 37,138 shares of the Company's common stock, with an exercise price of $6.46
per share and a term of five years. The Company repaid the Bridge Loan on May
30, 1997, and the obligations of the participating stockholders terminated under
the Warrant and Debenture Commitment.
On May 30, 1997, in order to partially finance the acquisition of HiFi
Buys, the Company replaced its loan agreement with the bank with a new senior
acquisition and working capital financing agreement. Among other things, this
new agreement changed (a) the maximum balance from $14,000,000 to $20,000,000,
(b) the maturity date from April 30, 1998 to June 1, 2000, and (c) certain
financial covenants, the most restrictive of which continued to be the
maintenance of certain debt coverage and leverage ratios. Amounts outstanding
under the agreement totaled $14,500,000 and $15,100,000 at September 30, 1997
and March 31, 1998, respectively, and are collateralized by the Company's
inventory and certain other assets. The unpaid balances under this agreement
bear interest at the lender's base rate, or LIBOR plus 2% if the Company commits
the balances for a period of 30 days or more (8.16% at September 30, 1997 and
7.68% at March 31, 1998).
On May 30, 1997, as part of the acquisition of HiFi Buys, the Company
entered into a subordinated debt financing with a predecessor of HFB Associate,
LLC (the "Seller"), and issued a $1,200,000 subordinated term note to the
Seller, with principal payments made in 36 equal installments monthly. The
unpaid principal balance bears an annual interest rate of 9.5%. The unpaid
balance on this note was $1,100,000 and $900,000 at September 30, 1997 and March
31, 1998, respectively. In addition, the Company issued warrants to the seller
to purchase 104,960 shares of common stock with a ten-year term and an exercise
price of $8.08 per share.
On May 30, 1997, in order to partially finance the acquisition of HiFi
Buys, the Company entered into a senior subordinated debt financing with a group
of institutional investors, and issued $15,000,000 of senior subordinated
promissory notes (the "1997 Notes"), with warrants (see Note 11). The notes bear
an annual interest rate of 12% on the unpaid principal balance. Principal
payments under the notes are $5,000,000 due on May 30 of 2002, 2003, and 2004.
The notes may be prepaid in whole or in part at any time and must be paid in
full upon the completion of the Company's initial public offering. The
detachable warrants issued with the 1997 Notes are exercisable for up to 629,566
shares of the Company's common stock, with an exercise price of $.002 per
F-13
<PAGE> 77
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
6. DEBT (CONTINUED)
share. Because these warrants had a fair value of $325,383, such discount was
recorded on the debt. The discount will accrete over the term of the debt.
Scheduled maturities under long-term debt, excluding the revolving term
bank loan, at March 31, 1998 were as follows:
<TABLE>
<S> <C>
Six months ended September 30, 1998......................... $ 200,000
Year ended September 30, 1999............................... 1,400,000
Year ended September 30, 2000............................... 300,000
Year ended September 30, 2001............................... --
Year ended September 30, 2002............................... 5,000,000
Thereafter.................................................. 10,000,000
-----------
Total............................................. $16,900,000
===========
</TABLE>
7. EMPLOYEE SAVINGS PLAN
In October 1985, the Company established an employee savings plan covering
all employees. Under the terms of the plan, which was adopted under Section
401(k) of the Internal Revenue Code, the Company can match employee
contributions. Such matching contributions cannot exceed the employer's
established annual percentage of compensation, which was a maximum of 6% for the
years ended September 30, 1995, 1996 and 1997. The Company's contribution
expense was $75,000, $75,000 and $100,000 for the years ended September 30,
1995, 1996 and 1997, respectively. The Company's contribution expense for the
six months ended March 31, 1998 and March 31, 1997 was $75,000 and $50,000,
respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases all of its stores, installation centers, warehouses and
administrative facilities under operating leases. The lives of these leases
range from 5 to 20 years with varying renewal options. The leases provide for
base rentals, real estate taxes, common area maintenance charges and, in some
instances, for the payment of percentage rents based on sales volume. Rent
expense for the six months ended March 31, 1998 and March 31, 1997 was
$4,332,171 and $2,443,525, respectively. Rent expense for the years ended
September 30, 1995, 1996 and 1997 was $2,054,250, $3,163,095 and $5,978,819,
respectively. Percentage rent expense was $53,657 and $34,143 for the six months
ended March 31, 1998 and March 31, 1997, respectively. Percentage rent expense
was $82,379, $64,964 and $47,243 for the years ended September 30, 1995, 1996
and 1997, respectively.
F-14
<PAGE> 78
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum rental commitments on operating leases as of March 31, 1998
are as follows:
<TABLE>
<S> <C>
Six months ended September 30, 1998......................... $ 4,177,508
Year ended September 30, 1999............................... 8,118,044
Year ended September 30, 2000............................... 7,931,735
Year ended September 30, 2001............................... 7,601,751
Year ended September 30, 2002............................... 7,188,791
Thereafter.................................................. 41,903,750
-----------
Total............................................. $76,921,579
===========
</TABLE>
On March 25, 1998 the Company entered into a purchase and sale agreement
for a facility in Massachusetts that will serve as the corporate headquarters,
service center and distribution center in Massachusetts. According to the signed
purchase and sale agreement, the purchase price is $4.1 million. The Company
will also incur related building improvement costs for the facility. The Company
expects to finance these costs with a mortgage of approximately $4 million.
Effective upon the consummation of the offering contemplated in this
Prospectus, the Company will enter into employment agreements with certain key
employees. These agreements provide for continued employment with termination by
either party. Under certain circumstances, the key employees could receive up to
an amount equal three times annual base salary.
9. INCOME TAXES
The provision (benefit) for income taxes under SFAS No. 109 consisted of
the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- ----------- ------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.......................... $ -- $ 563,777 $21,821 $654,881 $2,322,446
State............................ -- 160,195 6,101 162,773 657,499
--------- ----------- ------- -------- ----------
-- 723,972 27,922 817,654 2,979,945
Deferred:
Current deferral................. (173,498) (176,615) 71,040 58,683 (104,747)
Tax rate increase on temporary
differences resulting from the
revocation of the S Corporation
election....................... -- (1,000,805) -- -- --
--------- ----------- ------- -------- ----------
$(173,498) $ (453,448) $98,962 $876,337 $2,875,198
========= =========== ======= ======== ==========
</TABLE>
F-15
<PAGE> 79
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
9. INCOME TAXES (CONTINUED)
The tax effects of significant temporary differences comprising the
Company's current and long-term net deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- -----------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Accruals and reserves....................... $ 395,971 $ 574,272 $ 706,751
Deferred revenue............................ 200,483 646,209 569,269
----------- ----------- -----------
Net deferred tax assets -- current.......... 596,454 1,220,481 1,276,020
----------- ----------- -----------
Deferred rent............................... 883,344 1,036,466 1,143,208
Depreciation................................ 824,699 854,091 1,075,091
Deferred revenue............................ 278,521 931,364 665,999
Amortization and other...................... (1,232,100) (2,762,524) (2,775,693)
----------- ----------- -----------
Net deferred tax assets -- long-term........ 754,464 59,397 108,605
----------- ----------- -----------
Total net deferred tax assets............... $ 1,350,918 $ 1,279,878 $ 1,384,625
=========== =========== ===========
</TABLE>
The Company has determined that it is more likely than not that it will
fully realize the deferred tax assets. Consequently, no valuation allowance was
established as of September 30, 1996, September 30, 1997 and March 31, 1998. A
reconciliation between the statutory and effective income tax rates is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------- --------------------------
1996 1997 1997 1998
----- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory income tax rate...... 34.0% 34.0% 34.0% 34.0%
State income taxes net of
federal benefit.............. 5.8% 5.8% 5.8% 5.8%
Change in tax status........... (74.9)% 0.0% 0.0% 0.0%
Other.......................... 1.2% 0.5% 0.5% 0.2%
----- ---- ---- ----
Effective income tax rate...... (33.9)% 40.3% 40.3% 40.0%
===== ==== ==== ====
</TABLE>
The Company was taxed under Subchapter S of the Internal Revenue Code for
1995. The significant items included in the reconciliation between the statutory
and effective state income tax rate for that year were primarily attributable to
changes in the valuation allowance.
10. ACQUISITIONS
BRYN MAWR -- On May 13, 1996, the Company acquired the principal operating
assets and assumed certain liabilities of Bryn Mawr. This transaction has been
accounted for as a purchase and, accordingly, the results of operations of the
Company's business relating to Bryn Mawr have been included in the statements of
income since the acquisition date. The allocation of the purchase price is final
and resulted in goodwill of $5,600,900, which is being amortized over 25 years
using
F-16
<PAGE> 80
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
10. ACQUISITIONS (CONTINUED)
the straight-line method. The net assets acquired at fair market value on May
13, 1996 were allocated as follows:
<TABLE>
<S> <C>
Inventory............................................... $5,043,100
Property and equipment.................................. 6,860,400
Other assets............................................ 837,800
Accounts payable and accrued expenses................... (9,689,300)
----------
Net assets acquired................................ 3,052,000
Total purchase price and related costs.................. 8,652,900
----------
Goodwill........................................... $5,600,900
==========
</TABLE>
HIFI BUYS -- On May 31, 1997, the Company acquired the principal operating
assets and assumed certain liabilities of HiFi Buys. This transaction has been
accounted for as a purchase and, accordingly, the results of operations of the
Company's business relating to HiFi Buys have been included in the statement of
income since the acquisition date. The allocation of the purchase price is final
and resulted in goodwill of $15,521,950, which is being amortized over 25 years
using the straight-line method. The net assets acquired at fair market value on
May 30, 1997 were allocated as follows:
<TABLE>
<S> <C>
Inventory............................................. $ 9,273,400
Property and equipment................................ 2,771,700
Accounts receivable................................... 1,428,800
Other assets.......................................... 236,500
Accounts payable and accrued expenses................. (9,483,100)
-----------
Net assets acquired................................. 4,227,300
Total purchase price and related costs (see Note
11)................................................. 19,749,250
-----------
Goodwill............................................ $15,521,950
===========
</TABLE>
The following unaudited pro forma financial information reflects the
consolidated results of operations for the Company for the years ended September
30, 1996 and 1997 as though the acquisitions had occurred on the first day of
each fiscal year. The pro forma operating results are presented for comparative
purposes only and do not purport to present the Company's actual operating
results had the acquisitions been consummated on October 1, 1995 or results
which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net Sales............................ $207,359,183 $196,462,686
Net Income........................... 1,441,943 625,748
Net Income (Loss) Available to Common
Shareholders....................... 406,001 (1,530,608)
Basic Earnings (Loss) per Share...... .21 (.92)
Diluted Earnings (Loss) per share.... .20 (.92)
</TABLE>
F-17
<PAGE> 81
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
10. ACQUISITIONS (CONTINUED)
The Company had also previously recorded approximately $809,000 of goodwill
in connection with prior acquisitions.
Accumulated amortization of goodwill was $1,682,000 for the six months
ended March 31, 1998. Accumulated amortization of goodwill was approximately
$782,000 and $1,227,000 for the years ended September 30, 1996 and 1997,
respectively.
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
COMMON STOCK -- Holders of common stock are entitled to dividends if
declared by the Board of Directors, and each share carries one vote. The common
stock has no cumulative voting, redemption or preemptive rights.
SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK -- The holders of
preferred stock are entitled to significant additional rights beyond those
granted to the common stock. Some of these rights are as follows:
Voting Rights -- Each share of preferred stock is entitled to one vote
for each share of common stock into which it is then convertible.
Representative Directors -- Holders of a majority of the shares of
preferred stock and Investor Common Stock (as such term is defined in the
Company's Certificate of Incorporation, the "Charter"), voting separately
as a class, are entitled to elect two members of the Board of Directors.
Holders of preferred stock are also entitled to elect additional members of
the Board of Directors under certain circumstances.
Conversion Provisions -- All shares of preferred stock are
automatically convertible into common stock upon the completion of a public
offering resulting in net proceeds to the Company of not less than
$15,000,000. As of September 30, 1997 and March 31, 1998, the conversion
price of a share of Series A Preferred Stock was $6.46. The conversion
price of a share of Series B Redeemable Convertible Preferred Stock (the
"Series B Preferred Stock") at September 30, 1997 and March 31, 1998 was
$8.08.
Dividends -- No dividends shall be paid on the common stock unless the
shares of preferred stock receive the same dividends that such shares would
have received had they been converted into common stock prior to the record
date for such dividend.
Liquidation Preference -- In the event of involuntary liquidation,
dissolution or winding up of the Company, each holder of Series A Preferred
Stock and Series B Preferred Stock is entitled to receive, prior and in
preference to any distribution of any assets to holders of any other
capital stock of the Company, the sum of (a) $6.46 and/or $8.08 for each
share of Series A Preferred Stock and Series B Preferred Stock,
respectively, plus (b) an amount in the form of a dividend equal to a 15%
rate of return on each holder's investment compounded annually from the
date of original issuance.
Redemption Provisions -- Preferred stock is redeemable if (a) such
redemption would not violate any of the existing subordination agreements
between the Company and its Senior Lender, (as such term is defined in the
Charter), and (b) the Company has the consent of the holders of the 1997
Notes. Mandatory redemption of 6.5% of the total outstanding shares of
F-18
<PAGE> 82
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(CONTINUED)
Preferred Stock, is required to occur on the last day of March, June,
September and December commencing in 2001. The redemption price is equal to
$6.46 for each share of Series A Preferred Stock and $8.08 for each share
of Series B Preferred Stock, plus an amount in the form of a dividend equal
to a 15% rate of return on such holder's investment compounded annually and
calculated from the original issue date.
Reserved Shares -- As of September 30, 1997, and March 31, 1998 there
were 2,566,561 shares of common stock reserved for issuance upon conversion
of the preferred stock, 855,400 shares of common stock reserved for
issuance upon the exercise of options granted under the Company's 1995
Stock Option Plan, and 771,664 shares of common stock issuable upon the
exercise of outstanding warrants.
On November 28, 1995, the Company made significant changes to its capital
structure. On this date, the Company purchased for the treasury 1,698,929 shares
of common stock from former stockholders for $1,550,017 in cash and the
Redemption Note. The terms of the Redemption Note also require that upon an
initial public offering by the Company an additional payment of $650,000 plus an
amount equal to 9% interest per annum accruing on such amount from November 28,
1995 to the date of such offering (approximately $814,000 at the estimated time
of the effective date of this Offering). Also on November 28, 1995, the Company
authorized and issued 4,000,000 and 911,781 shares, respectively, of Series A
Preferred Stock. In exchange for the shares issued, the Company received net
cash proceeds of $5,469,110.
On January 16, 1996, the Board of Directors authorized a 10-for-1 stock
split. All share data in these financial statements reflects the impact of the
split.
On May 13, 1996, the Company issued an additional 788,349 shares of Series
A Preferred Stock for net proceeds to the Company of $5,091,818 in order to
partially finance the acquisition of Bryn Mawr.
During the period from March 7, 1997 through May 30, 1997, the Company
issued warrants to purchase 37,132 shares of common stock to certain
stockholders who participated in a Warrant and Debenture Commitment relating to
a Bridge Loan financing (see Note 6). The warrants have a five-year term and an
exercise price of $6.46 per share. The Company hired an independent appraiser to
determine the fair value of the warrants as of the issue date. The warrants were
issued at or above the fair value of the underlying stock; consequently, the
Company has not assigned value to nor recorded an expense for this warrant
issuance. All of the warrants issued as part of this transaction were
outstanding and exercisable at September 30, 1997 and March 31, 1998.
On May 30, 1997, the Company issued 866,425 shares of Series B Preferred
Stock for net proceeds to the Company of $6,837,385 in order to partially
finance the acquisition of HiFi Buys. Series B Preferred Stock is subject to
essentially the same terms and conditions as the Series A Preferred Stock,
except that the conversion price of Series B Preferred Stock is $8.08 per share.
On May 30, 1997, the Company issued warrants to purchase 629,566 shares of
common stock in connection with a subordinated debt offering in order to
partially finance the acquisition of HiFi Buys. The warrants have a ten-year
term, an exercise price of $.01, and are subject to certain transfer
restrictions. The Company hired an independent appraiser to determine the fair
value of the warrants as of the issue date. That value was appraised to be
$0.517 per share. Accordingly, the Company placed an aggregate value on the
warrants of $325,383. All of the warrants issued as part of this transaction are
outstanding as of September 30, 1997 and March 31, 1998. These warrants are
F-19
<PAGE> 83
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(CONTINUED)
exercisable on the earlier of five years from the date of issue or the
completion of the Company's initial public offering with net cash proceeds in
excess of $15 million.
On May 30, 1997, the Company issued to the seller of HiFi Buys warrants to
purchase 104,960 shares of common stock in connection with the subordinated
debt. The warrants have a term of (a) ten years from the date of issuance, or
(b) five years from the date of a qualified initial public offering. The
warrants are only exercisable upon certain corporate events, including the
Company's initial public offering. The Company hired an independent appraiser to
determine the fair value of the warrants as of the issue date. The warrants were
issued at or above the fair value of the underlying stock; consequently, the
Company has not assigned value to, nor recorded an expense for, these warrants.
The warrants have an exercise price of $8.08 per share and were outstanding at
September 30, 1997 and March 31, 1998.
The weighted average exercise price for all warrants outstanding at
September 30, 1997 and March 31, 1998 is $1.42. The following table summarizes
information regarding stock warrants outstanding at March 31, 1998:
<TABLE>
<CAPTION>
NUMBER
OUTSTANDING WEIGHTED
AVERAGE AND EXERCISABLE AVERAGE
EXERCISE AT MARCH 31, REMAINING
PRICES 1998 LIFE (YEARS)
-------- --------------- ------------
<S> <C> <C>
$0.01......................................... 629,566 9.20
6.46......................................... 37,138 8.90
8.08......................................... 104,960 9.20
------- ----
771,664 9.20
=======
</TABLE>
COMMON STOCK INCENTIVE PLAN -- In November of 1995, the Company implemented
the 1995 Stock Option Plan, under which incentive and nonqualified stock options
may be granted to management, key employees and outside directors to purchase
shares of the Company's common stock. The exercise price for incentive stock
options for employees and nonqualified options for outside directors range from
$0.61 to $8.08 per share. Options are generally exercisable over a period of ten
years from the date of the grant and are dependent on the vesting schedule
associated with the grant.
Options for 388,779, 568,274 and 617,479 shares were exercisable under the
1995 Stock Option Plan at September 30, 1996 and 1997 and March 31, 1998,
respectively. There were 26,745, 30,438 and 10,431 shares available for future
grants at September 30, 1996 and 1997 and March 31, 1998, respectively.
F-20
<PAGE> 84
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(CONTINUED)
The following summarizes transactions under the 1995 Stock Option Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER PER SHARE EXERCISE
OF SHARES OPTION PRICE PRICE
--------- -------------- --------
<S> <C> <C> <C>
October 1, 1995..................... -- -- --
Granted........................... 604,424 $0.61 to $7.10 $2.31
Exercised......................... -- -- --
Canceled.......................... -- -- --
---------
September 30, 1996.................. 604,424 $0.61 to $7.10 $2.31
Granted........................... 232,602 $6.46 to $8.08 $7.59
Exercised......................... --
Canceled.......................... 11,289 $0.61 to $6.46 $1.77
---------
September 30, 1997.................. 825,737 $0.61 to $8.08 $3.72
Granted........................... 29,604 $7.24 $7.24
Exercised.........................
Canceled.......................... 10,282 $0.61 to $7.24 $3.24
---------
March 31, 1998...................... 845,059 $0.61 to $8.08 $3.97
=========
</TABLE>
The following summarizes information about all stock options outstanding at
March 31, 1998 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
NUMBER AVERAGE OPTIONS
OUTSTANDING REMAINING EXERCISABLE
EXERCISE AT MARCH 31, CONTRACTUAL AT MARCH 31,
PRICES 1998 LIFE (YEARS) 1998
- -------- ------------ ------------ ------------
<S> <C> <C> <C>
$0.61............................... 215,676 7.9 172,157
0.67............................... 111,878 8.0 111,878
1.52............................... 107,584 7.8 107,584
6.46............................... 133,023 8.2 93,562
7.10............................... 44,148 8.3 44,148
7.24............................... 179,860 9.4 35,260
8.08............................... 52,890 9.4 52,890
--------- -------
Total............................... 845,059 8.38 617,479
========= =======
</TABLE>
The weighted average exercise price of all options outstanding as of
September 30, 1997 and March 31, 1998 is $3.72 and $3.97, respectively.
For purposes of determining the disclosure required by SFAS No. 123, the
fair value of each stock option granted in 1996, 1997 and 1998 under the
Company's 1995 Stock Option Plan was $0.12, $0.02 and $10.61, respectively. The
fair value of stock options was estimated on the date of
F-21
<PAGE> 85
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(CONTINUED)
grant using the Black-Scholes option-pricing model. Key assumptions used to
apply this pricing model were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED
-------------- MARCH 31,
1996 1997 1998
----- ----- ----------
<S> <C> <C> <C>
Risk free interest rate.................................. 6.21% 5.69% 5.67%
Expected life of option grants (years)................... 5.0 4.0 3.0
Expected volatility of underlying stock.................. 54.5% 54.5% 54.5%
</TABLE>
Had compensation cost for stock option grants during fiscal 1996, fiscal
1997 and the six months ended March 31, 1998 been determined under the
provisions of SFAS No. 123, the Company's net income would have been
approximately $1,742,600, $136,000 and $4,306,600, respectively. Pro forma
diluted earnings per share would have been $0.03 and $0.87 for the year ended
September 30, 1997 and the six months ended March 31, 1998, respectively.
12. RELATED PARTY TRANSACTIONS
In May 1996, in connection with the acquisition of Bryn Mawr, the company
entered into a consulting agreement with Bryn Mawr's former owner and a former
director of the Company ("BMFO") for a term of four years (the "Consulting
Period"). This consulting agreement was amended as of April 23, 1997 and
currently the Company is obligated to pay BMFO approximately $21,000 a month
during the first year after the commencement date of the agreement, and
approximately $4,200 a month during years three and four of the Consulting
Period plus out-of-pocket expenses. Aggregate payments under the agreement are
expensed on a straight-line basis over the Consulting Period.
The Company also entered into certain lease agreements for three facilities
in Pennsylvania with an affiliate of BMFO. Aggregate yearly payments under these
agreements total approximately $670,000.
F-22
<PAGE> 86
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following Pro Forma Condensed Consolidated Financial Information should
be read in conjunction with the historical consolidated financial statements and
the notes thereto included elsewhere in this Prospectus.
The Pro Forma Condensed Consolidated Statement of Operations for the year
ended September 30, 1997 reflects financial information with respect to the
Company's acquisition of HiFi Buys on May 30, 1997, which has been accounted for
under the purchase method of accounting. The Pro Forma Condensed Consolidated
Statement of Operations for the year ended September 30, 1997 was prepared as if
the acquisition of HiFi Buys occurred on October 1, 1996, the first day of
fiscal 1997.
The Pro Forma Condensed Consolidated Statements of Operations for fiscal
1997 do not include any potential operational costs savings, with the exception
of the reduction of the workforce of HiFi Buys that took place at the time of
the acquisition. The Company believes that it may be able to further reduce
operational costs as it consolidates the HiFi Buys operations into the Company.
There can be no assurance that the Company will be successful in effecting any
such costs savings.
The Pro Forma Condensed Consolidated Financial Information is unaudited and
is not necessarily indicative of the consolidated financial position and results
which actually would have occurred if the acquisition of HiFi Buys had been
consummated as of the date presented, nor does it purport to present the
financial position or results of operations of the Company for future periods.
F-23
<PAGE> 87
TWEETER HOME ENTERTAINMENT GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HIFI BUYS
COMPANY EIGHT MONTHS ENDED PRO FORMA
HISTORICAL 5/30/97 SUBTOTAL ADJUSTMENTS PRO FORMA
------------ ------------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Total Revenue............ $132,525,037 $ 63,937,649 $ 196,462,686 $ -- $ 196,462,686
Cost Of Sales............ (86,314,918) (45,168,763) (131,483,681) (131,483,681)
------------ ------------ ------------- -------------
Gross Profit............. 46,210,119 18,768,886 64,979,005 64,979,005
(1,574,323)(1)
Operating Expenses....... 44,157,214 17,842,958 62,000,172 408,333(2) 60,834,182
------------ ------------ ------------- -------------
Income (Loss) From
Operations............. 2,052,905 925,928 2,978,833 4,144,823
1,276,000(3)
Interest Expense......... 1,807,660 437,773 2,245,433 (437,773)(4) 3,083,660
------------ ------------ ------------- -------------
Income (loss) before
income taxes........... 245,245 488,155 733,400 1,061,163
Income tax expense
(benefit).............. 98,962 0 98,962 336,453(5) 435,415
------------ ------------ ------------- ----------- -------------
Net income............... $ 146,283 $ 488,155 $ 634,438 $ 8,690 $ 625,748
============ ============ ============= =========== =============
Accretion of Preferred
Stock Dividends........ $ 2,156,356 $ 2,156,356
------------ -------------
Net Income (Loss)
Available to Common
Shareholders........... (2,010,073) (1,530,608)
------------ -------------
Basic Earnings (Loss) per
Share.................. $ (1.20) $ (.92)
============ =============
Weighted Average Shares
Outstanding............ 1,672,507 1,672,507
============ =============
Diluted Earnings (Loss)
per Share.............. $ (1.20) $ (.92)
============ =============
Weighted Average Shares
Outstanding............ 1,672,507 1,672,507
============ =============
</TABLE>
F-24
<PAGE> 88
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(1) To record the prorated eight-month savings associated with the closing down
of the corporate offices of HiFi Buys. This resulted in the immediate
termination of 43 positions, and as part of the purchase and sale agreement
severance costs for these positions were borne by the seller.
(2) To record the amortization of goodwill associated with the acquisition of
HiFi Buys for a full fiscal year. See Note 10 to the Consolidated Financial
Statements.
(3) To record interest expense for the 1997 Notes and the Seller Note for the
full fiscal year. Both notes were issued in connection with the acquisition
of HiFi Buys. See Note 6 to the Consolidated Financial Statements.
(4) To eliminate interest expense recorded by HiFi Buys associated with (i) a
HiFi Buys mortgage not assumed as part of the HiFi Buys acquisition and (ii)
a line of credit that was replaced with the financing mentioned in (2).
(5) To reflect an effective tax rate of 41%, representing management's estimate
of the effective tax rate had HiFi Buys been a C corporation for the period
presented. A reconciliation between the statutory and pro forma effective
income tax rates is as follows:
<TABLE>
<S> <C>
Statutory income tax rate................................... 34.0%
State income taxes, net of federal benefit.................. 6.8
Other....................................................... 0.2
----
Pro forma effective income tax rate......................... 41.0%
====
</TABLE>
F-25
<PAGE> 89
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
HiFi Buys Incorporated
We have audited the accompanying statements of operations and cash flows of
HiFi Buys Incorporated (the "Company") for the years ended December 31, 1996,
1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of the Company for the years
ended December 31, 1996, 1995 and 1994 in conformity with generally accepted
accounting principles.
/s/DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 7, 1997
F-26
<PAGE> 90
HIFI BUYS INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1995 1994 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................. $93,227,100 $89,452,900 $78,305,300 $20,853,581 $21,491,067
COST OF GOODS SOLD........ 67,368,800 64,608,800 56,547,400 14,619,834 15,239,827
----------- ----------- ----------- ----------- -----------
25,858,300 24,844,100 21,757,900 6,233,747 6,251,240
OPERATING EXPENSES:
Selling, general, and
administrative....... 23,367,600 22,007,600 19,374,500 5,896,816 5,735,997
Depreciation and
amortization......... 991,900 972,100 870,900 269,894 215,771
----------- ----------- ----------- ----------- -----------
24,359,500 22,979,700 20,245,400 6,166,710 5,951,768
----------- ----------- ----------- ----------- -----------
OPERATING INCOME.......... 1,498,800 1,864,400 1,512,500 67,037 299,472
INTEREST EXPENSE.......... 519,600 491,500 352,100 145,265 115,671
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)......... $ 979,200 $ 1,372,900 $ 1,160,400 $ (78,228) $ 183,801
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 91
HIFI BUYS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1995 1994 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................ $ 979,200 $ 1,372,900 $ 1,160,400 $ (78,228) $ 183,801
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 991,900 972,100 870,900 269,894 215,771
Deferred product warranty revenues and
related costs, net................... 356,700 304,600 78,400 86,989 75,798
Gain on the sale of property and
equipment............................ -- (80,300) (19,500) -- --
Change in operating assets and
liabilities:
Accounts receivable, net............. 201,200 (276,100) (19,400) (260,081) (511,245)
Inventories.......................... (1,568,100) 638,500 (2,086,600) 2,412,644 1,374,132
Prepaid expenses and other assets.... (103,900) (84,800) (73,400) 127,159 (157,674)
Accounts payable and accrued
expenses........................... 2,714,100 (2,544,700) 2,238,100 (5,879,764) (2,439,064)
Customer deposits.................... (215,900) 318,800 107,000 (13,200) (353,673)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities....................... 3,355,200 621,000 2,255,900 (3,334,587) (1,612,154)
INVESTING ACTIVITIES:
Purchase of property and equipment....... (3,632,100) (1,969,000) (549,000) (80,118) (795,584)
Proceeds from sale of property and
equipment.............................. -- 141,900 60,100 -- --
Sale (purchase) of short-term
investment............................. -- 600,000 (600,000) -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities....................... (3,632,100) (1,227,100) (1,088,900) (80,118) (795,584)
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of
credit................................. (770,400) 957,600 (1,689,000) -- --
Proceeds from long-term borrowings....... 2,945,000 566,300 600,000 4,539,122 3,346,614
Payments on long-term borrowings......... (1,089,000) (67,500) (67,200) -- --
Payment for repurchase of common stock... -- (105,000) -- -- --
Proceeds from the issuance of common
stock.................................. -- -- 500,000 -- --
Dividends paid........................... (854,800) (721,100) (516,500) (701,947) (626,027)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities............. 230,800 630,300 (1,172,700) 3,837,175 2,720,587
NET (DECREASE) INCREASE IN CASH............ (46,100) 24,200 (5,700) 422,470 312,849
CASH:
Beginning of year........................ 62,900 38,700 44,400 16,800 62,900
----------- ----------- ----------- ----------- -----------
End of year.............................. $ 16,800 $ 62,900 $ 38,700 $ 439,270 $ 375,749
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the year (net of
amounts capitalized)................... $ 456,200 $ 465,500 $ 353,200 $ 145,265 $ 115,670
=========== =========== =========== =========== ===========
Equipment purchased through note
payable................................ $ -- $ 354,600 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Common stock repurchased through note
payable................................ $ -- $ 102,800 $ -- $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE> 92
HIFI BUYS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED WITH RESPECT TO THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND
1996)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HiFi Buys Incorporated (the "Company") sells consumer electronics through
its ten retail stores in Georgia. Its significant accounting policies are:
INVENTORIES -- Inventories are stated at the lower of average cost or
market. Cost includes certain warehousing and distribution costs which have been
capitalized in inventories.
PROPERTY AND EQUIPMENT -- Property and equipment is recorded at cost.
Depreciation is computed using accelerated methods based on the estimated useful
lives of the related assets. Amortization of leasehold improvements is computed
on the straight-line method over the shorter of the estimated useful lives or
the lease terms.
REVENUE RECOGNITION -- Revenue from merchandise sales is recognized upon
shipment or delivery of goods. Service revenue is recognized when the repair
service is completed.
COST OF GOODS SOLD -- Cost of goods sold represents the cost of the
inventory as well as substantially all warehousing and distribution costs.
INCOME TAXES -- The Company elected to be treated as an S Corporation for
federal and state income tax purposes.
STORE OPENING COSTS -- Costs associated with opening new stores are
expensed as incurred.
INTEREST -- In 1996, approximately $61,600 of interest incurred during the
construction of a new store was capitalized into the cost basis of the
constructed property. No interest costs were capitalized in 1995 or 1994.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS -- On an ongoing basis, the Company evaluates the
carrying value of its long-lived assets based upon estimated future undiscounted
cash flows relying on a number of factors, including operating results, business
plans and certain economic projections. In addition, the Company's evaluation
considers nonfinancial data such as changes in the operating environment,
competitive information, market trends and business relationships.
2. ACCOUNTING FOR PRODUCT WARRANTY REVENUES AND RELATED COSTS
Since 1988, the Company has offered and sold extended warranty contracts
(the "Contracts") under a Company-administered and self-insured program. The
terms of these Contracts generally extend from one to five years from their
purchase dates. Revenues from Contract sales are deferred and amortized into
income on a straight-line basis over the lives of the related Contracts (the
average life of Contracts sold by the Company is approximately four years).
Certain costs of such sales, principally sales commissions, are deferred and
amortized similarly; costs for product repairs are expensed as incurred.
F-29
<PAGE> 93
HIFI BUYS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED WITH RESPECT TO THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND
1996)
An analysis of product warranty sales and the associated product repair
expense is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------------
1996 1995 1994 1997 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product warranty:
Contracts sold............... $1,908,800 $1,625,100 $1,456,400 $474,000 $436,000
========== ========== ========== ======== ========
Revenue recognized........... $1,535,600 $1,372,200 $1,410,300 $410,200 $351,000
========== ========== ========== ======== ========
Related costs of product
warranty sales:
Deferred..................... $ 233,300 $ 150,700 $ 166,400 $ 52,300 $ 53,300
========== ========== ========== ======== ========
Expensed..................... $ 216,800 $ 202,500 $ 198,800 $ 58,700 $ 49,600
========== ========== ========== ======== ========
Product repair expense......... $ 377,600 $ 230,200 $ 224,000 $130,600 $116,800
========== ========== ========== ======== ========
</TABLE>
3. INCOME TAXES
The Company has elected to be treated as an S Corporation under Section
1362(a) of the Internal Revenue Code and to have its income taxed directly to
its stockholders. As a result of this election, the statements of operations for
the years ended December 31, 1996, 1995 and 1994 do not include a provision for
income taxes. Had this election not been made, the Company's net income in 1996,
1995 and 1994 would have been reduced by approximately $391,700, $549,200 and
$464,200, respectively, for federal and state income taxes. Similarly, had this
selection not been made, net income (loss) in the three months ended March 31,
1997 and 1996 would have been (increased)/reduced by approximately ($31,291) and
73,520, respectively (unaudited).
4. COMMITMENTS
The Company leases office, warehouse, and retail space under various
noncancelable operating leases. Total annual minimum rental payments at December
31, 1996 for all noncancelable operating leases with terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1997.................................................. $ 2,483,300
1998.................................................. 2,252,200
1999.................................................. 2,235,000
2000.................................................. 2,258,400
2001.................................................. 2,067,900
Thereafter............................................ 11,022,200
-----------
$22,319,000
===========
</TABLE>
Under a sublease agreement for certain retail space, the Company will
receive approximately $82,800 in annual minimum rental payments through 2003.
F-30
<PAGE> 94
HIFI BUYS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED WITH RESPECT TO THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND
1996)
Rent expense consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------------
1996 1995 1994 1997 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Minimum rent................... $2,633,300 $2,567,400 $2,096,400 $649,800 $685,300
Contingent rent................ -- 21,700 39,400 -- --
Sublease income................ (82,800) (82,800) (82,800) (20,700) (20,700)
---------- ---------- ---------- -------- --------
Total rent expense... $2,550,500 $2,506,300 $2,053,000 $629,100 $664,600
========== ========== ========== ======== ========
</TABLE>
Most leases provide for additional payments of real estate taxes and other
operating expenses applicable to the property. Such expenses are recorded as a
component of minimum rent.
5. EMPLOYEE BENEFIT PLAN
The Company maintains a retirement plan (the "Plan") covering substantially
all of its employees. Employees who are over the age of 21 and who have
completed their first year of service with the Company are eligible to be
admitted to the Plan during the open enrollment period. The Plan provides for a
discretionary profit sharing contribution as well as discretionary matching of
participant contributions by the Company. Participants are fully vested in their
contributions to the Plan and become 40% and 100% vested in the Company's profit
sharing and matching contributions after four and five years, respectively. The
Company's profit sharing and matching contributions were $117,900, $92,200 and
$68,700 for the years ended December 31, 1996, 1995 and 1994, respectively and
approximately $30,000 and $29,500 for the three months ended March 31, 1997 and
1996, respectively.
6. SUBSEQUENT EVENT
In February 1997, the Company entered into a nonbinding letter of intent
for the sale of substantially all of its assets.
F-31
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Bryn Mawr Radio and Television Centre, Inc.
We have audited the combined statements of operations and cash flows of
Bryn Mawr Radio and Television Centre, Inc. and affiliate (the "Company") for
the year ended August 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined results of operations and combined cash flows of the
Company for the year ended August 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the combined financial statements, on May 9,
1996, the Company sold substantially all of its assets to an unrelated party.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
October 20, 1995 (May 9, 1996 as to Note 2)
F-32
<PAGE> 96
BRYN MAWR RADIO AND TELEVISION CENTRE, INC. AND AFFILIATE
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1995 1996 1995
----------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
NET SALES....................................... $29,020,487 $19,098,609 $17,712,637
COST OF SALES................................... 18,631,960 12,370,459 11,410,268
----------- ----------- -----------
GROSS PROFIT.................................... 10,388,527 6,728,150 6,302,369
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 10,945,401 5,912,217 5,818,914
OTHER REVENUE................................... 255,882 81,683 125,456
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS................... (300,992) 897,616 608,911
INTEREST EXPENSE ON DEBT AND CAPITAL LEASES..... 300,989 310,640 146,474
INCOME TAXES (STATE)............................ 4,000 -- --
----------- ----------- -----------
NET (LOSS) INCOME............................... $ (605,981) $ 586,976 $ 462,437
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE> 97
BRYN MAWR RADIO AND TELEVISION CENTRE, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, 1995 FEBRUARY 29, 1996 FEBRUARY 28, 1995
--------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income..................... $ (605,981) $ 586,976 $ 462,437
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization...... 610,481 485,891 255,082
Changes in assets and liabilities
which (used) provided cash:
Accounts receivable................ (180,712) (182,870) (167,453)
Inventories........................ 101,914 (1,221,898) (778,459)
Prepaid expenses and other
assets........................... 25,747 (114,473) (283,681)
Accounts payable and accrued
expenses......................... (557,335) 2,952,726 1,124,126
Deferred revenue................... (156,329) 46,156 (7,391)
Customer deposits.................. 90,128 70,171 121,553
----------- ----------- -----------
Net cash (used in) provided by
operating activities........ (672,087) 2,622,679 726,214
----------- ----------- -----------
INVESTING ACTIVITIES -- Acquisition of
property, plant and equipment......... (6,776,579) (3,273,258) (3,742,066)
----------- ----------- -----------
FINANCING ACTIVITIES:
Capital contributions................. 100,000 -- --
Distribution to shareholders.......... (265,860) (1,950,817) (1,902,191)
Principal payments on capital leases
and term loans..................... (245,451) (122,726) (110,453)
Prepayments of proceeds from bank line
of credit.......................... (1,600,000) -- --
Borrowings under revolving credit
facility........................... 2,950,000 -- --
Borrowings under term loan facility... 1,900,000 3,005,496 4,697,829
Proceeds from construction loan
agreements......................... 4,089,262 -- --
----------- ----------- -----------
Net cash provided by financial
activities.................. 6,927,951 931,953 2,685,185
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................... (520,715) 281,374 (330,667)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.................................. 711,163 190,448 711,163
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR.................................. $ 190,448 $ 471,822 $ 380,496
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
ITEMS:
Cash paid during the year for:
Interest........................... $ 300,989 $ 373,057 $ 70,125
=========== =========== ===========
Income taxes....................... $ 23,873 $ -- $ --
=========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-34
<PAGE> 98
BRYN MAWR RADIO AND TELEVISION CENTRE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED AUGUST 31, 1995 AND SIX-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIODS ENDED FEBRUARY 29, 1996
AND FEBRUARY 28, 1995)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The financial statements are combined and include
the accounts of Bryn Mawr Radio and Television Centre, Inc. and BMS of Delaware,
Inc. (collectively, the "Company") which are under common ownership. All
significant balances and transactions between the companies have been
eliminated.
BMS of Delaware, a Delaware Holding Company, was incorporated in 1991, and
its shareholders are the same as Bryn Mawr Radio and Television Centre, Inc.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be temporary
investments and cash equivalents for balance sheet and cash flow statement
purposes.
INVENTORIES -- Inventories are stated at the lower of cost (average-cost
basis) or market.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization are computed
by the straight-line method over the estimated useful lives of the respective
assets. Amortization of improvements to leased properties is based upon the
remaining terms of the leases or the estimated useful lives of such
improvements, whichever is shorter.
OTHER ASSETS -- Goodwill and other acquisition costs are being amortized on
a straight-line basis over periods from six to ten years.
DEFERRED REVENUE -- The Company sells extended warranty contracts beyond
the normal manufacturer's warranty period, usually with terms of coverage
(including the manufacturer's warranty period) between twelve and sixty months.
All revenue from the sale of extended warranty contracts is deferred, and the
revenue is amortized on a straight-line basis over the contract period. All
costs related to the contracts are charged to expense when incurred.
REVENUE RECOGNITION -- Revenue from merchandise sales is recognized upon
shipment or delivery of goods. Service revenue is recognized when the repair is
completed.
INCOME TAXES -- Effective September 1, 1987, the shareholders elected to
have the Company taxed as an S Corporation for federal and certain state
corporate income tax purposes.
STORE OPENING COSTS -- The costs of opening new stores are expensed as
incurred.
CAPITAL LEASES -- The amount of amortization of assets recorded under
capital leases is included with depreciation expense.
LONG-LIVED ASSETS -- On an ongoing basis, the Company evaluates the
carrying value of its long-lived assets based upon estimated future undiscounted
cash flows relying on a number of factors, including operating results, business
plans and certain economic projections. In addition, the Company's evaluation
considers nonfinancial data such as changes in the operating environment,
competitive information, market trends and business relationships.
2. SUBSEQUENT EVENT
On March 15, 1996, the Company entered into an agreement to sell
substantially all of the assets of the Company to an unrelated party. The
consummation of this transaction is expected to occur on or about May 9, 1996.
F-35
<PAGE> 99
BRYN MAWR RADIO AND TELEVISION CENTRE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
YEAR ENDED AUGUST 31, 1995 AND SIX-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIODS ENDED FEBRUARY 29, 1996
AND FEBRUARY 28, 1995)
3. DEFERRED REVENUE
Extended warranty contract sales were approximately $531,000 in the year
ended August 31, 1995 and $375,000 and $337,000 in the six-month periods ended
February 29, 1996 and February 28, 1995, respectively. Amortization of the
deferred revenue was approximately $688,000 in the year ended August 31, 1995
and $324,000 and $353,200 in the six-month periods ended February 29, 1996 and
February 28, 1995, respectively. (See Note 1)
4. EMPLOYEE BENEFIT PLANS
The Company has a qualified profit sharing plan covering eligible employees
which provides for contributions at the discretion of the Board of Directors and
also contains a 401(k) feature which provides for salary reduction and certain
employer-matching contributions. Profit sharing plan contributions were $20,000
for the year ended August 31, 1995 and $10,000 for each of the six-month periods
ended February 29, 1996 and February 28, 1995.
5. COMMITMENTS AND RELATED-PARTY TRANSACTIONS
The Company has entered into various lease agreements with respect to its
stores and certain warehouse and administrative facilities. Certain of these
leases contain several options and escalation clauses.
A portion of the Company's store space is leased from an individual who is
both the principal shareholder and president. Rent expense was $1,271,811 for
the year ended August 31, 1995 (of which $186,000 was paid to related parties)
and $653,700 and $572,300 for the six-month periods ended February 29, 1996 and
February 28, 1995, respectively.
Future minimum rental commitments on operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31
---------------------
<S> <C>
1996.................................................... $1,026,119
1997.................................................... 960,270
1998.................................................... 868,651
1999.................................................... 860,709
2000.................................................... 788,464
Thereafter 2,748,670
----------
Total................................................... $7,252,883
==========
</TABLE>
The Company has commitments at August 31, 1995 to expend approximately
$1,800,000 to complete construction of its new distribution center,
administrative offices, and a retail facility.
F-36
<PAGE> 100
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial and Operating
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 32
Management............................ 42
Principal and Selling Stockholders.... 49
Certain Transactions.................. 51
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 57
Underwriting.......................... 59
Legal Matters......................... 60
Experts............................... 60
Additional Information................ 61
Index to Financial Statements......... F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
2,710,000 Shares
TWEETER HOME
ENTERTAINMENT
GROUP, INC.
Common Stock
------------------------------
PROSPECTUS
------------------------------
BT ALEX. BROWN
PAINEWEBBER INCORPORATED
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 1998
======================================================
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered,
all of which will be paid solely by the Company.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 16,055
NASD Filing Fee............................................. 5,800
NASDAQ Listing Fee.......................................... 59,960
Printing, Engraving and Mailing Expenses.................... 125,000
Legal Fees and Expenses..................................... 400,000
Accounting Fees and Expenses................................ 275,000
Transfer Agent Fees and Expenses............................ 12,000
Miscellaneous............................................... 6,185
--------
TOTAL............................................. $900,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Charter generally limits the liability of the Company's
Directors to the Company to the fullest extent permitted from time to time by
Delaware law. The DGCL permits, but does not require, a corporation to indemnify
its directors, officers, employees or agents, and expressly provides that the
indemnification provided for under the DGCL shall not be deemed exclusive of any
indemnification right under any By-law, vote of stockholders or disinterested
directors, or otherwise. The DGCL permits indemnification against expenses and
certain other liabilities arising out of legal actions brought or threatened
against such persons for their conduct on behalf of a corporation; provided,
however, that each such person acted in good faith and in a manner that he
reasonably believed was in or not opposed to such corporation's best interests
and, in the case of a criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The DGCL does not allow indemnification of
directors in the case of an action by or in the right of a corporation
(including stockholder derivative suits) unless the directors successfully
defend the action or indemnification is ordered by the court.
The Charter provides that directors and executive officers of the Company
shall be and, in the discretion of the Board of Directors, other officers and
non-officer employees may be indemnified by the Company to the fullest extent
authorized by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities actually and reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any By-law, agreement, vote of stockholders, or
otherwise. The Charter contains a provision permitted by Delaware law that
generally eliminates the personal liability of directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence or
gross negligence in business combinations, unless the director has breached his
or her duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or a knowing violation of law, paid a dividend or approved a stock
repurchase in violation of the DGCL or obtained an improper personal benefit.
The provision does not alter a director's liability under the Federal securities
laws. In addition, this provision does not affect the availability of equitable
remedies, such as an injunction or rescission, for breach of fiduciary duty.
Reference is also made to the Underwriting Agreement, which is filed as
Exhibit 1.1 to this Registration Statement.
II-1
<PAGE> 102
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order is information regarding the number of
shares of capital stock sold, the number of options granted by the Company, and
the amount of debt securities issued by the Company since March 31, 1995, the
consideration received by the Company for such shares, options and debt
instruments and information relating to the section of the Securities Act of
1933 (the "Securities Act"), or rule of the Securities and Exchange Commission
under which exemption from registration is claimed. None of these securities
were registered under the Securities Act. No sale of securities involved the use
of an underwriter and no commissions were paid in connection with the sales of
securities, except that the Company paid a placement fee of $500,000 to
BankBoston, N.A., in connection with the subordinated loan referred to in
paragraph 4 below.
1. On November 28, 1995, the Company issued an aggregate of 911,787
shares of Series A Redeemable Convertible Preferred Stock to Weston
Presidio Offshore Capital C.V., Natio Vie Developpement II, FCPR, BNP
Venture Holding Corp., Jeffrey Bloomberg, Harriet Bloomberg, Armin Biller
and Matthew Bronfman at a purchase price of $6.46 per share. These shares
will be converted into 911,787 shares of Common Stock upon consummation of
the Offering. At the same time, the Company redeemed shares of Common Stock
from certain stockholders and issued the Redemption Note to such
stockholders. The above securities were sold pursuant to Section 4(2) and
Regulation D under the Securities Act.
2. On May 13, 1996, the Company issued an aggregate of 788,349 shares
of Series A Redeemable Convertible Preferred Stock to Advent Direct
Investment Program Limited Partnership, Global Private Equity II Limited
Partnership and Carolina Bloomberg at a purchase price of $6.46 per share.
These shares will be converted into 788,349 shares of Common Stock upon
consummation of the Offering. The securities were sold pursuant to Section
4(2) and Regulation D under the Securities Act.
3. On March 7, 1997, in connection with a $2.0 million bridge loan
from the Company's existing lender, the Company sold to Weston Presidio
Offshore Capital, C.V., Natio Vie Developpement II, FCPR, BNP Venture
Holding Corp., Jeffrey Bloomberg, Harriet Bloomberg, Armin Biller, Matthew
Bronfman, Advent Direct Investment Program Limited Partnership, Global
Private Equity II Limited Partnership and Carolina Bloomberg, pursuant to
the terms of a Warrant and Debenture Commitment dated as of March 7, 1997,
Warrants initially exercisable for an aggregate of 37,138 shares of Common
Stock. The purchase price for each Warrant was $0.15 multiplied by the
number of shares of Common Stock which could initially be purchased upon
exercise in full of each Warrant. The exercise price for each such Warrant
is $6.46 per share. The securities were sold pursuant to Section 4(2) and
Regulation D under the Securities Act.
4. On May 30, 1997, as part of the total purchase price for the HiFi
Buys Acquisition, the Company issued a Warrant to HiFi Buys Incorporated,
now known as HFB Associates LLC, exercisable for 104,960 shares of Common
Stock. The exercise price for such HFB Associates Warrant is $8.08 per
share. The Company also issued the HiFi Buys Note to HiFi Buys Incorporated
at such time. The securities were sold pursuant to Section 4(2) and
Regulation D under the Securities Act.
5. On June 2, 1997, the Company issued the 1997 Notes in the
aggregate amount of $15,000,000 to PNC Capital Corp, Exeter Venture
Lenders, L.P., Exeter Equity Partners and Seacoast Capital Partners, L.P.
The Company also issued to these lenders warrants exercisable for an
aggregate of 629,566 shares of Common Stock. The exercise price under each
such Warrant is $.002 per share. The securities were sold pursuant to
Section 4(2) and Regulation D under the Securities Act.
6. On June 2, 1997, the Company issued an aggregate of 866,425 shares
of Series B Redeemable Convertible Preferred Stock to Weston Presidio
Offshore Capital C.V., Natio Vie
II-2
<PAGE> 103
Developpement II, FCPR, BNP Venture Holding Corp., Jeffrey Bloomberg,
Harriet Bloomberg, Matthew Bronfman, Advent Direct Investment Program
Limited Partnership, Carolina Bloomberg, PNC Capital Corp, Exeter Venture
Lenders, L.P. and BancBoston Investments Inc., at a purchase price of $8.08
per share. These shares will be converted into 866,425 shares of Common
Stock upon consummation of the Offering. The securities were sold pursuant
to Section 4(2) and Regulation D under the Securities Act.
7. During the past three years, the Company has granted options to
purchase an aggregate number of 866,630 shares to purchase Common Stock to
263 individuals, (some of which have terminated their employment with the
Company) all of whom were at the time of grant employees or directors of
the Company, pursuant to the Company's 1995 Stock Option Plan. These
options have been granted under Section 4(2) of the Securities Act and/or
Rule 701 under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.
(a) See the Exhibit Index included immediately preceding the exhibits to
this Registration Statement.
(b) Schedule II is included in this Registration Statement. All other
schedules are not required under the instructions relating to the applicable
accounting regulations of the Securities and Exchange Commission or are
inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and that offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts on July 8, 1998.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By: /s/ JOSEPH MCGUIRE
------------------------------------
Joseph McGuire
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been duly signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SAMUEL BLOOMBERG Director, Chairman of the Board July 8, 1998
- --------------------------------------------------- and Chief Executive Officer
Samuel Bloomberg, By Joseph McGuire;
His Attorney-in-Fact.
/s/ JEFFREY STONE Director and President (Principal July 8, 1998
- --------------------------------------------------- Executive Officer)
Jeffrey Stone, By Joseph McGuire;
His Attorney-in-Fact.
/s/ JOSEPH MCGUIRE Vice President and Chief Financial July 8, 1998
- --------------------------------------------------- Officer (Principal Financial
Joseph McGuire Officer and Principal Accounting
Officer)
/s/ JEFFREY BLOOMBERG Director July 8, 1998
- ---------------------------------------------------
Jeffrey Bloomberg, By Joseph McGuire;
His Attorney-in-Fact.
/s/ MATTHEW BRONFMAN Director July 8, 1998
- ---------------------------------------------------
Matthew Bronfman, By Joseph McGuire;
His Attorney-in-Fact.
/s/ MICHAEL CRONIN Director July 8, 1998
- ---------------------------------------------------
Michael Cronin, By Joseph McGuire;
His Attorney-in-Fact.
</TABLE>
II-4
<PAGE> 105
SCHEDULE II
TWEETER HOME ENTERTAINMENT GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT --------------------------------- DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO NET OF END OF
DESCRIPTION OF PERIOD AND EXPENSES OTHER ACCOUNTS WRITE-OFFS PERIOD
----------- ---------- ---------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Six months ended March 31,
1998........................ $631 $ -- $ -- $31 $600
Years ended
September 30, 1997.......... 440 191 -- -- 631
September 30, 1996.......... 15 427 -- 2 440
September 30, 1995.......... 15 4 -- 4 15
</TABLE>
S-1
<PAGE> 106
EXHIBIT INDEX
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
**1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Company.
**3.2 -- Amended and Restated Certificate of Incorporation of the
Company.
*3.3 -- Articles of Organization of New England Audio Co., Inc., as
amended.
*3.4 -- By-Laws of the Company.
**3.5 -- Amended and Restated By-Laws of the Company.
*3.6 -- By-Laws of New England Audio Co., Inc.
**3.7 -- Form of Amended and Restated Certificate of Incorporation of
the Company, to be effective immediately prior to the
closing of the Offering.
**3.8 -- Form of Amended and Restated By-Laws of the Company, to be
effective immediately prior to the closing of the Offering.
***4.1 -- Specimen Certificate representing the Common Stock.
**4.2 -- Form of Shareholders' Rights Agreement to be effective
immediately prior to the closing of the Offering.
**5.1 -- Opinion of Goulston & Storrs, P.C. with respect to the
legality of the shares being offered.
*10.1 -- Amended and Restated Registration Rights Agreement, dated as
of May 30, 1997, as amended, among the Company and the
shareholders and warrantholders listed therein, as amended.
*10.2 -- Warrant Purchase Agreement among the Company, PNC Capital
Corp, Seacoast Capital Partners, L.P. and Exeter Venture
Lenders, L.P., dated as of May 30, 1997, as amended.
+***10.3 -- Stock Purchase Warrant issued to PNC Capital Corp dated
June 5, 1998 for 209,855 shares of Common Stock of the
Company.
+***10.4 -- Stock Purchase Warrant issued to Seacoast Capital Partners,
L.P. dated June 5, 1998 for 209,855 shares of Common Stock
of the Company.
+***10.5 -- Stock Purchase Warrant issued to Exeter Venture Lenders,
L.P. dated as of June 5, 1998 for 104,928 shares of Common
Stock of the Company.
+***10.6 -- Stock Purchase Warrant issued to Exeter Equity Partners,
L.P. dated as of June 5, 1998 for 104,928 shares of Common
Stock of the Company.
+***10.7 -- Common Stock Warrant issued to HiFi Buys Incorporated dated
June 5, 1998 for 104,960 shares of Common Stock of the
Company.
*10.8 -- Form of Common Stock Purchase Warrant dated June 5, 1998
issued by the Company pursuant to the Warrant and Debenture
Commitment.
10.9 -- [Intentionally omitted]
10.10 -- [Intentionally omitted]
*10.11 -- Lease from James M. Salah of Boca Raton, Florida, as Trustee
of JMS Realty Trust, to the Company for premises at 40
Hudson Road, Canton, Massachusetts, dated June 11, 1991.
*10.12 -- 1995 Stock Option Plan.
**10.13 -- 1998 Plan.
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
**10.14 -- 1998 Outside Director Stock Plan (included as Section 12 of
1998 Plan filed as Exhibit 10.13).
**10.15 -- Employment Agreement between the Company and Samuel
Bloomberg to be effective upon the Offering.
**10.16 -- Employment Agreement between the Company and Jeffrey Stone
to be effective upon the Offering.
**10.17 -- Employment Agreement between the Company and Joseph McGuire
to be effective upon the Offering.
*10.18 -- Employment Agreement between the Company and Fred Lokoff,
dated as of May 13, 1996 and amended as of April 23, 1997.
*10.19 -- Employment Agreement between the Company and David Ginsburg,
dated as of June 1, 1997.
*10.20 -- Asset Purchase Agreement, dated as of May 30, 1997, between
the Company and HiFi Buys Incorporated.
*10.21 -- Purchase and Sale Agreement between Chadwick-Miller Inc. and
New England Audio Co., Inc. for premises at 10 Pequot Way,
Canton, MA, dated March 31, 1998.
*10.22 -- Progressive Retailers Organization, Inc. Policy and
Procedures Manual.
**11 -- Statement Re Computation of Per Share Earnings.
**21.1 -- Subsidiaries of the Company.
***23.1 -- Consent of Deloitte & Touche LLP (Boston).
***23.2 -- Consent of Deloitte & Touche LLP (Atlanta).
***23.3 -- Consent of Deloitte & Touche LLP (Philadelphia).
**23.4 -- Consent of Goulston & Storrs, P.C., counsel to the Company
(included in Exhibit 5.1).
**23.5 -- Consent of Audio Video International Magazine.
**23.6 -- Consent of TWICE Consumer Electronics Retail Registry.
**23.7 -- Consent of DVD Video Group.
*24.1 -- Power of Attorney (included on Signature Page).
**27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Supersedes and replaces exhibit of same numerical designation filed with
the Commission on April 24, 1998.
* Previously filed with the Commission on April 24, 1998.
** Previously filed with the Commission on June 8, 1998.
*** Filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or in the Notes thereto.
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
TWEETER HOME ENTERTAINMENT
GROUP, INC
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE COMMON STOCK
IN BOSTON, MA OR NEW YORK, NY $.01 PAR VALUE
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT CUSIP 901167 10 6
is the owner of
- --------------------------------------------------------------------------------
SEE REVERSE FOR CERTAIN DEFINITIONS
FULLY PAID AND NON-ASSESSABLE SHARES, $.01 PAR VALUE, OF THE COMMON STOCK OF
TWEETER HOME ENTERTAINMENT GROUP, INC. transferable on the books of the
Corporation in person or by attorney upon surrender of this certificate
properly endorsed. This certificate and the shares represented hereby are
subject to the laws of the State of Delaware and to the Certificate of
Incorporation and the By-Laws of the Corporation as from time to time amended.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, TWEETER HOME ENTERTAINMENT GROUP, INC. has caused its
facsimile corporate seal and the facsimile signatures of its duly authorized
officers to be hereunto affixed.
Dated:
/s/ Jeffrey S. Stone /s/ Jeffrey S. Stone
- -------------------- --------------------
TREASURER PRESIDENT
--------------------------------------
Tweeter Home Entertainment Group, Inc.
CORPORATE
SEAL
1998
DELAWARE
--------------------------------------
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/ ?
- ----------------------------------------------
AMERICAN BANK NOTE COMPANY JUNE 5, 1998 fm
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 057119fc-C
(562) 989-2333
(FAX) (562) 426-7450 308-19x Proof REV 1
- ----------------------------------------------
<PAGE> 2
TWEETER HOME ENTERTAINMENT GROUP, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK. THE
CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A
COPY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE RIGHTS OF THE SHARES
OF EACH OUTSTANDING CLASS OF STOCK OR SERIES THEREOF OF THE CORPORATION, AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ..........Custodian...........
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minora
survivorship and not as tenants Act............................
in common (State)
</TABLE>
Additional abbreviations may also be used thought not in the above list.
For value received, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
/ /
/ /
/ /
___________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
___________________________________________________________________________
___________________________________________________________________________
____________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
__________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _____________________________
______________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
_______________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
/ /
/ AMERICAN BANK NOTE COMPANY JUNE 5, 1998 fm /
/ 3504 ATLANTIC AVENUE /
/ SUITE 12 057119bk-C /
/ LONG BEACH, CA 90807 /
/ (562) 989-2333 /
/ (FAX) (562) 426-7450 Proof_____ REV 1 /
/ /
<PAGE> 1
EXHIBIT 10.3
NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES
LAWS, AND NO TRANSFER OF THIS WARRANT OR THE SECURITIES ISSUABLE UPON ITS
EXERCISE MAY BE MADE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH LAWS OR THE AVAILABILITY OF EXEMPTIONS FROM THE REGISTRATION PROVISIONS
THEREOF. MOREOVER, THIS WARRANT AND THE SECURITIES FOR WHICH IT IS EXERCISABLE
ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND CERTAIN OTHER RESTRICTIONS SET FORTH
IN A TAG-ALONG, TRANSFER RESTRICTION AND BRING-ALONG AGREEMENT DATED AS OF
NOVEMBER 28, 1995, AS AMENDED (WHICH AGREEMENT IS ON FILE WITH THE COMPANY'S
SECRETARY).
TWEETER HOME ENTERTAINMENT GROUP, INC.
June 5, 1998 Certificate No. 1
STOCK PURCHASE WARRANT
209,855 Shares of Common Stock
THIS WARRANT IS BEING ISSUED IN EXCHANGE FOR A NEW ENGLAND AUDIO CO., INC.
COMMON STOCK PURCHASE WARRANT DATED MAY 30, 1997.
This is to certify that, for value received, PNC Capital Corp (the
"Initial Holder"), its registered successors and assigns, is entitled upon the
due exercise hereof to purchase (subject to adjustment as provided in the
Purchase Agreement) 209,855 shares of the Common Stock, $.01 par value (such
stock, together with such other securities or properties as may be issued upon
the exercise hereof, being referred to herein as the "Stock"), of Tweeter Home
Entertainment Group, Inc., a Delaware corporation (the "Company"), for the price
of $.002 per share (the "Exercise Price") and to exercise the other rights,
powers and privileges provided for herein, all upon the terms and subject to the
conditions specified herein.
1. CERTAIN DEFINITIONS. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in that certain
Warrant Purchase Agreement dated as of May 30, 1997 between New England Audio
Co., Inc., the Initial Holder and certain other parties (the "Purchase
Agreement") unless the context otherwise requires.
<PAGE> 2
2. EXERCISE. This Warrant may be exercised by the registered
Holder hereof at any time during the period commencing on the date hereof and
ending at 5:00 p.m., Boston, Massachusetts time on the Expiration Date specified
in Paragraph 9 by surrender of this Warrant at the Company's principal offices
at 40 Hudson Road, Canton, Massachusetts 02021 (or such other address as the
Company may advise the Holder by notice given in the manner provided in the
Purchase Agreement), with the form of election to subscribe attached hereto as
ANNEX A duly executed and upon tender to the Company of the Exercise Price. Upon
the date the Company receives all of the foregoing from the Holder this Warrant
shall be deemed to have been exercised and the Holder exercising the same to
have become a holder of record of shares of Stock purchased hereunder for all
purposes and certificates for such shares shall be delivered to such Holder or
its transferee within a reasonable time (not exceeding ten business days) after
this Warrant shall have been exercised. If an exercise of this Warrant is for
less than all of the Stock then, concurrently with its delivery of such
certificates, the Company shall deliver to such Holder (or, so long as such
Holder has also complied with Paragraph 6, its transferee) a new warrant or
warrants which shall be of like tenor and date as this Warrant and shall
represent in the aggregate the right to subscribe for and purchase the remaining
number of shares which may be subscribed for and purchased hereunder.
3. PAYMENT OF EXERCISE PRICE. Upon any exercise of this Warrant
the Exercise Price may be paid, in the sole discretion of the Holder, by (a)
tendering the same to the Company in cash, (b) setting-off the same against any
debt owed by the Company to the Holder or (c) tendering to the Company such
number of shares of Stock issuable upon the exercise of this Warrant as have a
value equal to the Exercise Price. If the Holder shall choose option (b) or (c)
above then, in lieu of tendering the Exercise Price upon the exercise this
Warrant, it shall tender to the Company a notice specifying the manner in which
it has elected to pay the Exercise Price.
4. TAXES. If any tax (other than income tax) is payable by the
Holder by reason of the issuance of any certificates representing Stock, such
tax shall be paid by the Company; provided, that the Company shall not be
required to pay any tax which may be payable in respect of the issuance of any
such certificate in a name other than that of the registered Holder of this
Warrant, and the Company shall not be required to issue any such certificate in
a name other than such Holder's unless and until any tax payable by reason of
such issuance has been paid.
5. WARRANT REGISTER. The Company shall at all times while any
portion of this Warrant remains outstanding and exercisable keep and maintain at
its principal office a register (the "Warrant Register") in which the
registration, transfer and exchange of this Warrant shall be recorded. The
Company shall not at any time, except upon the dissolution, liquidation or
winding up of the Company, close such register so as to result in preventing or
delaying the exercise, transfer or exchange of this Warrant. If at any time the
Company shall appoint an agent (the "Warrant Agent") to maintain such register,
the Company shall promptly give notice in the manner provided in the Purchase
Agreement to the registered Holder hereof of the name of such Warrant Agent and
of the place or places at which this Warrant may be presented for transfer,
exchange or exercise. The terms of the agreement between the Company and any
Warrant Agent at any time in effect will be in conformity with the terms of this
Warrant and the Purchase Agreement.
-2-
<PAGE> 3
6. TRANSFER. Subject to compliance with applicable securities
laws and with the restrictions on transfer set forth in the Amended and Restated
Tag-Along, Transfer Restriction and Bring-Along Agreement among the Company, as
assignee of New England Audio Co., Inc., and certain of its shareholders, as
amended, this Warrant and all rights hereunder are transferable on the books of
the Company by the registered Holder hereof in person or by duly authorized
attorney upon surrender of this Warrant at the address set forth in Paragraph 2,
together with the form of transfer authorization attached hereto as ANNEX B duly
executed. Absent any such transfer, the Company may deem and treat the
registered Holder of this Warrant at any time as the absolute owner hereof for
all purposes and shall not be affected by any notice to the contrary.
7. EXCHANGE. This Warrant is exchangeable, upon the surrender
hereof by the Holder at the address set forth in Paragraph 2 together with the
form of exchange authorization attached hereto as ANNEX C duly executed, for new
warrants in such denominations as the Holder shall designate at the time of
surrender for exchange (but not for less than 10% of the shares of Stock for
which this Warrant is originally exerciseable), which new warrants shall be of
like tenor and date and shall represent in the aggregate the right to subscribe
for and purchase the number of shares which may be subscribed for and purchased
hereunder.
8. LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If this
Warrant shall become lost, stolen, mutilated or destroyed the Company shall
issue a new warrant of like denomination, tenor and date as this Warrant upon
its receipt from the Holder of reasonably satisfactory evidence of such event
and assurances that the Holder will indemnify the Company on account of any loss
incurred by the Company which is occasioned by such event. Any such new warrant
shall constitute an original contractual obligation of the Company whether or
not the allegedly lost, stolen, mutilated or destroyed warrant shall be at any
time enforceable by anyone.
9. EXPIRATION. This Warrant shall expire and be of no further
force and effect on the date (the "Expiration Date") which is the earlier to
occur of (a) the date when the Company has fully complied with Paragraph 2
hereof, in the event of a complete exercise hereof or (b) the earlier to occur
of (i) May 30, 2007 or (ii) the fourth anniversary of the date on which Senior
Subordinate Promissory Notes issued under the Note Purchase Agreement have been
paid in full.
10. MANDATORY EXERCISE. Notwithstanding any other provision
hereof, the Holder shall, upon the request of the Company, fully exercise this
Warrant concurrently with the closing of a Qualified Public Offering.
11. WARRANT PURCHASE AGREEMENT. The terms of the Purchase
Agreement, as they relate to this Warrant, are incorporated by reference in this
Warrant as fully as if the same were set forth herein.
12. APPLICABLE LAW. The validity, interpretation and performance
of this Warrant shall be governed by the laws of the State of Delaware.
-3-
<PAGE> 4
13. SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
permitted assigns of the Company and the Holder.
14. NOTICES. All notices and other correspondence which is
required or may be given hereunder shall be given in the manner and to the
addresses specified in the Purchase Agreement.
WITNESS the due execution of this Stock Purchase Warrant as of the date
first written above with the intent to be legally bound.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By: /s/ Jeffrey S. Stone
-----------------------------------
Title: President
-4-
<PAGE> 5
ANNEX A
to Warrant
[SUBSCRIPTION FORM TO BE EXECUTED UPON EXERCISE OF THE WARRANT]
The undersigned registered holder of the within Warrant hereby (1)
subscribes for _____________ shares which the undersigned is entitled to
purchase under the terms of the within Warrant, (2) makes the full cash payment
therefor called for by the within Warrant, and (3) directs that the shares
issuable upon exercise of said Warrant be issued as follows:
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 6
ANNEX B
to Warrant
[TO BE EXECUTED TO EFFECT A TRANSFER OF THE WARRANT]
FOR VALUE RECEIVED _______________________________ hereby sells,
assigns, and transfers unto __________________________________________________
______________________________________________________________________________,
the right to purchase ___________________ shares evidenced by the within
Warrant, and does hereby irrevocably constitute and appoint ________________ to
transfer such right on the books of Company, with full power of substitution.
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 7
ANNEX C
to Warrant
[TO BE EXECUTED TO EFFECT AN EXCHANGE OF THE WARRANT]
The undersigned registered holder of the within Warrant hereby directs
the Company to exchange said Warrant for like warrants in the following
denominations: _______________________.
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 1
EXHIBIT 10.4
NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES
LAWS, AND NO TRANSFER OF THIS WARRANT OR THE SECURITIES ISSUABLE UPON ITS
EXERCISE MAY BE MADE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH LAWS OR THE AVAILABILITY OF EXEMPTIONS FROM THE REGISTRATION PROVISIONS
THEREOF. MOREOVER, THIS WARRANT AND THE SECURITIES FOR WHICH IT IS EXERCISABLE
ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND CERTAIN OTHER RESTRICTIONS SET FORTH
IN A TAG-ALONG, TRANSFER RESTRICTION AND BRING-ALONG AGREEMENT DATED AS OF
NOVEMBER 28, 1995, AS AMENDED (WHICH AGREEMENT IS ON FILE WITH THE COMPANY'S
SECRETARY).
TWEETER HOME ENTERTAINMENT GROUP, INC.
June 5, 1998 Certificate No. 2
STOCK PURCHASE WARRANT
209,855 Shares of Common Stock
THIS WARRANT IS BEING ISSUED IN EXCHANGE FOR A NEW ENGLAND AUDIO CO., INC.
COMMON STOCK PURCHASE WARRANT DATED MAY 30, 1997.
This is to certify that, for value received, Seacoast Capital Partners,
L.P. (the "Initial Holder"), its registered successors and assigns, is entitled
upon the due exercise hereof to purchase (subject to adjustment as provided in
the Purchase Agreement) 209,855 shares of the Common Stock, $.01 par value (such
stock, together with such other securities or properties as may be issued upon
the exercise hereof, being referred to herein as the "Stock"), of Tweeter Home
Entertainment Group, Inc., a Delaware corporation (the "Company"), for the price
of $.002 per share (the "Exercise Price") and to exercise the other rights,
powers and privileges provided for herein, all upon the terms and subject to the
conditions specified herein.
1. CERTAIN DEFINITIONS. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in that certain
Warrant Purchase Agreement dated as of May 30, 1997 between New England Audio
Co., Inc., the Initial Holder and certain other parties (the "Purchase
Agreement") unless the context otherwise requires.
<PAGE> 2
2. EXERCISE. This Warrant may be exercised by the registered
Holder hereof at any time during the period commencing on the date hereof and
ending at 5:00 p.m., Boston, Massachusetts time on the Expiration Date specified
in Paragraph 9 by surrender of this Warrant at the Company's principal offices
at 40 Hudson Road, Canton, Massachusetts 02021 (or such other address as the
Company may advise the Holder by notice given in the manner provided in the
Purchase Agreement), with the form of election to subscribe attached hereto as
ANNEX A duly executed and upon tender to the Company of the Exercise Price. Upon
the date the Company receives all of the foregoing from the Holder this Warrant
shall be deemed to have been exercised and the Holder exercising the same to
have become a holder of record of shares of Stock purchased hereunder for all
purposes and certificates for such shares shall be delivered to such Holder or
its transferee within a reasonable time (not exceeding ten business days) after
this Warrant shall have been exercised. If an exercise of this Warrant is for
less than all of the Stock then, concurrently with its delivery of such
certificates, the Company shall deliver to such Holder (or, so long as such
Holder has also complied with Paragraph 6, its transferee) a new warrant or
warrants which shall be of like tenor and date as this Warrant and shall
represent in the aggregate the right to subscribe for and purchase the remaining
number of shares which may be subscribed for and purchased hereunder.
3. PAYMENT OF EXERCISE PRICE. Upon any exercise of this Warrant
the Exercise Price may be paid, in the sole discretion of the Holder, by (a)
tendering the same to the Company in cash, (b) setting-off the same against any
debt owed by the Company to the Holder or (c) tendering to the Company such
number of shares of Stock issuable upon the exercise of this Warrant as have a
value equal to the Exercise Price. If the Holder shall choose option (b) or (c)
above then, in lieu of tendering the Exercise Price upon the exercise this
Warrant, it shall tender to the Company a notice specifying the manner in which
it has elected to pay the Exercise Price.
4. TAXES. If any tax (other than income tax) is payable by the
Holder by reason of the issuance of any certificates representing Stock, such
tax shall be paid by the Company; provided, that the Company shall not be
required to pay any tax which may be payable in respect of the issuance of any
such certificate in a name other than that of the registered Holder of this
Warrant, and the Company shall not be required to issue any such certificate in
a name other than such Holder's unless and until any tax payable by reason of
such issuance has been paid.
5. WARRANT REGISTER. The Company shall at all times while any
portion of this Warrant remains outstanding and exercisable keep and maintain at
its principal office a register (the "Warrant Register") in which the
registration, transfer and exchange of this Warrant shall be recorded. The
Company shall not at any time, except upon the dissolution, liquidation or
winding up of the Company, close such register so as to result in preventing or
delaying the exercise, transfer or exchange of this Warrant. If at any time the
Company shall appoint an agent (the "Warrant Agent") to maintain such register,
the Company shall promptly give notice in the manner provided in the Purchase
Agreement to the registered Holder hereof of the name of such Warrant Agent and
of the place or places at which this Warrant may be presented for transfer,
exchange or exercise. The terms of the agreement between the Company and any
Warrant Agent at any time in effect will be in conformity with the terms of this
Warrant and the Purchase Agreement.
-2-
<PAGE> 3
6. TRANSFER. Subject to compliance with applicable securities
laws and with the restrictions on transfer set forth in the Amended and Restated
Tag-Along, Transfer Restriction and Bring-Along Agreement among the Company, as
assignee of New England Audio Co., Inc., and certain of its shareholders, as
amended, this Warrant and all rights hereunder are transferable on the books of
the Company by the registered Holder hereof in person or by duly authorized
attorney upon surrender of this Warrant at the address set forth in Paragraph 2,
together with the form of transfer authorization attached hereto as ANNEX B duly
executed. Absent any such transfer, the Company may deem and treat the
registered Holder of this Warrant at any time as the absolute owner hereof for
all purposes and shall not be affected by any notice to the contrary.
7. EXCHANGE. This Warrant is exchangeable, upon the surrender
hereof by the Holder at the address set forth in Paragraph 2 together with the
form of exchange authorization attached hereto as ANNEX C duly executed, for new
warrants in such denominations as the Holder shall designate at the time of
surrender for exchange (but not for less than 10% of the shares of Stock for
which this Warrant is originally exerciseable), which new warrants shall be of
like tenor and date and shall represent in the aggregate the right to subscribe
for and purchase the number of shares which may be subscribed for and purchased
hereunder.
8. LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If this
Warrant shall become lost, stolen, mutilated or destroyed the Company shall
issue a new warrant of like denomination, tenor and date as this Warrant upon
its receipt from the Holder of reasonably satisfactory evidence of such event
and assurances that the Holder will indemnify the Company on account of any loss
incurred by the Company which is occasioned by such event. Any such new warrant
shall constitute an original contractual obligation of the Company whether or
not the allegedly lost, stolen, mutilated or destroyed warrant shall be at any
time enforceable by anyone.
9. EXPIRATION. This Warrant shall expire and be of no further
force and effect on the date (the "Expiration Date") which is the earlier to
occur of (a) the date when the Company has fully complied with Paragraph 2
hereof, in the event of a complete exercise hereof or (b) the earlier to occur
of (i) May 30, 2007 or (ii) the fourth anniversary of the date on which Senior
Subordinate Promissory Notes issued under the Note Purchase Agreement have been
paid in full.
10. MANDATORY EXERCISE. Notwithstanding any other provision
hereof, the Holder shall, upon the request of the Company, fully exercise this
Warrant concurrently with the closing of a Qualified Public Offering.
11. WARRANT PURCHASE AGREEMENT. The terms of the Purchase
Agreement, as they relate to this Warrant, are incorporated by reference in this
Warrant as fully as if the same were set forth herein.
12. APPLICABLE LAW. The validity, interpretation and performance
of this Warrant shall be governed by the laws of the State of Delaware.
-3-
<PAGE> 4
13. SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
permitted assigns of the Company and the Holder.
14. NOTICES. All notices and other correspondence which is
required or may be given hereunder shall be given in the manner and to the
addresses specified in the Purchase Agreement.
WITNESS the due execution of this Stock Purchase Warrant as of the date
first written above with the intent to be legally bound.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By: /s/ Jeffrey S. Stone
----------------------------------
Title: President
<PAGE> 5
ANNEX A
to Warrant
[SUBSCRIPTION FORM TO BE EXECUTED UPON EXERCISE OF THE WARRANT]
The undersigned registered holder of the within Warrant hereby (1)
subscribes for _____________ shares which the undersigned is entitled to
purchase under the terms of the within Warrant, (2) makes the full cash payment
therefor called for by the within Warrant, and (3) directs that the shares
issuable upon exercise of said Warrant be issued as follows:
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 6
ANNEX B
to Warrant
[TO BE EXECUTED TO EFFECT A TRANSFER OF THE WARRANT]
FOR VALUE RECEIVED ____________________________ hereby sells, assigns,
and transfers unto ____________________________________________________________
_______________________________________________________________________________,
the right to purchase ___________________ shares evidenced by the within
Warrant, and does hereby irrevocably constitute and appoint ________________ to
transfer such right on the books of Company, with full power of substitution.
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 7
ANNEX C
to Warrant
[TO BE EXECUTED TO EFFECT AN EXCHANGE OF THE WARRANT]
The undersigned registered holder of the within Warrant hereby directs
the Company to exchange said Warrant for like warrants in the following
denominations: _______________________.
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 1
EXHIBIT 10.5
NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES
LAWS, AND NO TRANSFER OF THIS WARRANT OR THE SECURITIES ISSUABLE UPON ITS
EXERCISE MAY BE MADE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH LAWS OR THE AVAILABILITY OF EXEMPTIONS FROM THE REGISTRATION PROVISIONS
THEREOF. MOREOVER, THIS WARRANT AND THE SECURITIES FOR WHICH IT IS EXERCISABLE
ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND CERTAIN OTHER RESTRICTIONS SET FORTH
IN A TAG-ALONG, TRANSFER RESTRICTION AND BRING-ALONG AGREEMENT DATED AS OF
NOVEMBER 28, 1995, AS AMENDED (WHICH AGREEMENT IS ON FILE WITH THE COMPANY'S
SECRETARY).
TWEETER HOME ENTERTAINMENT GROUP, INC.
June 5, 1998 Certificate No. 4
STOCK PURCHASE WARRANT
104,928 Shares of Common Stock
THIS WARRANT IS BEING ISSUED IN EXCHANGE FOR A NEW ENGLAND AUDIO CO., INC.
COMMON STOCK PURCHASE WARRANT DATED MAY 30, 1997.
This is to certify that, for value received, Exeter Venture Lenders,
L.P. (the "Initial Holder"), its registered successors and assigns, is entitled
upon the due exercise hereof to purchase (subject to adjustment as provided in
the Purchase Agreement) 104,928 shares of the Common Stock, $.01 par value (such
stock, together with such other securities or properties as may be issued upon
the exercise hereof, being referred to herein as the "Stock"), of Tweeter Home
Entertainment Group, Inc., a Delaware corporation (the "Company"), for the price
of $.002 per share (the "Exercise Price") and to exercise the other rights,
powers and privileges provided for herein, all upon the terms and subject to the
conditions specified herein.
1. CERTAIN DEFINITIONS. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in that certain
Warrant Purchase Agreement dated as of May 30, 1997 between New England Audio
Co., Inc., the Initial Holder and certain other parties (the "Purchase
Agreement") unless the context otherwise requires.
<PAGE> 2
2. EXERCISE. This Warrant may be exercised by the registered
Holder hereof at any time during the period commencing on the date hereof and
ending at 5:00 p.m., Boston, Massachusetts time on the Expiration Date specified
in Paragraph 9 by surrender of this Warrant at the Company's principal offices
at 40 Hudson Road, Canton, Massachusetts 02021 (or such other address as the
Company may advise the Holder by notice given in the manner provided in the
Purchase Agreement), with the form of election to subscribe attached hereto as
ANNEX A duly executed and upon tender to the Company of the Exercise Price. Upon
the date the Company receives all of the foregoing from the Holder this Warrant
shall be deemed to have been exercised and the Holder exercising the same to
have become a holder of record of shares of Stock purchased hereunder for all
purposes and certificates for such shares shall be delivered to such Holder or
its transferee within a reasonable time (not exceeding ten business days) after
this Warrant shall have been exercised. If an exercise of this Warrant is for
less than all of the Stock then, concurrently with its delivery of such
certificates, the Company shall deliver to such Holder (or, so long as such
Holder has also complied with Paragraph 6, its transferee) a new warrant or
warrants which shall be of like tenor and date as this Warrant and shall
represent in the aggregate the right to subscribe for and purchase the remaining
number of shares which may be subscribed for and purchased hereunder.
3. PAYMENT OF EXERCISE PRICE. Upon any exercise of this Warrant
the Exercise Price may be paid, in the sole discretion of the Holder, by (a)
tendering the same to the Company in cash, (b) setting-off the same against any
debt owed by the Company to the Holder or (c) tendering to the Company such
number of shares of Stock issuable upon the exercise of this Warrant as have a
value equal to the Exercise Price. If the Holder shall choose option (b) or (c)
above then, in lieu of tendering the Exercise Price upon the exercise this
Warrant, it shall tender to the Company a notice specifying the manner in which
it has elected to pay the Exercise Price.
4. TAXES. If any tax (other than income tax) is payable by the
Holder by reason of the issuance of any certificates representing Stock, such
tax shall be paid by the Company; provided, that the Company shall not be
required to pay any tax which may be payable in respect of the issuance of any
such certificate in a name other than that of the registered Holder of this
Warrant, and the Company shall not be required to issue any such certificate in
a name other than such Holder's unless and until any tax payable by reason of
such issuance has been paid.
5. WARRANT REGISTER. The Company shall at all times while any
portion of this Warrant remains outstanding and exercisable keep and maintain at
its principal office a register (the "Warrant Register") in which the
registration, transfer and exchange of this Warrant shall be recorded. The
Company shall not at any time, except upon the dissolution, liquidation or
winding up of the Company, close such register so as to result in preventing or
delaying the exercise, transfer or exchange of this Warrant. If at any time the
Company shall appoint an agent (the "Warrant Agent") to maintain such register,
the Company shall promptly give notice in the manner provided in the Purchase
Agreement to the registered Holder hereof of the name of such Warrant Agent and
of the place or places at which this Warrant may be presented for transfer,
exchange or exercise. The terms of the agreement between the Company and any
Warrant Agent at any time in effect will be in conformity with the terms of this
Warrant and the Purchase Agreement.
-2-
<PAGE> 3
6. TRANSFER. Subject to compliance with applicable securities
laws and with the restrictions on transfer set forth in the Amended and Restated
Tag-Along, Transfer Restriction and Bring-Along Agreement among the Company, as
assignee of New England Audio Co., Inc., and certain of its shareholders, as
amended, this Warrant and all rights hereunder are transferable on the books of
the Company by the registered Holder hereof in person or by duly authorized
attorney upon surrender of this Warrant at the address set forth in Paragraph 2,
together with the form of transfer authorization attached hereto as ANNEX B duly
executed. Absent any such transfer, the Company may deem and treat the
registered Holder of this Warrant at any time as the absolute owner hereof for
all purposes and shall not be affected by any notice to the contrary.
7. EXCHANGE. This Warrant is exchangeable, upon the surrender
hereof by the Holder at the address set forth in Paragraph 2 together with the
form of exchange authorization attached hereto as ANNEX C duly executed, for new
warrants in such denominations as the Holder shall designate at the time of
surrender for exchange (but not for less than 10% of the shares of Stock for
which this Warrant is originally exerciseable), which new warrants shall be of
like tenor and date and shall represent in the aggregate the right to subscribe
for and purchase the number of shares which may be subscribed for and purchased
hereunder.
8. LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If this
Warrant shall become lost, stolen, mutilated or destroyed the Company shall
issue a new warrant of like denomination, tenor and date as this Warrant upon
its receipt from the Holder of reasonably satisfactory evidence of such event
and assurances that the Holder will indemnify the Company on account of any loss
incurred by the Company which is occasioned by such event. Any such new warrant
shall constitute an original contractual obligation of the Company whether or
not the allegedly lost, stolen, mutilated or destroyed warrant shall be at any
time enforceable by anyone.
9. EXPIRATION. This Warrant shall expire and be of no further
force and effect on the date (the "Expiration Date") which is the earlier to
occur of (a) the date when the Company has fully complied with Paragraph 2
hereof, in the event of a complete exercise hereof or (b) the earlier to occur
of (i) May 30, 2007 or (ii) the fourth anniversary of the date on which Senior
Subordinate Promissory Notes issued under the Note Purchase Agreement have been
paid in full.
10. MANDATORY EXERCISE. Notwithstanding any other provision
hereof, the Holder shall, upon the request of the Company, fully exercise this
Warrant concurrently with the closing of a Qualified Public Offering.
11. WARRANT PURCHASE AGREEMENT. The terms of the Purchase
Agreement, as they relate to this Warrant, are incorporated by reference in this
Warrant as fully as if the same were set forth herein.
12. APPLICABLE LAW. The validity, interpretation and performance
of this Warrant shall be governed by the laws of the State of Delaware.
-3-
<PAGE> 4
13. SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
permitted assigns of the Company and the Holder.
14. NOTICES. All notices and other correspondence which is
required or may be given hereunder shall be given in the manner and to the
addresses specified in the Purchase Agreement.
WITNESS the due execution of this Stock Purchase Warrant as of the date
first written above with the intent to be legally bound.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By: /s/ Jeffrey S. Stone
-----------------------------------
Title: President
<PAGE> 5
ANNEX A
to Warrant
[SUBSCRIPTION FORM TO BE EXECUTED UPON EXERCISE OF THE WARRANT]
The undersigned registered holder of the within Warrant hereby (1)
subscribes for _____________ shares which the undersigned is entitled to
purchase under the terms of the within Warrant, (2) makes the full cash payment
therefor called for by the within Warrant, and (3) directs that the shares
issuable upon exercise of said Warrant be issued as follows:
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 6
ANNEX B
to Warrant
[TO BE EXECUTED TO EFFECT A TRANSFER OF THE WARRANT]
FOR VALUE RECEIVED ____________________________ hereby sells, assigns,
and transfers unto ____________________________________________________________
_______________________________________________________________________________,
the right to purchase ___________________ shares evidenced by the within
Warrant, and does hereby irrevocably constitute and appoint ________________ to
transfer such right on the books of Company, with full power of substitution.
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 7
ANNEX C
to Warrant
[TO BE EXECUTED TO EFFECT AN EXCHANGE OF THE WARRANT]
The undersigned registered holder of the within Warrant hereby directs
the Company to exchange said Warrant for like warrants in the following
denominations: _______________________.
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 1
EXHIBIT 10.6
NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH IT IS EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES
LAWS, AND NO TRANSFER OF THIS WARRANT OR THE SECURITIES ISSUABLE UPON ITS
EXERCISE MAY BE MADE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH LAWS OR THE AVAILABILITY OF EXEMPTIONS FROM THE REGISTRATION PROVISIONS
THEREOF. MOREOVER, THIS WARRANT AND THE SECURITIES FOR WHICH IT IS EXERCISABLE
ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND CERTAIN OTHER RESTRICTIONS SET FORTH
IN A TAG-ALONG, TRANSFER RESTRICTION AND BRING-ALONG AGREEMENT DATED AS OF
NOVEMBER 28, 1995, AS AMENDED (WHICH AGREEMENT IS ON FILE WITH THE COMPANY'S
SECRETARY).
TWEETER HOME ENTERTAINMENT GROUP, INC.
June 5, 1998 Certificate No. 5
STOCK PURCHASE WARRANT
104,928 Shares of Common Stock
THIS WARRANT IS BEING ISSUED IN EXCHANGE FOR A NEW ENGLAND AUDIO CO., INC.
COMMON STOCK PURCHASE WARRANT DATED MAY 30, 1997.
This is to certify that, for value received, Exeter Equity Partners,
L.P. (the "Initial Holder"), its registered successors and assigns, is entitled
upon the due exercise hereof to purchase (subject to adjustment as provided in
the Purchase Agreement) 104,928 shares of the Common Stock, $.01 par value (such
stock, together with such other securities or properties as may be issued upon
the exercise hereof, being referred to herein as the "Stock"), of Tweeter Home
Entertainment Group, Inc., a Delaware corporation (the "Company"), for the price
of $.002 per share (the "Exercise Price") and to exercise the other rights,
powers and privileges provided for herein, all upon the terms and subject to the
conditions specified herein.
1. CERTAIN DEFINITIONS. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in that certain
Warrant Purchase Agreement dated as of May 30, 1997 between New England Audio
Co., Inc., the Initial Holder and certain other parties (the "Purchase
Agreement") unless the context otherwise requires.
<PAGE> 2
2. EXERCISE. This Warrant may be exercised by the registered
Holder hereof at any time during the period commencing on the date hereof and
ending at 5:00 p.m., Boston, Massachusetts time on the Expiration Date specified
in Paragraph 9 by surrender of this Warrant at the Company's principal offices
at 40 Hudson Road, Canton, Massachusetts 02021 (or such other address as the
Company may advise the Holder by notice given in the manner provided in the
Purchase Agreement), with the form of election to subscribe attached hereto as
ANNEX A duly executed and upon tender to the Company of the Exercise Price. Upon
the date the Company receives all of the foregoing from the Holder this Warrant
shall be deemed to have been exercised and the Holder exercising the same to
have become a holder of record of shares of Stock purchased hereunder for all
purposes and certificates for such shares shall be delivered to such Holder or
its transferee within a reasonable time (not exceeding ten business days) after
this Warrant shall have been exercised. If an exercise of this Warrant is for
less than all of the Stock then, concurrently with its delivery of such
certificates, the Company shall deliver to such Holder (or, so long as such
Holder has also complied with Paragraph 6, its transferee) a new warrant or
warrants which shall be of like tenor and date as this Warrant and shall
represent in the aggregate the right to subscribe for and purchase the remaining
number of shares which may be subscribed for and purchased hereunder.
3. PAYMENT OF EXERCISE PRICE. Upon any exercise of this Warrant
the Exercise Price may be paid, in the sole discretion of the Holder, by (a)
tendering the same to the Company in cash, (b) setting-off the same against any
debt owed by the Company to the Holder or (c) tendering to the Company such
number of shares of Stock issuable upon the exercise of this Warrant as have a
value equal to the Exercise Price. If the Holder shall choose option (b) or (c)
above then, in lieu of tendering the Exercise Price upon the exercise this
Warrant, it shall tender to the Company a notice specifying the manner in which
it has elected to pay the Exercise Price.
4. TAXES. If any tax (other than income tax) is payable by the
Holder by reason of the issuance of any certificates representing Stock, such
tax shall be paid by the Company; provided, that the Company shall not be
required to pay any tax which may be payable in respect of the issuance of any
such certificate in a name other than that of the registered Holder of this
Warrant, and the Company shall not be required to issue any such certificate in
a name other than such Holder's unless and until any tax payable by reason of
such issuance has been paid.
5. WARRANT REGISTER. The Company shall at all times while any
portion of this Warrant remains outstanding and exercisable keep and maintain at
its principal office a register (the "Warrant Register") in which the
registration, transfer and exchange of this Warrant shall be recorded. The
Company shall not at any time, except upon the dissolution, liquidation or
winding up of the Company, close such register so as to result in preventing or
delaying the exercise, transfer or exchange of this Warrant. If at any time the
Company shall appoint an agent (the "Warrant Agent") to maintain such register,
the Company shall promptly give notice in the manner provided in the Purchase
Agreement to the registered Holder hereof of the name of such Warrant Agent and
of the place or places at which this Warrant may be presented for transfer,
exchange or exercise. The terms of the agreement between the Company and any
Warrant Agent at any time in effect will be in conformity with the terms of this
Warrant and the Purchase Agreement.
-2-
<PAGE> 3
6. TRANSFER. Subject to compliance with applicable securities
laws and with the restrictions on transfer set forth in the Amended and Restated
Tag-Along, Transfer Restriction and Bring-Along Agreement among the Company, as
assignee of New England Audio Co., Inc., and certain of its shareholders, as
amended, this Warrant and all rights hereunder are transferable on the books of
the Company by the registered Holder hereof in person or by duly authorized
attorney upon surrender of this Warrant at the address set forth in Paragraph 2,
together with the form of transfer authorization attached hereto as ANNEX B duly
executed. Absent any such transfer, the Company may deem and treat the
registered Holder of this Warrant at any time as the absolute owner hereof for
all purposes and shall not be affected by any notice to the contrary.
7. EXCHANGE. This Warrant is exchangeable, upon the surrender
hereof by the Holder at the address set forth in Paragraph 2 together with the
form of exchange authorization attached hereto as ANNEX C duly executed, for new
warrants in such denominations as the Holder shall designate at the time of
surrender for exchange (but not for less than 10% of the shares of Stock for
which this Warrant is originally exerciseable), which new warrants shall be of
like tenor and date and shall represent in the aggregate the right to subscribe
for and purchase the number of shares which may be subscribed for and purchased
hereunder.
8. LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If this
Warrant shall become lost, stolen, mutilated or destroyed the Company shall
issue a new warrant of like denomination, tenor and date as this Warrant upon
its receipt from the Holder of reasonably satisfactory evidence of such event
and assurances that the Holder will indemnify the Company on account of any loss
incurred by the Company which is occasioned by such event. Any such new warrant
shall constitute an original contractual obligation of the Company whether or
not the allegedly lost, stolen, mutilated or destroyed warrant shall be at any
time enforceable by anyone.
9. EXPIRATION. This Warrant shall expire and be of no further
force and effect on the date (the "Expiration Date") which is the earlier to
occur of (a) the date when the Company has fully complied with Paragraph 2
hereof, in the event of a complete exercise hereof or (b) the earlier to occur
of (i) May 30, 2007 or (ii) the fourth anniversary of the date on which Senior
Subordinate Promissory Notes issued under the Note Purchase Agreement have been
paid in full.
10. MANDATORY EXERCISE. Notwithstanding any other provision
hereof, the Holder shall, upon the request of the Company, fully exercise this
Warrant concurrently with the closing of a Qualified Public Offering.
11. WARRANT PURCHASE AGREEMENT. The terms of the Purchase
Agreement, as they relate to this Warrant, are incorporated by reference in this
Warrant as fully as if the same were set forth herein.
12. APPLICABLE LAW. The validity, interpretation and performance
of this Warrant shall be governed by the laws of the State of Delaware.
-3-
<PAGE> 4
13. SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
permitted assigns of the Company and the Holder.
14. NOTICES. All notices and other correspondence which is
required or may be given hereunder shall be given in the manner and to the
addresses specified in the Purchase Agreement.
WITNESS the due execution of this Stock Purchase Warrant as of the date
first written above with the intent to be legally bound.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By: /s/ Jeffrey S. Stone
----------------------------------
Title: President
-4-
<PAGE> 5
ANNEX A
to Warrant
[SUBSCRIPTION FORM TO BE EXECUTED UPON EXERCISE OF THE WARRANT]
The undersigned registered holder of the within Warrant hereby (1)
subscribes for _____________ shares which the undersigned is entitled to
purchase under the terms of the within Warrant, (2) makes the full cash payment
therefor called for by the within Warrant, and (3) directs that the shares
issuable upon exercise of said Warrant be issued as follows:
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 6
ANNEX B
to Warrant
[TO BE EXECUTED TO EFFECT A TRANSFER OF THE WARRANT]
FOR VALUE RECEIVED ____________________________ hereby sells, assigns,
and transfers unto ___________________________________________________________
_______________________________________________________________________________,
the right to purchase ___________________ shares evidenced by the within
Warrant, and does hereby irrevocably constitute and appoint ________________ to
transfer such right on the books of Company, with full power of substitution.
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 7
ANNEX C
to Warrant
[TO BE EXECUTED TO EFFECT AN EXCHANGE OF THE WARRANT]
The undersigned registered holder of the within Warrant hereby directs
the Company to exchange said Warrant for like warrants in the following
denominations: _______________________.
__________________________________
(Name)
Signature: _______________________
Dated: ___________________________
<PAGE> 1
EXHIBIT 10.7
THIS WARRANT AND THE SECURITIES THAT MAY BE ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "FEDERAL ACT"), OR UNDER THE PROVISIONS OF ANY APPLICABLE STATE SECURITIES
LAWS. NEITHER THIS WARRANT NOR THE SECURITIES THAT MAY BE ACQUIRED UPON THE
EXERCISE OF THIS WARRANT MAY BE SOLD, PLEDGED, TRANSFERRED, ASSIGNED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER PROVISIONS OF THE FEDERAL ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF CODE
SECTION 10-5-9 OF THE GEORGIA SECURITIES ACT OF 1973, AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT
TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.
TWEETER HOME ENTERTAINMENT GROUP, INC.
Common Stock Warrant
THIS WARRANT IS BEING ISSUED IN EXCHANGE FOR A NEW ENGLAND AUDIO CO., INC.
COMMON STOCK WARRANT DATED AS OF MAY 30, 1997.
TWEETER HOME ENTERTAINMENT GROUP, INC., a Delaware corporation (the
"Company"), hereby certifies that, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, HFB Associates LLC, a
Georgia limited liability company ("HFB"), or its permitted assigns under the
terms of this warrant (HFB or such permitted assigns at the time being the
registered holder or holders hereof being hereinafter referred to as "Holder")
is entitled, subject to the terms set forth below, to acquire from the Company,
at a purchase price per share of $8.08 (the "Purchase Price"), at any time or
from time to time on or after the date hereof and prior to 5:00 P.M., Boston
time, on the Expiration Date, 104,960 fully paid and non-assessable shares of
the Company's Common Stock, $.01 par value (the "Common Stock," such shares of
Common Stock, in each case as the number of such shares may be adjusted from
time to time pursuant to Section 2.4 and the provisions of the Company's
certificate of incorporation, are herein referred to as the "Warrant Shares").
Certain capitalized terms not otherwise defined herein shall have the
meanings set forth in Section 5 hereof.
-1-
<PAGE> 2
SECTION 1. EXERCISE OF WARRANT.
1.1. EXERCISE. Subject to Section 10, this Warrant may be converted
or exercised by Holder, in whole or in part (but not for less than 10% of the
Warrant Shares issuable under this Warrant, or the remaining Warrant Shares, if
less than such amount), at any time and from time to time by surrender of this
Warrant, together with the form of subscription at the end hereof duly executed
by Holder, to the Company at its principal office and accompanied by payment in
full, in cash or by check payable to the order of the Company, in the amount of
the aggregate Purchase Price for the Warrant Shares covered by such exercise. In
lieu of exercising this Warrant pursuant to the immediately preceding sentence,
the Holder shall have the right to require the Company to convert this Warrant,
in whole or in part and at any time or times (the "Conversion Right"), into
Warrant Shares, by surrendering this Warrant to the Company accompanied by the
form conversion notice (in the form attached hereto as Exhibit B) which has been
duly completed and signed. Upon exercise of the Conversion Right, the Company
shall deliver to the Holder (WITHOUT payment by the Holder of any Purchase
Price) that number of Warrant Shares which is equal to the quotient obtained by
dividing (x) the value this Warrant (or the portion thereof being converted) at
the time the Conversion Right is exercised determined by subtracting the
aggregate Purchase Price for the Warrant (or such portion thereof being
converted) immediately prior to the exercise of the Conversion Right from the
aggregate current market price (determined on the basis of the Current Market
Price Per Share) of that number of Warrant Shares purchasable upon exercise of
this Warrant (or such portion thereof) immediately prior to the exercise of the
Conversion Right (taking into account all applicable adjustments pursuant to
this Warrant) by (y) the Current Market Price Per Share of one share of Common
Stock immediately prior to the exercise of the Conversion Right. Any references
in this Warrant to the "exercise" of any Warrants, and the use of the term
"exercise" herein, shall be deemed to include (without limitation) any exercise
of the Conversion Right. In the event this Warrant is not exercised in full, the
Warrant Shares shall be reduced by the number of Warrant Shares subject to such
partial exercise, and the Company, at its expense, shall forthwith issue and
deliver to Holder a new Warrant of like tenor in the name of Holder, reflecting
such adjusted Warrant Shares.
1.2. DELIVERY OF STOCK CERTIFICATES. Subject to Section 12,
promptly upon exercise of this Warrant in full or in part, the Company will
issue and deliver to Holder, a certificate or certificates, in such name or
names as such Holder may designate, for the number of fully paid and
non-assessable shares of Common Stock to which Holder shall be entitled on such
exercise.
1.3. FRACTIONAL SHARES. This Warrant may not be exercised as to
fractional shares of Common Stock.
SECTION 2. CERTAIN OBLIGATIONS OF THE COMPANY.
2.1. RESERVATION OF STOCK. The Company covenants that it will at
all times reserve and keep available, free from preemptive rights, solely for
the purpose of
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effecting the exercise of this Warrant, a number of shares of Common Stock equal
to the total number of Warrant Shares then issuable upon the exercise of this
Warrant. The Company will from time to time, in accordance with the laws of its
state of incorporation take action to increase the authorized amount of its
Common Stock if at any time the number of shares of Common Stock authorized but
remaining unissued and unreserved for other purposes shall be insufficient to
permit the exercise of this Warrant.
2.2. CORPORATE ACTIONS. The Company covenants that all Warrant
Shares will, upon issuance in accordance with the terms of this Warrant
Agreement and the Company's certificate of incorporation, be fully paid and
nonassessable and free from all taxes with respect to the issuance thereof
(other than income taxes, if any, related to ordinary income attributable to the
Holder) and from all liens, charges and security interests. The Company will
not, by amendment of its certificate of incorporation or through any
consolidation, merger, reorganization, transfer of assets, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant. Without limiting
the generality of the foregoing, the Company (a) will not permit the par value
or the determined or stated value of any shares of the Company's Common Stock
receivable upon the exercise of the Warrants to exceed the amount payable
therefor upon such exercise, (b) will take all such action as may be necessary
or appropriate in order that the Company may validly and legally issue fully
paid and nonassessable shares of the Company's Common Stock upon the exercise of
the Warrants from time to time outstanding, including, without limitation,
amending its certificate of incorporation, and (c) will not take any action
which results in an adjustment in the number of Warrant Shares obtainable upon
the exercise of any Warrants if the total number of shares of the Company's
Common Stock (or other securities) issuable after such action upon the exercise
of all of the then-outstanding Warrants would exceed the total number of shares
of the Company's Common Stock (or other securities) then authorized by the
Company's certificate of incorporation and available for purpose of issuance
upon such exercise.
2.3. MAINTENANCE OF OFFICE. The Company will maintain an office at
40 Hudson Road, Canton, Massachusetts 02021, where presentations and demands to
or upon the Company in respect of this Warrant may be made. The Company will
give notice in writing to Holder, at the address of Holder appearing on the
books of the Company, of each change in the location of such office.
2.4. ADJUSTMENT OF WARRANT SHARES PURCHASABLE.
(a) The number of Warrant Shares which may be acquired upon the
exercise or conversion of this Warrant and the Purchase Price of such shares are
subject to adjustment from time to time upon the occurrence of any of the events
enumerated in this Section 2.4 at any time or from time to time after the date
hereof and prior to the Expiration Date.
(b) If the Company shall (i) declare a dividend on the Common
Stock in shares of its capital stock (whether shares of Common Stock or of
capital stock of any other class), (ii) split or subdivide the outstanding
Common Stock or (iii) combine the outstanding Common Stock into a smaller number
of shares, each Warrant outstanding at the time of the
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record date for such dividend or of the effective date of such split,
subdivision or combination shall thereafter entitle the Holder to receive the
aggregate number and kind of shares which, if such Warrant had been exercised
immediately prior to such time, such Holder would have owned or have become
entitled to receive by virtue of such dividend, subdivision or combination at a
Purchase Price adjusted for such change in the number of shares purchasable.
Such adjustment shall be made successively whenever any event listed above shall
occur and, if a dividend which is declared is not paid, each Warrant outstanding
shall again entitle the Holder thereof to receive the number of shares of Common
Stock as would have been the case had such dividend not been declared. If at any
time, as a result of an adjustment made pursuant to this subsection 2.4(b), the
Holder shall become entitled to receive any shares of capital stock of the
Company other than shares of Common Stock, thereafter the number of such other
shares so receivable upon exercise of any Warrant shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Warrant Shares contained in this Section
2.4, and the provisions of this Warrant with respect to the Warrant Shares shall
apply on like terms to such other shares.
(c) In case the Company shall make a distribution to all holders
of Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing corporation) of
evidences of its indebtedness, cash or other assets, each Warrant outstanding on
the date of such distribution shall thereafter entitle the Holder to receive a
number of shares of Common Stock, at a Purchase Price adjusted for such change
in the number of shares purchasable, equal to the product of (i) the number of
shares of Common Stock to which the Holder was entitled immediately prior to
such date of distribution and (ii) a fraction of which the numerator shall be
the then Current Market Price Per Share of Common Stock on such date and of
which the denominator shall be the then Current Market Price Per Share of Common
Stock on such date less the fair market value, of the portion of the assets or
evidences of indebtedness, or the portion of the cash, so to be distributed
applicable to one share of then-outstanding Common Stock. Such adjustment shall
be made successively whenever a date for such distribution is fixed (which date
of distribution shall be the record date for such distribution if a record date
therefor is fixed) and, if such distribution is not so made, each Warrant
outstanding shall again entitle the holder thereof to receive the number of
shares of Common Stock as would have been the case had such date of distribution
not been fixed.
(d) In the event of any capital reorganization of the Company, or
of any reclassification of the Common Stock (other than a subdivision or
combination of outstanding shares of Common Stock), or in case of the
consolidation of the Company with or the merger of the Company with or into any
other corporation or of the sale of the properties and assets of the Company as,
or substantially as, an entirety to any other corporation, each Warrant shall
after such capital reorganization, reclassification of Common Stock,
consolidation, merger or sale be exercisable upon the terms and conditions
specified in this Warrant, for the number of shares of stock or other securities
or assets to which the Holder (at the time of such capital reorganization,
reclassification of Common Stock, consolidation, merger or sale) upon exercise
of such Warrant would have been entitled upon such capital reorganization,
reclassification of Common Stock, consolidation,
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merger or sale; and in any such case, if necessary, the provisions set forth in
this Section 2.4 with respect to the rights thereafter of the Holder shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or assets thereafter deliverable on
the exercise of the Warrants.
(e) If any event occurs, as to which, in the sole good faith
opinion of the Board of Directors of the Company, the other provisions of this
Section 2.4 are not strictly applicable or (if strictly applicable) would not
fairly protect the purchase rights of the Holder in accordance with the
essential intent and principles of such provisions, then the Board of Directors
may make an adjustment in the application of such provisions, in accordance with
such essential intent and principles, so as to protect such purchase rights as
aforesaid, but in no event shall any such adjustment have the effect of
decreasing or increasing the number of shares of Common Stock purchasable upon
the exercise of this Warrant from that which would otherwise be determined
pursuant to this Section 2.4.
(f) Anything in this Section 2.4 to the contrary notwithstanding:
(1) the Company shall be entitled, but not required, to
make such increases in the number of Warrant Shares purchasable upon
the exercise of each Warrant, in addition to those adjustments required
by this Section 2.4, as it in its sole discretion may determine to be
advisable in order that any consolidation or subdivision of the Common
Stock, or any issuance wholly for cash or any shares of Common Stock at
less than the Current Market Price Per Share, or any issuance wholly
for cash or shares of Common Stock or securities which by their terms
are convertible into or exchangeable for shares of Common Stock or any
stock dividend, or any issuance of rights, options or warrants referred
to hereinabove in this Section 2.4, hereinafter made by the Company to
the holders of its Common Stock shall not be taxable to them; and
(2) no adjustment in the number of Warrant Shares
purchasable shall be required in the event the Company pays a cash
dividend to holders of Common Stock; provided that the Company also
pays a cash dividend to the Holders which dividend shall be calculated
as if the Warrant had been exercised.
2.5. REPRESENTATIONS AND WARRANTIES. The Company hereby represents
and warrants to Holder as follows:
(a) The Company is a corporation duly organized, validly existing
and in good standing under the Laws of the State of Delaware and has all
requisite corporate power and authority to execute, deliver and perform this
Warrant and all documents and agreements contemplated hereby and to consummate
the transactions contemplated hereby and thereby. The Company is duly qualified
to conduct business as a foreign corporation in every jurisdiction in which its
ownership or lease of property or conduct of its business makes such
qualification necessary, except for such jurisdictions in which the Company's
failure to be so qualified, individually or together with any other failure to
qualify, would not materially impair the Purchaser's ability to perform its
obligations hereunder. The
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execution and delivery of this Warrant and the consummation by the Company of
the transactions contemplated hereby and thereby have been duly authorized by
all requisite corporate action and, assuming the due execution of this Warrant
by HFB, this Warrant constitutes the valid and binding obligation of the Company
enforceable against it in accordance with its terms, subject only to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar Laws
relating to creditor's rights generally and to general principles of equity
(regardless of whether such enforcement is considered in a proceeding at law or
in equity).
(b) Neither the execution and delivery by the Company of this
Warrant or all documents and agreements contemplated hereby nor the consummation
of the transactions contemplated hereby or thereby: (i) violates or will violate
any Law applicable to the Company; (ii) violates or will violate any order,
writ, judgment, injunction or decree applicable to the Company; (iii) results or
will result in a breach of or default under the certificate of incorporation or
bylaws of the Company, or (iv) conflicts or will conflict with or results or
will result in any breach of any contract, agreement or other commitment of the
Company. No consent, authorization or approval from, or registration or filing
with, any governmental entity or third party (not obtained or made as of the
date hereof) is required to be obtained or made by or with respect to the
Company in connection with the execution and delivery of this Warrant or all
documents and agreements contemplated hereby or the consummation by the Company
of the transactions contemplated hereby or thereby.
SECTION 3. NOTICE OF CERTAIN EVENTS.
If at any time:
(a) the Company shall declare any dividend or distribution payable
to the holders of its Common Stock;
(b) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class;
(c) there shall be any recapitalization of the Company, or
consolidation or merger of the Company with, or sale of all or substantially all
of its assets to, another corporation or business organization; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company as a whole or substantially as a whole
in a single transaction or a series of related transactions;
then, in any one or more of such cases, the Company shall give Holder written
notice, by registered mail, of the date on which a record shall be taken for
such dividend, distribution or subscription rights or for determining
stockholders entitled to vote upon such recapitalization, consolidation, merger,
sale, dissolution, liquidation or winding up and of the date when any such
transaction shall take place, as the case may be. Such
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notice shall also specify the date as of which the holders of Common Stock of
record shall participate in such dividend, distribution or subscription rights
or shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such recapitalization, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Such notice shall
describe the proposed transaction in reasonable detail and specify the
consideration to be received by the Holder in respect thereto and/or any
adjustment which would be made to the number of Warrant Shares obtainable upon
the exercise of this Warrant as a result of such transaction. The Company shall
also furnish to each Holder all notices and materials furnished to its
stockholders in connection with such transaction as and when such notices and
materials are furnished to its stockholders. Such written notice shall be given
not less than 20 days prior to the record date with respect thereto. Upon the
effectiveness of such recapitalization, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be, this Warrant shall
terminate and cease to be exercisable.
SECTION 4. REGISTRATION RIGHTS.
4.1. GENERAL. For purposes of this Section 4, the terms "register,"
"registered," and "registration" refer to a registration effected by preparing
and filing a registration statement in compliance with the Securities Act of
1933 (the "Federal Act") and the declaration or ordering of effectiveness of
such registration statement.
4.2. COMPANY REGISTRATION. If at any time the Company proposes to
register any of its Common Stock under the Federal Act in connection with an
initial public offering of such securities for its own account or for the
accounts of its shareholders, except pursuant to a registration statement filed
on Form S-8 or Form S-4 or any successor forms which may be used for
transactions of the type currently contemplated in the instructions to such
forms, the Company shall, not later than thirty (30) days before filing the
registration statement with respect thereto, give Holder and each holder of
Warrant Shares (a "Warrant Shareholder") written notice of such proposal by
registered mail. Upon the written request of any such Holder or Warrant
Shareholder (each a "Selling Holder" and collectively, "Selling Holders") given
within fifteen (15) days after mailing of any such notice by the Company, the
Company shall use its best efforts to cause to be registered under the Federal
Act in connection with such initial public offering all of the Warrant Shares
that any Selling Holder has requested be registered; PROVIDED that if the
managing underwriter(s) advises the Selling Holders in writing that the total
amount of securities which they, the Company and all other Persons holding Other
Registration Rights intend to include in such offering is sufficiently large to
materially and adversely affect the success of such offering, the amount of
securities to be offered for the accounts of each Selling Holder and all other
Persons exercising piggy-back registration rights in such offering shall be
reduced pro rata (based upon the amount of securities each such Person sought to
include in the offering) to the extent necessary to reduce the total amount of
securities to be included in the offering to the amount recommended by such
managing underwriter(s).
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Notwithstanding the foregoing, the Company may withdraw any
registration statement referred to in this Section 4.2 without incurring
liability to any Selling Holder on account of such withdrawal and shall not be
under any obligation to complete any offering.
4.3. LOCK-UP AGREEMENTS, ETC. If requested by the managing
underwriter in connection with an offering of Common Stock, each Holder and
Warrant Shareholder shall agree that it will not, for a period of seven (7) days
prior to and 90 days following, the effective date of a registration statement
for the offering of the Common Stock, or any other period reasonably requested
by the managing underwriter, offer or sell any of the Warrant Shares without the
prior consent of the managing underwriter.
4.4. OBLIGATIONS OF THE COMPANY. Subsequent to the other provisions
of this Section 4, whenever required hereunder to use its best efforts to effect
the registration of any Warrant Shares, the Company shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the SEC a registration
statement on the appropriate form with respect to such Warrant Shares
and use its best efforts to cause such registration statement to become
effective as soon as practicable after such filing and remain
effective: (i) in the case of an underwritten offering, for such period
as is required by the underwriter for such offering or (ii) in the case
of an offering not underwritten, until the Selling Holders have
informed the Company in writing that the distribution of their
securities has been completed, but in no event longer than 180 days
plus any period during which the Selling Holders are obligated to
refrain from selling because the Company is required to amend or
supplement the prospectus.
(b) Prepare and file with the SEC such amendments and
supplements (including post-effective amendments and supplements) to
such registration statement and the prospectus used in connection with
such registration statement as may be necessary to comply with the
provisions of the Federal Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to each Selling Holder such numbers of copies
of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Federal Act, and such other documents as it may
reasonably request in order to facilitate the disposition of Warrant
Shares owned by it.
(d) Notify each Selling Holder if, at any time when a
prospectus relating to such Warrant Shares is required to be delivered
under the Federal Act, any event shall have occurred as a result of
which the prospectus then in use with respect to such Warrant Shares
would include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or for any other reason it shall be
necessary to amend or supplement such prospectus in order to comply
with the Federal Act and prepare and furnish to all sellers as promptly
as possible, and in any event within
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ninety (90) days of such notice, a reasonable number of copies of a
supplement to or an amendment of such prospectus to correct such
statement or omission or effect such compliance.
(e) Use its best efforts to register and qualify the
securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as the Selling
Holders may reasonably request for the distribution of the securities
covered by the registration statement; provided that the Company shall
not be required to qualify as a foreign corporation in any state where
it is not then otherwise required to qualify.
(f) Use its reasonable best efforts to keep the Selling
Holders informed of the Company's best estimate of the earliest date on
which such registration statement or any post-effective amendment or
supplement thereto will become effective and will promptly notify such
Selling Holders and the managing underwriters, if any, participating in
the distribution pursuant to such registration statement of the
following promptly after learning of the same: (A) when such
registration statement or any post-effective amendment or supplement
thereto becomes effective or is approved; (B) of the issuance by any
competent authority of any stop order suspending the effectiveness or
qualification of such registration statement or the prospectus then in
use or the initiation or threat of any proceeding for that purpose; and
(C) of the suspension of the qualification of any Warrant Shares
included in such registration statement for sale in any jurisdiction.
(g) Make available to its security holders, as soon as
practicable, an earnings statement covering a period of at least twelve
months which satisfies the provisions of Section 11(a) of the Federal
Act and Rule 158 thereunder.
(h) Cooperate with the Selling Holders and the
underwriters, if any, of such Warrant Shares; give each Selling Holder,
and the underwriters, if any, of such Warrant Shares and their
respective counsel and accountants, such access to its books and
records and such opportunities to discuss the business of the Company
with its officers and independent public accountants as shall be
necessary to enable them to conduct a reasonable investigation within
the meaning of the Federal Act and, in the event that Warrant Shares
are to be sold in an underwritten offering, enter into an underwriting
agreement with the underwriters and the Selling Holders containing
customary representations and warranties, covenants, conditions and
indemnification provisions, including without limitation the furnishing
to the underwriters of a customary opinion of independent counsel to
the Company and a customary "comfort" letter from the Company's
independent public accountants; provided, however, that nothing
contained in this Warrant shall limit the Company's right to terminate
any such offering of its Common Stock at any time.
(i) Provide a CUSIP number for all Warrant Shares not
later than the effective date of the registration statement.
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(j) Take such actions as the underwriters reasonably
request in order to expedite or facilitate the disposition of the
Warrant Shares to be included in any such offering (including, without
limitation, effecting a stock split, stock dividend or a combination of
shares of Common Stock).
(k) Provide a transfer agent for the Warrant Shares no
later than the effective date of the first registration of any Warrant
Shares.
4.5. FURNISH INFORMATION. Each Selling Holder shall furnish to the
Company such information regarding it and the Warrant Shares held by it and the
intended method of disposition of such securities as the Company shall
reasonably request and as shall be required in connection with the action to be
taken by the Company.
4.6. EXPENSES. All expenses incurred in connection with
registrations pursuant to this Section 4, excluding (a) underwriters' discounts
and commissions (which shall be paid ratably by all holders of securities
subject to such registrations) and (b) fees and disbursements of counsel to the
Selling Holders (which shall be paid by such Selling Holders which consent to
such counsel's employment) but including all registration and qualification
fees, transfer taxes, printers' and accounting fees (including the entire
expense of any audits required by the Federal Act), fees and disbursements of
counsel for the Company, shall be paid by the Company.
4.7. INDEMNIFICATION. In the event any Warrant Shares are included
in a registration statement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Selling Holder, any underwriter, and each person, if any, who
controls such Selling Holder or any such underwriter within the meaning of the
Federal Act, against any losses, claims, damages or liabilities and legal and
other expenses, joint or several, to which they may become subject under the
Federal Act or otherwise, insofar as such losses, claims, damages or liabilities
and legal and other expenses (or actions in respect thereof) arise out of or are
based on any untrue or alleged untrue statement of any material fact contained
in a registration statement under which Warrant Shares were registered
including, any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading or
arise out of any violation by the Company of any rule or regulation promulgated
under the Federal Act or state securities (or so-called "Blue Sky") laws, or
regulations promulgated thereunder, of any jurisdiction applicable to the
Company and relating to any action or inaction required of the Company in
connection with any such registration or such offering; and will reimburse such
Selling Holder, and each such underwriter or controlling person for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the Company shall not be liable in any such case for any loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
an untrue statement or alleged untrue statement or omission
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or alleged omission that was furnished for use in connection with such
registration by such Selling Holder.
(b) To the extent permitted by law, each Selling Holder will,
severally but not jointly, indemnify and hold harmless the Company, each of its
officers, directors, agents, employees, each person, if any, who controls the
Company within the meaning of the Federal Act, against any losses, claims,
damages or liabilities, joint or several, to which the Company or any of its
officers, directors, agents, employees, each person, if any, who controls the
Company within the meaning of the Federal Act, may become subject under the
Federal Act, state securities (or so-called "Blue Sky") laws or otherwise,
insofar as any such loss, claim, damage, or liability arises solely out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in connection with such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements thereto,
that was furnished for use in connection with such registration by such Selling
Holder; provided, however, that the liability of any Selling Holder shall be
limited to the amount of proceeds received by such Selling Holder in the
offering or by the amount such Selling Holder would have received if the
offering is terminated.
(c) Promptly after receipt by a indemnified party under this
Section 4.7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, to assume the defense thereof
with counsel selected by such party, but the failure to notify the indemnifying
party promptly of the commencement of any such action will not relieve the
indemnifying party of any liability that it may have to any indemnified party,
unless and to the extent that the indemnifying party is actually and materially
prejudiced by such failure. If any such action is against both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it that are
different from or additional to those available to the indemnifying party or
that its interests conflict with the interests of the indemnifying party, the
indemnified party shall have the right to select a separate counsel and to
assume such legal defenses and otherwise to participate in the defense of such
action, with the expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party.
4.8. TRANSFER OF REGISTRATION RIGHTS. The registration rights of
Holder may not be transferred to any transferee except in connection with a
transfer of this Warrant or of Warrant Shares permitted under Section 8 below.
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SECTION 5. DEFINITIONS.
As used herein, the following terms, unless the context otherwise
requires, have the following respective meanings:
5.1 The term "COMMON STOCK" includes the Company's Common Stock,
without par value per share, and any other securities or rights into which or
for which the Common Stock is converted or exchanged, whether pursuant to a plan
of reclassification, reorganization, consolidation, merger, sale of assets,
dissolution, liquidation, or otherwise.
5.2 "COMPOSITE TRANSACTIONS TAPE" shall mean a security price
reporting service that includes all transactions in a security on each of the
exchanges and in the over-the-counter market.
5.3 "CURRENT MARKET PRICE PER SHARE" shall mean, with respect to
any of the Common Stock, as of any particular date of determination:
(i) if the Common Stock is then reported on the Composite
Transactions Tape, the average of the daily closing prices for the 30
consecutive trading days immediately prior to such date as reported on
the Composite Transactions Tape (as adjusted for any stock dividend,
split, combination or reclassification that occurred during such 30-day
period); or
(ii) if the Common Stock is not then reported on the
Composite Transaction Tape but is then listed or admitted to trading on
a national securities exchange, the average of the daily last sale
prices regular way of such Common Stock, for the 30 consecutive trading
days immediately prior to such date (as adjusted for any stock
dividend, split, combination or reclassification that occurred during
such 30-day period), on the principal national securities exchange on
which such Common Stock is traded or, in case no such sale takes place
on any such day, the average of the closing bid and asked prices
regular way, in either case on such national securities exchange; or
(iii) if the Common Stock is not then reported on the
Composite Transaction Tape but is then traded on the over-the-counter
market, the average of the daily closing sales prices, or, if there is
no closing sales price, the average of the closing bid and asked
prices, in the over-the-counter market, for the 30 consecutive trading
days immediately prior to such date (as adjusted for any stock
dividend, split, combination or reclassification that occurred during
such 30-day period), as reported by the National Association of
Securities Dealers' Automated Quotation System, or, if not so reported,
as reported by the National Quotation Bureau, Incorporated or any
successor thereof, or, if no so reported the average of the closing bid
and asked prices as furnished by any member of the national Association
of Securities Dealers, Inc. selected from time to time by the Board of
Directors of the Company for that purpose; or
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(iv) if no such prices are then furnished, the higher of
(x) the Exercise Price and (y) the fair market value of a share of the
Common Stock as determined by agreement between the holders of a
majority of the Warrants and the Company or, in the absence of such an
agreement, by an independent investment banking firm or an independent
appraiser engaged by the Company (in either case the cost of which
engagement will be divided equally between the Company and the holders
of a majority of the Warrants).
5.4 The term "EXPIRATION DATE" shall mean the earlier of (x) the
fifth anniversary of the date of the closing of an initial public offering of
the Common Stock and (y) May 30, 2007.
5.5 The term "FAIR MARKET VALUE PER SHARE OF THE WARRANT" shall
mean the difference between the Current Market Price Per Share and the Purchase
Price.
5.6 The term "OTHER REGISTRATION RIGHTS" shall mean rights to
register shares of Common Stock granted to any Person (other than rights granted
under this Warrant) by the Company at any time prior to the date hereof or on or
after the date hereof.
5.7 The term "WARRANT SHARES" shall mean the shares of Common
Stock from time to time issued upon exercise of this Warrant.
5.8 The term "PERSON" shall mean an individual, corporation,
partnership, limited liability company, association, trust, joint venture,
unincorporated organization or any government, governmental department or agency
or political subdivision thereof.
SECTION 6. REPLACEMENT OF WARRANTS.
Upon (a) surrender of this Warrant in mutilated form or receipt of
evidence satisfactory to the Company of the loss, theft or destruction of this
Warrant and (b) in the case of any loss, theft or destruction of this Warrant,
if requested, receipt of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company, then, the Company, at its
expense, shall execute and deliver, in lieu of and in replacement of this
Warrant, a Warrant identical in form to this Warrant.
SECTION 7. REMEDIES.
The Company stipulates that the remedies at law of the Holder in the
event of any breach or threatened breach by the Company of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a breach of any of the terms hereof
or otherwise. The Company hereby irrevocably waives, to the extent that it may
do so under applicable law, any defense based on the adequacy of a remedy at law
which may be asserted as a bar to the remedy of specific performance in any
action brought against the Company for specific performance of this Warrant by
the Holder.
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<PAGE> 14
Such remedies and all other remedies provided for in this Warrant shall,
however, be cumulative and not exclusive and shall be in addition to any other
remedies which may be available under this Warrant.
SECTION 8. TRANSFER.
This Warrant and Warrant Shares issued hereunder shall not be sold,
transferred, pledged or hypothecated unless the proposed disposition is the
subject of a currently effective registration statement under the Federal Act or
such sale is made pursuant to an exemption from registration.
Until transfer hereof on the registration books of the Company, the
Company may treat the existing registered holder hereof as the owner hereof for
all purposes. Any transferee of this Warrant and the rights hereunder, by
acceptance thereof, agrees to assume all of the obligations of Holder and to be
bound by all of the terms and provisions of this Warrant.
SECTION 9. NOTICES.
Where this Warrant provides for notice of any event, such notice shall
be given (unless otherwise herein expressly provided) in writing and either (i)
delivered personally, (ii) sent by certified, registered or express mail,
postage prepaid (iii) telexed or sent by facsimile transmission, and shall be
deemed given when so delivered personally, telexed, sent by facsimile
transmission (confirmed in writing) or mailed. Notices shall be addressed, if to
Holder, to the address of Holder appearing in the registration books referred to
in Section 8 or, if to the Company, to its office maintained pursuant to Section
2.2.
SECTION 10. LIMITATIONS ON EXERCISE.
Notwithstanding any other provision of this Warrant, the Holder shall
not have the right to exercise or convert this Warrant into or for Warrant
Shares Except upon one or more of the following events: (a) the consummation of
a public offering of the Company's Common Stock; (b) the sale of all or
substantially all of the issued and outstanding capital stock of the Company by
the Company's stockholders to the same purchaser or group of purchasers in a
single transaction or series of related transactions; (c) a merger or
consolidation of the Company into or with another entity where the surviving or
resulting entity is not the Company and where, as part of such merger or
consolidation, the stockholders of the Company, including the Holder upon any
such exercise and conversion, receive equity securities of, or other
consideration from, the surviving or resulting entity in exchange for their
capital stock of the Company; (d) the liquidation or dissolution of the Company;
or (e) a transaction requiring or allowing such exercise or conversion pursuant
to and in accordance with Section 11.1 or Section 11.2. The right to exercise or
convert this Warrant upon the occurrence of the foregoing transactions or events
shall not be exercisable until immediately after the closing of the foregoing
events, and the Holder shall not be entitled to vote as a stockholder with
respect
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<PAGE> 15
to, or otherwise object to, any such transaction. In the event that this Warrant
is not exercised or converted upon the closing of the transactions or events
described in (b) through (e) above, this Warrant shall terminate and shall be
null and void in all respects.
SECTION 11. DRAG-ALONG RIGHTS AND TAG-ALONG RIGHTS.
11.1 DRAG-ALONG RIGHTS. If at any time one or more stockholders of
the Company alone or together holding a majority of the then issued and
outstanding capital stock of the Company have agreed to sell, assign or
otherwise transfer such capital stock of the Company (a "Transfer of Control")
so held by such stockholders (the "Majority Stockholders") to the same purchaser
or group of purchasers (collectively, the "Purchaser"), then such Majority
Stockholders shall have the right, but not the obligation, upon written notice
to the Holder, to require the Holder to: (a) sell, assign or transfer this
Warrant and all Warrant Shares held by the Holder to such Purchaser, (b)
exercise and convert this Warrant in full and sell, assign and transfer and all
Warrant Shares held by the Holder prior to such exercise or conversion together
with all Warrant Shares issuable to the Holder as a result of such exercise and
conversion to such Purchaser; or (c) exercise and convert this Warrant in part
and sell, assign and transfer this Warrant and all Warrant Shares issuable to
the Holder as a result of such partial exercise or conversion to such Purchaser;
provided, however, that in no event shall the Holder be required to exercise
this warrant if the Current Market Price Per Share is less than the Purchase
Price. Any such sale, assignment or transfer by the Holder of this Warrant or
any Warrant Shares to the Purchaser shall be on the same substantive economic
terms and conditions applicable to the Transfer of Control. In such event, the
Holder will take such necessary and appropriate actions as shall be required to
implement such sale, assignment or transfer in accordance with such reasonable
terms as are agreed to by the Majority Stockholders and the Purchaser. If at the
end of 180 days following the date such Holder was notified of such sale
assignment or transfer the Majority Stockholders have not completed such
transaction, the Holder shall be released from his obligations pursuant to this
Section 11.1.
11.2. TAG-ALONG RIGHTS. In the event of a proposed Transfer of
Control where (i) the Majority Stockholders have not exercised their rights to
require the sale, assignment or transfer by the Holder of this Warrant or any
Warrant Shares as part of such Transfer of Control pursuant to Section 11.1, ,
and (ii) the Purchaser has not offered to purchase the Warrant and any Warrant
Shares at the same price per share and upon the same terms and conditions as are
available to the Majority Stockholders; the Holder will have the right, upon
written notice to the Majority Stockholders, to require the Purchaser, as a
condition precedent or concurrent to such Transfer of Control, to purchase or
otherwise acquire at the same price per share and upon the same terms and
conditions as to be paid and given to the Majority Stockholders, such number of
his Warrant Shares equal to the product of (a) all shares to be included in the
Transfer of Control multiplied by (b) a fraction, the numerator of which is the
total number of Warrant Shares then owned by the Holder and the denominator of
which is the total number of shares of Common Stock outstanding, taking into
account all shares then issuable upon conversion of all outstanding warrants,
options, and other rights as of such date, including without
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<PAGE> 16
limitation this warrant; if (1) the Holder exercises and converts this Warrant
in full concurrently with or immediately prior to such Transfer of Control, and
(2) the Holder agrees to take such actions and execute such documents as shall
be reasonably necessary in order to consummate such proposed Transfer of
Control; provided, however, that in no event shall the Holder be required to
assume joint liability with the Majority Stockholders pursuant to the terms of
any agreement related to such Transfer of Control or be liable for any amounts
in excess of the proceeds received by such Holder pursuant to this Section 11.2
on consummation of any such Transfer of Control by way of indemnity or
otherwise. In the event that the Holder exercises his, her or its right to
require such purchase or acquisition of Warrant Shares in accordance with this
Section 11.2, the Majority Stockholders shall collectively be entitled to sell,
assign and transfer to the Purchaser the number of shares of capital stock held
by them equal to the difference between (a) the number of shares of capital
stock proposed to be transferred to the Purchaser pursuant to such Transfer of
Control and (b) the aggregate number of Warrant Shares to be sold, transferred
or assigned to the Purchaser as required by this Section 11.2.
SECTION 12. SET-OFF.
(a) In the event that an indemnification obligation related to
Purchaser Losses (as defined in the Asset Purchase Agreement dated May 30, 1997
by and among New England Audio Co., Inc. ("NEA") and HFB (f/k/a HiFi Buys
Incorporated) (the "Purchase Agreement")), shall become due and payable pursuant
to the terms of the Purchase Agreement, the Holder hereby consents that the
Company shall have the right, by written notice to the Holder, to reduce the
number of Warrant Shares issuable upon exercise or conversion hereof by that
number of Warrant Shares equal to the amount of such indemnification claim
payable, divided by the Fair Market Value Per Share of the Warrant. Such set-off
shall be asserted by the Company against the Holders pro-rata based upon the
number of Warrant Shares issued to such Holder.
(b) ESCROW UPON EXERCISE. If any Holder shall exercise or convert
this Warrant after delivery of a notice of an indemnification claim by the
Company or NEA, the Holder shall pay to an escrow agent (which escrow agent
shall be mutually agreeable to the Company and such Holder) an amount equal to
the lesser of (x) the number of Warrant Shares for which the Warrant is being
exercised or converted, multiplied by the Fair Market Value Per Share of the
Warrant and (y) the amount of the indemnification claim, as determined in the
good faith judgment of the Board of Directors. On final judgment or settlement
related to the amount payable with respect to such indemnification claim, the
escrow agent shall pay any amounts due with respect to such claim to the
Company; or if no amount is due with respect to such claim, the amount so
deposited shall be promptly paid to such Holder. In addition, in the event that
the indemnification amount, upon final judgment or settlement of such claim, is
less than the amount so deposited, then upon such final judgment or settlement
the escrow agent shall promptly return such excess amount to Holder.
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<PAGE> 17
SECTION 13. SURVIVAL.
The provisions of Sections 4 and 8 shall survive the termination or
expiration of this Warrant and shall continue to be effective with respect to
Warrant Shares.
SECTION 14. MISCELLANEOUS.
This Warrant shall be binding upon the Company and Holder and their
legal representatives, successors and assigns. In case any provision of this
Warrant shall be invalid, illegal or unenforceable, or partially invalid,
illegal or unenforceable, the provision shall be enforced to the extent, if any,
that it may legally be enforced and the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by a statement in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. This
Warrant shall be governed by, and construed and enforced in accordance with, the
laws of the State of Delaware without regard to its principles of conflicts of
laws. The headings in this Warrant are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
This Warrant shall take effect as an instrument under seal.
IN WITNESS WHEREOF, the Company and the Holder have caused this Warrant
to be executed as an instrument under seal by a duly authorized officer and, in
the case of the Company, attested by its Clerk or Assistant Clerk.
Dated as of June 5, 1998
(Corporate Seal)
Attest: TWEETER HOME ENTERTAINMENT GROUP, INC.
By: /s/ Jeffrey S. Stone
- ------------------------------ ----------------------------------
Clerk/Assistant Clerk Name: Jeffrey Stone
Title: President
HFB ASSOCIATES LLC
By: /s/ Jeffrey Snow
----------------------------------
Name: Jeffrey Snow
Title: Manager
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<PAGE> 18
EXHIBIT A
FORM OF SUBSCRIPTION
(To be signed only on exercise of
Common Stock Warrant)
TO: TWEETER HOME ENTERTAINMENT GROUP, INC.
The undersigned, the holder of the within Common Stock Warrant, hereby
irrevocably elects to exercise this Common Stock Warrant for, and to receive
thereunder ______*______ shares of Common Stock of TWEETER HOME ENTERTAINMENT
GROUP, INC. (the "Company"), and requests that the certificates for such shares
be issued in the name of the undersigned, and delivered to
_____________________________________________ whose address is
__________________________________________________.
Dated:
________________________________________
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant)
________________________________________
(Address)
- ----------
* Insert here the number of shares of Common Stock as to which the Warrant
is being exercised.
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<PAGE> 19
EXHIBIT B
FORM OF NOTICE OF CONVERSION
(To be executed upon conversion of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant delivered herewith, to convert Warrants represented
thereby into ___ Warrant Shares* in accordance with the terms hereof. The
undersigned requests that a certificate for such Warrant Shares be registered
in the name of ___________________ whose address is _________________________
and that such certificate be delivered to __________________________ whose
address is ___________________. If said number of Warrant Shares is less than
all of the Warrant Shares obtainable hereunder, the undersigned requests that
a new Warrant representing the remaining balance of the Warrant Shares be
registered in the name of _____________________________ whose address is
___________________ and that such Warrant be delivered to _______________
address is _________________.
Signature:
__________________________________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant.)
Date:_____________
* Consisting of: ____ shares of Common Stock
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<PAGE> 1
EXHIBIT 10.8
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE
OR CONVERSION OF THIS WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT
WHILE SUCH A REGISTRATION IS IN EFFECT OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE
OR CONVERSION OF THIS WARRANT ARE ENTITLED TO CERTAIN
REGISTRATION RIGHTS AND TO CERTAIN OTHER BENEFITS AND
SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN A WARRANT
AND DEBENTURE COMMITMENT DATED MARCH 7, 1997 AND IN A
REGISTRATION RIGHTS AGREEMENT AND A TAG-ALONG, TRANSFER
RESTRICTION AND BRING-ALONG AGREEMENT, EACH DATED AS OF
NOVEMBER 28, 1995, AND AS FROM TIME TO TIME AMENDED AND
IN EFFECT. THE COMPANY WILL FURNISH A COPY OF SUCH
AGREEMENTS TO THE HOLDER OF THIS WARRANT WITHOUT CHARGE
UPON WRITTEN REQUEST.
TWEETER HOME ENTERTAINMENT GROUP, INC.
Common Stock Purchase Warrant
THIS WARRANT IS BEING ISSUED IN EXCHANGE FOR A NEW ENGLAND AUDIO CO., INC.
COMMON STOCK PURCHASE WARRANT DATED AS OF MARCH 7, 1997.
No.CG-1 June 5, 1998
Tweeter Home Entertainment Group, Inc., a Delaware corporation (the
"COMPANY"), for value received, hereby certifies that Weston Presidio Offshore
Capital C.V., or registered assigns, is entitled to purchase from the Company,
at the purchase price per share of $6.46 (the "INITIAL WARRANT PRICE"), at any
time or from time to time prior to 5:00 p.m., Boston, Massachusetts time, on
June 30, 2002 (the "EXPIRATION DATE"), 11,832 duly authorized, validly issued,
fully paid and nonassessable shares of Common Stock, $.01 par value (the "COMMON
STOCK"), of the Company all subject to the terms, conditions and adjustments set
forth below in this Warrant. This Warrant is one of the Common Stock Purchase
Warrants
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<PAGE> 2
(the "WARRANTS", such term to include any such warrants issued in substitution
therefor) originally issued pursuant to a Warrant and Debenture Commitment dated
March 7, 1997 (the "WARRANT AND DEBENTURE COMMITMENT") among the Company, the
holder hereof and certain other original holders of Warrants.
1. DEFINITIONS.
"ADDITIONAL SHARES OF COMMON STOCK" means all shares of Common Stock
issued (or, pursuant to Section 3.1.3 or 3.1.4, deemed to be issued) by the
Company after the Original Issue Date, other than shares of Common Stock issued
or issuable at any time:
(a) upon the issuance or exercise or conversion of the
Warrants in accordance with their terms;
(b) and excluded from the definition of "Additional
Shares of Common Stock" in section 8.4.1(d) of the Certificate of Designation;
(c) by way of dividend or other distribution on shares of
capital stock excluded from the definition of "Additional Shares of Common
Stock" by the foregoing clauses (a) and (b).
"BOOK VALUE" means the Company's consolidated shareholders' equity per
share of Common Stock on a fully diluted basis (assuming the exercise of all
Warrants, the conversion of all Preferred Stock into Common Stock and the
exercise of all other then exercisable options, warrants and other purchase
rights), determined in accordance with generally accepted accounting principles,
as of the end of its fiscal quarter most recently completed prior to the date of
determination.
"BUSINESS DAY" means any day other than a Saturday or a Sunday or a day
on which commercial banking institutions in Boston, Massachusetts or New York,
New York are authorized by law to be closed.
"CERTIFICATE OF DESIGNATION" means the Certificate of Vote of Directors
Establishing a Series of a Class of Stock of New England Audio Co., Inc. filed
by the Company as of November 28, 1995, as from time to time in effect.
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"COMMON STOCK" is defined in the preamble.
"COMPANY" is defined in the preamble, and includes any corporation
which shall succeed to or assume the obligations of the Company hereunder in
compliance with Section 3.
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<PAGE> 3
"CONVERTIBLE SECURITIES" means any indebtedness, shares or other
securities convertible into or exchangeable for Common Stock, other than the
Preferred Stock.
"CURRENT MARKET PRICE" means, on any date, the average daily Market
Price during the period of the most recent 20 days, ending on such date, on
which the national securities exchanges were open for trading, except that if no
class of the Common Stock is then listed or admitted to trading on any national
securities exchange or quoted in the over-the-counter market, the Current Market
Price shall be the Market Price on such date.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"EXPIRATION DATE" is defined in the preamble.
"INITIAL WARRANT PRICE" is defined in the preamble.
"MARKET PRICE" means, on any date, the amount per share of Common Stock
equal to (a) the last sale price of Common Stock, regular way, on such date or,
if no such sale takes place on such date, the average of the closing bid and
asked prices thereof on such date, in each case as officially reported on the
principal national securities exchange on which Common Stock is then listed or
admitted to trading, or (b) if Common Stock is not then listed or admitted to
trading on any national securities exchange but is designated as a national
market system security by the NASD, the last trading price of Common Stock on
such date, or (c) if no trading occurred on such date or if Common Stock is not
so designated, the average of the closing bid and asked prices of Common Stock
on such date as shown by the NASD automated quotation system, or (d) if Common
Stock is not then listed or admitted to trading on any national exchange or
quoted in the over-the-counter market, the higher of (i) Book Value or (ii) the
fair value thereof determined in good faith by the Board of Directors of the
Company as of a date which is within 15 days of the date as of which the
determination is to be made.
"NASD" means the National Association of Securities Dealers, Inc.
"OPTIONS" means rights, options or warrants to subscribe for, purchase
or otherwise acquire either Common Stock or Convertible Securities.
"ORIGINAL ISSUE DATE" means March 7, 1997.
"OTHER SECURITIES" means any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which the
holders of the Warrants at any time shall be entitled to receive, or shall have
received, upon the exercise of the Warrants, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to
Section 3 or otherwise.
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<PAGE> 4
"PERSON" means a corporation, an association, a partnership, an
organization, a business trust, a limited liability company, a trust, an
individual, a government or political subdivision thereof or a governmental
agency.
"PREEMPTIVE GROUP" is defined in Section 10.1 of the Certificate of
Designation.
"PURCHASE AGREEMENT" means the Amended and Restated Preferred Stock
Purchase Agreement dated as of March 30,1997 (as from time to time in effect)
among the Company, as assignee of New England Audio Co., Inc., and the preferred
stock purchasers named therein.
"REGISTRATION RIGHTS AGREEMENT" means the Amended and Restated
Registration Rights Agreement dated as of March 30, 1997, among the Company, as
assignee of New England Audio Co., Inc., and certain of its stockholders, as
from time to time in effect.
"SECURITIES ACT" means the Securities Act of 1933, or any similar
federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time.
"PREFERRED STOCK" means the Company's Series A Redeemable Convertible
Preferred Stock, $.01 par value, and the Company's Series B Redeemable
Convertible Preferred Stock, $.01 par value, each issued pursuant to the
Purchase Agreement.
"WARRANT AND DEBENTURE COMMITMENT" is defined in the preamble.
"WARRANT PRICE" is defined in Section 3.1.
"WARRANT SHARES" means the shares of Common Stock or Other Securities
issuable upon exercise or conversion of this Warrant.
"WARRANTS" is defined in the preamble.
2. EXERCISE OR CONVERSION OF WARRANT.
2.1. MANNER OF EXERCISE OR CONVERSION; PAYMENT.
2.1.1. EXERCISE. This Warrant may be exercised by the holder
hereof, in whole or in part, during normal business hours on any
Business Day on or prior to the Expiration Date, by surrender of this
Warrant to the Company at its office maintained pursuant to Section
6.2(a), accompanied by a subscription in substantially the form
attached to this Warrant duly executed by such holder and accompanied
by payment, in cash or by check payable to the order of the Company, in
the amount obtained by multiplying (a) the number of shares of Common
Stock (without giving effect to any adjustment thereof) designated in
such subscription by (b) the Initial Warrant Price,
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<PAGE> 5
and such holder shall thereupon be entitled to receive the number of
duly authorized, validly issued, fully paid and nonassessable Warrant
Shares determined as provided in Section 3.
2.1.2. CONVERSION. This Warrant may be converted by the
holder hereof, in whole or in part, into Warrant Shares, during normal
business hours on any Business Day on or prior to the Expiration Date
by surrender of this Warrant to the Company at its office maintained
pursuant to Section 6.2(a), accompanied by a conversion notice in
substantially the form attached to this Warrant duly executed by such
holder, and such holder shall thereupon be entitled to receive a number
of duly authorized, validly issued, fully paid and nonassessable
Warrant Shares equal to:
(a) an amount equal to:
(i) an amount equal to (A) the number
of Warrant Shares determined as
provided in Section 3 which such
holder would be entitled to receive
upon exercise of this Warrant for
the number of shares of Common
Stock designated in such conversion
notice MULTIPLIED BY (B) the
Current Market Price of each such
Warrant Share so receivable upon
such exercise
MINUS
(ii) an amount equal to (A) the number
of shares of Common Stock (without
giving effect to any adjustment
thereof) designated in such
conversion notice MULTIPLIED BY (B)
the Initial Warrant Price
DIVIDED BY
(b) such Current Market Price of each such
Warrant Share.
For all purposes of this Warrant (other than this Section 2.1), any
reference herein to the exercise of this Warrant shall be deemed to
include a reference to the conversion of this Warrant into Warrant
Shares in accordance with the terms of this Section 2.1.2.
2.2. WHEN EXERCISE EFFECTIVE. Each exercise of this Warrant shall
be deemed to have been effected immediately prior to the close of business on
the Business Day on which this Warrant shall have been surrendered to the
Company as provided in Section 2.1, and at such time the Person in whose name
any certificate for Warrant Shares shall be issuable upon such exercise as
provided in Section 2.3 shall be deemed to have become the holder of record
thereof.
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<PAGE> 6
2.3. DELIVERY OF STOCK CERTIFICATES, ETC. As soon as practicable
after each exercise of this Warrant, in whole or in part, and in any event
within five Business Days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder hereof or, subject to Section 5, as such holder
(upon payment by such holder of any applicable transfer taxes) may direct:
(a) a certificate for the number of duly
authorized, validly issued, fully paid and nonassessable Warrant Shares
to which such holder shall be entitled upon such exercise PLUS, in lieu
of any fractional share to which such holder would otherwise be
entitled, cash in an amount equal to the same fraction of the Market
Price per share on the Business Day immediately preceding the date of
such exercise; and
(b) in case such exercise is in part only, a new
Warrant of like tenor, dated the date hereof and calling in the
aggregate on the face thereof for the number of shares of Common Stock
equal (without giving effect to any adjustment thereof) to the number
of such shares called for on the face of this Warrant minus the number
of such shares designated by the holder upon such exercise as provided
in Section 2.1.
2.4. COMPANY TO REAFFIRM OBLIGATIONS. The Company will, at the time
of each exercise of this Warrant, upon the request of the holder hereof,
acknowledge in writing its continuing obligation to afford to such holder all
rights (including any rights pursuant to the Registration Rights Agreement with
respect to the Warrant Shares issued upon such exercise) to which such holder
shall continue to be entitled after such exercise in accordance with the terms
of this Warrant; PROVIDED, HOWEVER, that if the holder of this Warrant shall
fail to make any such request, such failure shall not affect the continuing
obligation of the Company to afford such rights to such holder.
3. ADJUSTMENT OF WARRANT SHARES AND WARRANT PRICE.
3.1. ADJUSTMENT OF WARRANT SHARES AND WARRANT PRICE DUE TO
ADDITIONAL SHARES. The number of Warrant Shares which the holder of this Warrant
shall be entitled to receive upon the exercise hereof shall be determined by
multiplying the number of shares of Common Stock which would otherwise (but for
the provisions of this Section 3.1) be issuable upon such exercise, as
designated by the holder hereof pursuant to Section 2.1, by the fraction of
which (a) the numerator is the Initial Warrant Price and (b) the denominator is
the Warrant Price in effect on the date of such exercise. The "WARRANT PRICE"
shall initially be the Initial Warrant Price, but shall be adjusted and
readjusted from time to time as provided in this Section 3.1 and, as so adjusted
or readjusted, shall remain in effect until a further adjustment or readjustment
thereof is required by this Section 3.1.
3.1.1. NO ADJUSTMENT OF WARRANT PRICE. No adjustment in the
Warrant Price shall be made in respect of the issuance of Additional
Shares of Common Stock unless the consideration per share for an
Additional Share of Common Stock issued or deemed to be issued by the
Company is less than the applicable Warrant Price in
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<PAGE> 7
effect on the date of, and immediately prior to, such issue.
3.1.2. ADJUSTMENT OF WARRANT PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event the Company shall issue
Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to Section 3.1.4) for a
consideration per share less than the applicable Warrant Price in
effect on the date of and immediately prior to such issue, then the
applicable Warrant Price shall be recomputed, concurrently with such
issue (calculated to the nearest one hundredth of a cent) by dividing
(a) an amount equal to the sum of (i) the number of shares of Common
Stock outstanding immediately prior to such issue multiplied by the
then effective Warrant Price and (ii) the consideration, if any, deemed
received by the Company upon such issue by (b) the total number of
shares of Common Stock deemed to be outstanding immediately after such
issue; and provided that, for purposes of this Section 3.1.2, all
shares of Common Stock outstanding and issuable upon conversion of
outstanding Options, Convertible Securities and the Preferred Stock
shall be deemed to be outstanding. In no event will the Warrant Price
be adjusted as the result of any issuance of any Additional Shares of
Common Stock for any amount higher than the Warrant Price in effect
immediately prior to such issuance.
3.1.3. ADJUSTMENTS FOR SUBDIVISIONS, STOCK DIVIDENDS,
COMBINATIONS OR CONSOLIDATION OF COMMON STOCK. In the event the
outstanding shares of Common Stock shall be increased by way of stock
issued as a dividend for no consideration or subdivided (by stock split
or otherwise) into a greater number of shares of Common Stock, the
Warrant Price then in effect shall, concurrently with the effectiveness
of such increase or subdivision, be proportionately decreased. In the
event the outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, the Warrant Price then in effect shall,
concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
3.1.4. DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK -
OPTIONS AND CONVERTIBLE SECURITIES. In the event the Company at any
time after the Original Issue Date shall issue any Options or
Convertible Securities other than such Options or Convertible
Securities which are exchangeable, issuable, exercisable or convertible
into Common Stock which is excluded from the definition of Additional
Common Stock, or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such Options
or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such
number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed
to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the
close of business on such record date, PROVIDED that Additional Shares
of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 3.1.5) of such
Additional Shares of
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<PAGE> 8
Common Stock would be less than the applicable Warrant Price in effect
on the date of, and immediately prior to, such issue, or such record
date, as the case may be, and PROVIDED FURTHER that in any such case in
which Additional Shares of Common Stock are deemed to be issued:
(a) no further adjustment in the applicable
Warrant Price shall be made upon the subsequent issue of
shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities or upon
the subsequent issue of such Convertible Securities or
Options;
(b) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise,
for any increase or decrease in the consideration payable to
the Company, or any increase or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion
or exchange thereof, the applicable Warrant Price computed
upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the
rights of conversion or exchange under such Convertible
Securities; and
(c) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the applicable
Warrant Price computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon shall, upon such
expiration, be recomputed as if such unexercised portion of
such Options or rights of conversion or exchange under such
Convertible Securities had not been issued.
3.1.5. DETERMINATION OF CONSIDERATION. For purposes of this
Section 3.1, the consideration received by the Company for the issue of
any Additional Shares of Common Stock shall be computed as follows:
(a) CASH AND PROPERTY: Such consideration shall:
(i) insofar as it consists of cash, be
computed at the aggregate amount of net cash proceeds
received by the Company excluding unpaid amounts
payable for accrued interest or accrued dividends;
(ii) insofar as it consists of property
other than cash, be computed at the fair value
thereof at the time of such issue, as determined in
good faith by the Board of Directors of the Company;
-8-
<PAGE> 9
and
(iii) in the event Additional Shares of
Common Stock are issued together with other shares or
securities or other assets of the Company for
consideration which covers both, be the proportion of
such consideration so received, computed as provided
in clauses (i) and (ii) above, which is allocated to
the Additional Shares of Common Stock as determined
in good faith by the Board of Directors.
(b) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Company for Additional
Shares of Common Stock deemed to have been issued pursuant to
Section 3.1.4, relating to Options and Convertible Securities,
shall be determined by dividing
(i) the total amount, if any, received
or receivable by the Company as consideration for the
issue of such Options or Convertible Securities, plus
the minimum aggregate amount of additional
consideration (as set forth in the instruments
relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such
consideration but subject to later readjustment
pursuant to Section 3.1.4) payable to the Company
upon the exercise of such Options or the conversion
or exchange of such Convertible Securities, or in the
case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible
Securities by
(ii) the maximum number of shares of
Common Stock (as set forth in the instruments
relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such
number but subject to later readjustment pursuant to
Section 3.1.4) issuable upon the exercise of such
Options or the conversion or exchange of such
Convertible Securities.
3.1.6. OTHER DILUTIVE EVENTS. In case any event shall occur
as to which the other provisions of this Section 3.1 are not strictly
applicable, but the failure to make any adjustment in the Warrant Price
would not fairly protect the rights represented by this Warrant in
accordance with the intention of this Section 3, then, upon request of
the holders of a majority of the Warrants, the Board of Directors of
the Company shall appoint a firm of independent public accountants of
recognized national standing (which may be the regular auditors of the
Company) to give their opinion as to the adjustment, if any, on a basis
consistent with the intention of this Section 3, necessary to preserve
without dilution the rights represented by the Warrants. Upon receipt
of such opinion, the Company will promptly furnish a copy thereof to
the holders of the Warrants and the Warrant Price shall be adjusted in
accordance therewith. The fees and expenses of such accountants shall
be paid by the Company;
-9-
<PAGE> 10
PROVIDED, HOWEVER, that if such accountants opine that no adjustment is
necessary, such fees and expenses will be paid by the holders of the
Warrants.
3.2. SUBSEQUENT EVENTS. In the event of any recapitalization,
consolidation or merger of the Company or its successor, the Warrants shall be
exercisable for such shares or other interests as the Warrants would have been
entitled if the Warrants had been exercised for Common Stock immediately prior
to such event.
4. COVENANTS.
4.1. NO IMPAIRMENT. The Company will not seek to avoid the
observance or performance of any of the terms to be observed or performed under
this Warrant by the Company, but will at all times in good faith assist in
carrying out all the provisions of this Warrant.
4.2. RESERVATION OF SHARES. So long as any Warrants shall remain
outstanding, the Company shall at all times reserve and keep available, free
from preemptive rights, out of its authorized capital stock, for the purpose of
issuance upon exercise of the Warrants, the full number of shares of Common
Stock then issuable upon exercise of all outstanding Warrants. If the Company's
Common Stock shall be listed on any national stock exchange, the Company at its
expense shall include in its listing application all of the shares of Common
Stock reserved for issuance upon exercise of the Warrants (subject to issuance
or notice of issuance to the exchange) and will similarly procure the listing of
any further Common Stock reserved for issuance upon exercise of the Warrants at
any subsequent time as a result of adjustments in the outstanding Common Stock
or otherwise.
4.3. VALIDITY OF SHARES. The Company will from time to time take
all such action as may be required to assure that all shares of Common Stock
which may be issued upon exercise of this Warrant will, upon issuance, be
legally and validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issuance thereof. Without limiting
the generality of the foregoing, the Company will from time to time take all
such action as may be required to assure that the par value per share, if any,
of the Common Stock is at all times equal to or less than the lowest quotient
obtained by dividing the then current exercise price of this Warrant by the
number of shares of Common Stock into which this Warrant can, from time to time,
be exercised.
4.4. NOTICE OF CERTAIN EVENTS. If at any time:
(a) the Company shall declare any dividend or
distribution payable to the holders of its Common Stock;
(b) the Company shall offer for subscription pro rata to
the holders of Common Stock any additional shares of stock of any class
or any other rights;
(c) there shall be any recapitalization of the Company,
or consolidation or
-10-
<PAGE> 11
merger of the Company with, or sale of all or substantially all of its
assets to, another corporation or business organization; or
(d) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company as a whole or
substantially as a whole in a single transaction or a series of related
transactions;
then, in any one or more of such cases, the Company shall give the registered
holder of this Warrant written notice, by registered mail, of the date on which
a record shall be taken for such dividend, distribution or subscription rights
or for determining stockholders entitled to vote upon such recapitalization,
consolidation, merger, sale, dissolution, liquidation or winding up and of the
date when any such transaction shall take place, as the case may be. Such notice
shall also specify the date as of which the holders of Common Stock of record
shall participate in such dividend, distribution or subscription rights, or
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such recapitalization, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Such written notice
shall be given 20 days prior to the record date with respect thereto.
5. RESTRICTIONS ON TRANSFER.
Each certificate for Warrant Shares issued upon the exercise of any
Warrant, each certificate issued upon the direct or indirect transfer of any
Warrant Shares and each Warrant issued upon direct or indirect transfer or in
substitution for any Warrant pursuant to Section 6 shall be transferable only
upon satisfaction of the conditions specified in Section 6.5 of the Warrant and
Debenture Commitment (as in effect on March 7, 1997) and shall be stamped or
otherwise imprinted with legends in substantially the form set forth on the face
of this Warrant or otherwise required by Section 6.5 of the Warrant and
Debenture Commitment (as in effect on March 7, 1997).
The holder understands and agrees that: (1) there are substantial
restrictions on the transferability of this Warrant; (2) this Warrant has not
been registered under the Securities Act and it may not be sold, pledged,
transferred or otherwise disposed of unless it is so registered or an exemption
from such registration is available and unless any such proposed sale, pledge,
transfer or disposition is effected in compliance with state securities laws;
(3) this Warrant may only be registered under the Securities Act by the Company;
(4) there is no trading market for this Warrant; (5) the Warrant has been issued
to the holder in reliance upon an exemption from the registration requirements
of the Securities Act afforded to private offerings; and (6) in light of the
foregoing, the holder may not be able to liquidate its investment in this
Warrant at any given time, and the holder must be prepared to bear that economic
risk.
-11-
<PAGE> 12
6. OWNERSHIP, TRANSFER AND SUBSTITUTION OF WARRANTS.
6.1. OWNERSHIP OF WARRANTS. The Company may treat the person in
whose name any Warrant is registered on the register kept at the office of the
Company maintained pursuant to Section 6.2(a) as the owner and holder thereof
for all purposes, notwithstanding any notice to the contrary, except that, if
and when any Warrant is properly assigned in blank, the Company may (but shall
not be obligated to) treat the bearer thereof as the owner of such Warrant for
all purposes, notwithstanding any notice to the contrary. Subject to Section 5,
a Warrant, if properly assigned, may be exercised by a new holder without a new
Warrant first having been issued.
6.2. OFFICE; TRANSFER AND EXCHANGE OF WARRANTS.
(a) The Company will maintain an office (which may be an
agency maintained at a bank) in the United States of America where
notices, presentations and demands in respect of this Warrant may be
made upon it. Such office shall be maintained at 40 Hudson Road,
Canton, Massachusetts 02021 or such location as the Company shall
otherwise notify the holders of the Warrants.
(b) The Company shall cause to be kept at its office
maintained pursuant to Section 6.2(a) a register for the registration
and transfer of the Warrants. The names and addresses of holders of
Warrants, the transfers thereof and the names and addresses of
transferees of Warrants shall be registered in such register. Subject
to Section 6.2(a), the Person in whose name any Warrant shall be so
registered shall be deemed and treated as the owner and holder thereof
for all purposes of this Warrant, and the Company shall not be affected
by any notice or knowledge to the contrary.
(c) Upon the surrender of any Warrant, properly endorsed,
for registration of transfer or for exchange at the office of the
Company maintained pursuant to Section 6.2(a), the Company at its
expense will (subject to compliance with Section 5, if applicable)
execute and deliver to or upon the order of the holder thereof a new
Warrant of like tenor, in the name of such holder or as such holder
(upon payment by such holder of any applicable transfer taxes) may
direct, calling in the aggregate on the face thereof for the number of
shares of Common Stock called for on the face of the Warrant so
surrendered.
6.3. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction of any Warrant
held by a Person other than a Purchaser or any institutional investor, upon
delivery of an indemnity bond in such reasonable amount as the Company may
determine (or, in the case of a security held by the Investors or any
institutional holder or by the Investors or such institutional holder's nominee,
of an unsecured indemnity agreement from the Investors or such other holder
reasonably satisfactory to the Company), or, in the case of any such mutilation,
upon surrender of such Warrant for
-12-
<PAGE> 13
cancellation at the office of the Company maintained pursuant to Section 6.2(a),
the Company at its expense will execute and deliver, in lieu thereof, a new
Warrant of like tenor and dated the date hereof.
7. REMEDIES. The Company stipulates that the remedies at law of the holder
of this Warrant in the event of any default or threatened default by the Company
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate and that, to the fullest extent permitted by law,
such terms may be specifically enforced by a decree for the specific performance
of any agreement contained herein or by an injunction against a violation of any
of the terms hereof or otherwise.
8. NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing contained in this
Warrant shall be construed as conferring upon the holder hereof any rights as a
stockholder of the Company or as imposing any obligation on such holder to
purchase any securities or as imposing any liabilities on such holder as a
stockholder of the Company, whether such obligation or liabilities are asserted
by the Company or by creditors of the Company.
9. NOTICES. Any notice or other communication in connection with this
Warrant shall be deemed to be delivered if in writing addressed as provided
below and if either (a) actually delivered at said address, (b) in the case of a
letter, seven business days shall have elapsed after the same shall have been
deposited in the United States mails, postage prepaid and registered or
certified, return receipt requested, or two business days shall have elapsed
after the same shall have been deposited with an overnight courier (for
overnight delivery) of national recognition, (c) in the case of a telecopy
within the United States, upon confirmation of receipt of such telecopy (which
confirmation may consist of a telecopy machine printout showing successful
transmission), if such telecopy is followed by a copy of the same being
deposited within one business day of such telecopy with an overnight courier
(for overnight delivery) or (d) transmitted to any address outside of the United
States, by telecopy and confirmed by overnight or two-day courier:
If to the Company, to it at 40 Hudson Road, Canton, MA 02021, telecopy:
(617) 821-9956, telephone: (617) 821-2900, with a copy to Goulston & Storrs, 400
Atlantic Ave., Boston, MA 02110, attention: Kitt Sawitsky or at such other
address as the Company shall have specified by notice delivered to the holder
hereof.
If to the holder thereof, to the holders' addresses set forth on
Exhibit 1 to the Purchase Agreement, or at such other address as the Investors
shall have specified by notice delivered to the Company, in each case with a
copy to WPC.
If to any other holder of record of this Warrant, to it at its address
set forth in the registers of the Company.
-13-
<PAGE> 14
10. MISCELLANEOUS. The section headings in this Warrant are for convenience
of reference only and shall not constitute a part hereof. This Warrant and any
term hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought. This Warrant shall be
construed and enforced in accordance with and governed by the laws (other than
the conflict of laws rules) of the State of Delaware.
This Warrant is hereby executed on behalf of the Company by its duly
authorized officer under its corporate seal as of the date first written above.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By /s/ Jeffrey S. Stone
------------------------------------
Title: President
-14-
<PAGE> 15
FORM OF SUBSCRIPTION
[To be executed only upon exercise of Warrant]
To TWEETER HOME ENTERTAINMENT GROUP, INC.
The undersigned registered holder of the enclosed Warrant hereby
irrevocably exercises such Warrant for, and purchases thereunder, __________(1)
shares of the Common Stock and herewith makes payment of $___________________
therefor, and requests that the certificates for such shares be issued in the
name of, and delivered to ____________________, whose address is _____________
___________________________________________________.
Dated: ____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
- ----------
(1) Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which this
Warrant is being exercised), in either case without making any adjustment for
Additional Shares of Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of this Warrant,
may be delivered upon exercise. In the case of a partial exercise, a new Warrant
will be issued and delivered, representing the unexercised portion of the
Warrant, to the holder surrendering the Warrant.
-i-
<PAGE> 16
FORM OF CONVERSION NOTICE
[To be executed only upon conversion of Warrant]
To TWEETER HOME ENTERTAINMENT GROUP, INC.
The undersigned registered holder of the enclosed Warrant hereby
irrevocably converts such Warrant with respect to ____________(1) shares of the
Common Stock which such holder would be entitled to receive upon the exercise
hereof, and requests that the certificates for such shares be issued in the name
of, and delivered to ____________, whose address is ______________________.
Dated: _________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
_________________________________
(Street Address)
_________________________________
(City) (State) (Zip Code)
__________
(1) Insert here the number of shares called for on the face of this
Warrant (or, in the case of a partial conversion, the portion thereof as to
which this Warrant is being converted), in either case without making any
adjustment for Additional Shares of Common Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment provisions of
this Warrant, may be delivered upon exercise. In the case of a partial
conversion, a new Warrant will be issued and delivered, representing the
unconverted portion of the Warrant, to the holder surrendering the Warrant.
<PAGE> 17
FORM OF ASSIGNMENT
[To be executed only upon transfer of Warrant that
complies with Section 5 of the Warrant]
For value received, the undersigned registered holder of the attached
Warrant hereby sells, assigns and transfers unto the right
represented by such Warrant to purchase ______________ (1) shares of Common
Stock of TWEETER HOME ENTERTAINMENT GROUP, INC. to which such Warrant relates,
and appoints _______________ Attorney to make such transfer on the books of
TWEETER HOME ENTERTAINMENT GROUP, INC. maintained for such purpose, with full
power of substitution in the premises.
Dated: _________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
_________________________________
(Street Address)
_________________________________
(City) (State) (Zip Code)
Signed in the presence of:
_________________________________
__________
(1) Insert here the number of shares called for on the face of this
Warrant (or, in the case of a partial transfer, the portion thereof being
transferred), in either case without making any adjustment for Additional Shares
of Common Stock or any other stock or other securities or property or cash
which, pursuant to the adjustment provisions of this Warrant, may be delivered
upon exercise. In the case of a partial transfer, a new Warrant will be issued
and delivered, representing the untransferred portion of the Warrant, to the
holder surrendering the Warrant.
<PAGE> 18
FORM OF CONVERSION NOTICE
[To be executed only upon conversion of Warrant]
To TWEETER HOME ENTERTAINMENT GROUP, INC.
The undersigned registered holder of the enclosed Warrant hereby
irrevocably converts such Warrant with respect to __________(1) shares of the
Common Stock which such holder would be entitled to receive upon the exercise
hereof, and requests that the certificates for such shares be issued in the name
of, and delivered to _____________________________, whose address is __________
______________________________________________.
Dated: ____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
- ----------
(1) Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial conversion, the portion thereof as to which this
Warrant is being converted), in either case without making any adjustment for
Additional Shares of Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of this Warrant,
may be delivered upon exercise. In the case of a partial conversion, a new
Warrant will be issued and delivered, representing the unconverted portion of
the Warrant, to the holder surrendering the Warrant.
-i-
<PAGE> 19
FORM OF ASSIGNMENT
[To be executed only upon transfer of Warrant that
complies with Section 5 of the Warrant]
For value received, the undersigned registered holder of the attached
Warrant hereby sells, assigns and transfers unto the right represented
by such Warrant to purchase __________(1) shares of Common Stock of TWEETER
HOME ENTERTAINMENT GROUP, INC. to which such Warrant relates, and appoints
_________ ________________________ Attorney to make such transfer on the books
of TWEETER HOME ENTERTAINMENT GROUP, INC. maintained for such purpose, with
full power of substitution in the premises.
Dated: ____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of Warrant)
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
Signed in the presence of:
______________________________
- ----------
(1) Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial transfer, the portion thereof being transferred),
in either case without making any adjustment for Additional Shares of Common
Stock or any other stock or other securities or property or cash which, pursuant
to the adjustment provisions of this Warrant, may be delivered upon exercise. In
the case of a partial transfer, a new Warrant will be issued and delivered,
representing the untransferred portion of the Warrant, to the holder
surrendering the Warrant.
-i-
<PAGE> 20
SCHEDULE TO EXHIBIT 10.8
FORM OF COMMON STOCK PURCHASE WARRANTS DATED JUNE 5, 1998
All Common Stock Purchase Warrants issued by the Company on June 5,
1998 are substantially identical in all material respects except as to the
Warrant Holder thereunder and the number of Common Stock shares of the Company
for which each individual Common Stock Purchase Warrant is exercisable. Such
information is set forth below:
<TABLE>
<CAPTION>
NUMBER OF
WARRANT HOLDER WARRANT SHARES
<S> <C> <C>
1. Weston Presidio Offshore Capital C.V. 18,036
2. Advent Direct Investment Program Limited Partnership 7,052
3. Global Private Equity II Limited Partnership 18,720
4. Natio Vie Developpement II, FCPR 5,156
5. BNP Venture Holding Corp. 5,156
6. Matthew Bronfman 128
7. Jeffrey Bloomberg 928
8. Harriet Bloomberg 476
9. Carolyn Bloomberg 476
10. Armin Biller 476
======
TOTAL SHARES SUBJECT TO WARRANTS: 56,604
</TABLE>
-1-
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement of Tweeter Home
Entertainment Group, Inc. on Amendment No. 3 to Form S-1 of our report dated
June 5, 1998, appearing in the Prospectus, which is part of this Registration
Statement and to the reference to us under the headings "Experts" in such
Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedule of Tweeter Home Entertainment Group, Inc., listed in Item 16. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated 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.
/s/DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 7, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Tweeter Home
Entertainment Group, Inc. on Amendment No. 3 to Form S-1 of our report dated
March 7, 1997 on the financial statements of HiFi Buys Incorporated for the
years ended December 31, 1996, 1995 and 1994, appearing in the Prospectus, which
is part of this Registration Statement, and to the reference to us under the
headings "Experts" in such Prospectus.
/s/DELOITTE & TOUCHE LLP
Atlanta, Georgia
July 7, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Tweeter Home
Entertainment Group, Inc. on Amendment No. 3 to Form S-1 of our report dated
October 20, 1995 (May 9, 1996 as to Note 2) on the combined financial statements
of Bryn Mawr Radio and Television Center, Inc. and affiliate for the year ended
August 31, 1995, appearing in the Prospectus, which is part of this Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
July 7, 1998
