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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1999
Commission file number: ________
TWEETER HOME ENTERTAINMENT GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3417513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 PEQUOT WAY
CANTON, MA 02021
(Address of principal executive offices including zip code)
781-830-3000
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT MAY 6, 1999
Common Stock, $.01 par value 7,524,023
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TWEETER HOME ENTERTAINMENT GROUP, INC.
INDEX
<TABLE>
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PAGE
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<S> <C>
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998 and March 31, 1999............... 3
Condensed Consolidated Statements of Income For the Six and Three Months Ended
March 31, 1998 and 1999......................................................................... 4
Condensed Consolidated Statements of Cash Flows For the Six Months Ended
March 31, 1998 and 1999......................................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.................................. 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk...................................... 13
Part II. OTHER INFORMATION............................................................................... 14
</TABLE>
2
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TWEETER HOME ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 776,709 $ 14,615,729
Accounts receivable, net of allowance for doubtful accounts of $560,000
at September 30, 1998 and $560,714 at March 31, 1999 .......................... 6,207,837 8,204,744
Inventory ........................................................................ 38,362,311 44,438,726
Deferred tax assets .............................................................. 1,598,352 1,598,352
Prepaid expenses and other current assets ........................................ 590,788 335,640
----------- -------------
Total current assets ........................................................ 47,535,997 69,193,191
Property and equipment, net ...................................................... 23,978,118 29,760,028
Other assets, net ................................................................ 35,789 33,142
Goodwill, net .................................................................... 20,093,107 23,713,977
----------- -------------
TOTAL ....................................................................... $91,643,011 $ 122,700,338
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Amount due to bank ............................................................... $ 4,071,310 $ 5,479,415
Accounts payable ................................................................. 10,663,216 8,371,540
Accrued expenses ................................................................. 12,006,824 17,791,505
Customer deposits ................................................................ 1,422,557 2,016,191
Deferred warranty ................................................................ 1,109,325 995,218
----------- -------------
Total current liabilities ................................................... 29,273,232 34,653,869
----------- -------------
LONG-TERM DEBT:
Note payable to bank ............................................................. 5,250,000 --
----------- -------------
OTHER LONG TERM LIABILITIES:
Rent related accruals ............................................................ 2,821,202 3,035,360
Deferred warranty ................................................................ 1,066,251 582,363
Deferred tax liabilities ......................................................... 1,423,283 1,423,283
Other long-term liabilities ...................................................... 198,660 138,600
----------- -------------
Total other long-term liabilities ........................................... 5,509,396 5,179,606
----------- -------------
Total liabilities ........................................................... 40,032,628 39,833,475
----------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares
issued and outstanding ........................................................ -- --
Common stock, $.01 par value, 30,000,000 shares authorized;
7,521,763 shares issued in September 30, 1998 and
8,492,922 in March 31,1999 .................................................... 75,217 84,929
Additional paid-in capital ....................................................... 46,840,737 72,269,731
Retained earnings ................................................................ 6,701,244 12,404,609
Total ....................................................................... 53,617,198 84,759,269
Less treasury stock: 1,439,073 shares in September 30, 1998 and
1,012,538 shares in March 31, 1999 , at cost ................................... (2,006,815) (1,892,406)
----------- -------------
Total stockholders' equity .................................................. 51,610,383 82,866,863
----------- -------------
TOTAL ....................................................................... $91,643,011 $ 122,700,338
=========== =============
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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TWEETER HOME ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue .......................................... $ 54,512,256 $ 62,236,297 $129,129,712 $149,020,450
Cost of sales .......................................... (35,043,718) (39,899,306) (84,280,356) (97,132,590)
------------ ------------ ------------ ------------
Gross Profit ...................................... 19,468,538 22,336,991 44,849,356 51,887,860
Selling expenses ....................................... 13,817,724 16,423,470 30,207,653 33,922,218
Corporate, general and administrative expenses ......... 2,770,777 3,221,843 5,387,351 7,262,535
Amortization of goodwill ............................... 234,612 255,400 455,913 470,800
------------ ------------ ------------ ------------
Income from operations ................................. 2,645,425 2,436,278 8,798,439 10,232,307
Interest expense ....................................... 745,498 36,540 1,610,446 237,038
------------ ------------ ------------ ------------
Income before income taxes ............................. 1,899,927 2,399,738 7,187,993 9,995,269
Income tax expense ..................................... 759,966 959,895 2,875,198 3,998,107
------------ ------------ ------------ ------------
NET INCOME ............................................. $ 1,139,961 $ 1,439,843 $ 4,312,795 $ 5,997,162
============ ============ ============ ============
Accretion of preferred stock ........................... 791,820 -- 1,583,640 --
------------ ------------ ------------ ------------
Net income available to common stockholders ............ $ 348,141 $ 1,439,843 $ 2,729,155 $ 5,997,162
============ ============ ============ ============
Basic earnings per share ............................... $ 0.21 $ 0.20 $ 1.63 $ 0.88
============ ============ ============ ============
Diluted earnings per share ............................. $ 0.17 $ 0.18 $ 0.93 $ 0.78
============ ============ ============ ============
Weighted average shares outstanding
Basic ............................................... 1,672,507 7,259,262 1,672,506 6,851,372
Diluted ............................................. 2,055,697 8,113,497 4,615,999 7,684,116
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
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TWEETER HOME ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------------
1998 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 4,312,795 $ 5,997,162
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................................ 1,928,655 2,365,578
Deferred income tax provision (benefit) .................................. (104,747) --
Changes in operating assets and liabilities, net of effects from
acquisition of business:
Increase in accounts receivable ...................................... (1,923,533) (1,635,233)
Increase in inventory ................................................ (4,311,074) (2,483,768)
Decrease (increase) in prepaid expenses and other current assets ..... (231,810) 279,642
Increase in accounts payable and accrued expenses .................... 2,395,675 3,291,767
Increase in customer deposits ........................................ 374,130 208,140
Increase in deferred rent ............................................ 249,341 214,158
Decrease in deferred warranty ........................................ (799,591) (597,995)
Decrease in other liabilities ........................................ (60,060) (60,060)
----------- ------------
Net cash provided by operating activities ....................... 1,829,781 7,579,391
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................................... (1,343,454) (6,319,867)
Acquisition of business, net of cash acquired ................................ -- (8,837,927)
----------- ------------
Net cash used in investing activities ........................... (1,343,454) (15,157,794)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount due to bank ........................................................... (904,356) 1,408,105
Proceeds from long-term borrowings ........................................... 600,000 --
Payments of long term debt ................................................... -- (5,250,000)
Payments of subordinated debt ................................................ (200,000) --
Issuance of common stock, net of issuance costs .............................. -- 24,433,242
Other equity transactions .................................................... -- 826,076
----------- ------------
Net cash (used) provided by financing activities ............... (504,356) 21,417,423
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... (18,029) 13,839,020
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 1,156,837 776,709
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 1,138,808 $ 14,615,729
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................................... $ 1,880,120 $ 218,328
=========== ============
Taxes ...................................................................... $ 1,080,496 $ 2,613,936
=========== ============
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements of Tweeter Home
Entertainment Group, Inc. and its subsidiaries ("Tweeter"), included herein,
should be read in conjunction with the consolidated financial statements and
notes thereto included in Tweeter's Annual Report on Form 10-K for the year
ended September 30, 1998.
2. Accounting Policies
The unaudited consolidated financial statements of Tweeter have been
prepared in accordance with generally accepted accounting principles. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation of the interim
consolidated financial statements have been included. Operating results for the
six-month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending September 30, 1999. Tweeter
typically records its highest revenue and earnings in the first fiscal quarter.
3. Earnings per Share
Tweeter computed earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings per share is calculated based on the weighted average number of common
shares outstanding, adjusted for the nominal issuance of certain warrants.
Diluted earnings per share is based on the weighted average number of common
shares outstanding, adjusted for the nominal issuance of certain warrants,
shares of 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 per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Numerator:
Net income $1,139,961 $1,439,843 $4,312,795 $5,997,162
Accretion of preferred stock dividends 791,820 -- 1,583,640 --
---------- ---------- ---------- ----------
Net income available to common stockholders 348,141 1,439,843 2,729,155 5,997,162
Denominator:
Weighted average common shares outstanding 1,587,552 7,174,307 1,501,278 6,680,144
Nominal issuance of warrants 84,955 84,955 171,229 171,229
---------- ---------- ---------- ----------
Weighted average shares outstanding 1,672,507 7,259,262 1,672,507 6,851,372
---------- ---------- ---------- ----------
Basic earnings per share $ 0.21 $ 0.20 $ 1.63 $ 0.88
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE:
Numerator $ 348,141 $1,439,843 $4,312,795 $5,997,162
Denominator:
Weighted average shares outstanding 1,672,507 7,259,262 1,672,507 6,851,372
Potential common stock outstanding 383,190 854,235 2,943,493 832,743
---------- ---------- ---------- ----------
Total 2,055,697 8,113,497 4,616,000 7,684,116
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.17 $ 0.18 $ 0.93 $ 0.78
========== ========== ========== ==========
</TABLE>
6
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TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
4. Follow-on Offering
In February 1999, Tweeter completed a follow-on public offering of 2,875,00
shares of common stock, including the underwriters' over allotment option. The
primary purpose of the offering was to provide the opportunity for Tweeter's
early stage investors to sell a portion of their holdings in an orderly manner,
and to raise cash for Tweeter's working capital and for potential acquisitions,
including the February 1, 1999 acquisition of Home Entertainment of Texas, Inc.
The Company sold 875,000 shares in the offering and selling stockholders sold
2,000,000 shares. Net proceeds to the Company from the offering were
approximately $24,400,000.
5. Recent Acquisitions
On February 1, 1999, the Company acquired the principal operating assets and
assumed certain liabilities of Home Entertainment of Texas, Inc. This
transaction has been accounted for as a purchase and, accordingly, the results
of operations of the Company's business relating to Home Entertainment have been
included in the consolidated statements of income since the acquisition date.
The allocation of the purchase price resulted in goodwill to date of
approximately $4,078,000, which is being amortized over twenty-five years using
the straight-line method. The net assets acquired at fair market value on
February 1, 1999 were allocated as follows:
Inventory $3,592,000
Property and equipment 1,351,000
Accounts receivable 362,000
Other assets 42,000
Accrued expenses and customer deposits (587,000)
----------
Net assets acquired 4,760,000
Total purchase price and related costs 8,838,000
----------
Goodwill $4,078,000
==========
The following unaudited pro forma financial information reflects the
consolidated results of operations for the Company for the six months ended
March 31, 1999 and 1998 as though the acquisition 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 or results which may occur in the future, had the acquisition
been consummated at the beginning of each fiscal year.
Six months ended March 31,
--------------------------------
1998 1999
------------ ------------
Net sales $141,737,527 $158,284,689
Net income 4,638,974 6,375,603
Net income available to
common stockholders 3,055,334 6,375,603
Basic earnings per share 1.83 0.93
Diluted earnings per share 1.00 0.83
7
<PAGE> 8
6. Subsequent Events
On April 9, 1999, Tweeter filed a shelf registration statement on Form S-4
with the Securities and Exchange Commission.
The registration statement related to 2,000,000 shares of common stock of
Tweeter Home Entertainment Group, Inc. These shares may be issued from time to
time in the future by Tweeter in connection with its acquisition of the assets,
business or securities of other companies, whether by purchase, merger or any
other form of business combination.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Tweeter is a specialty retailer of mid to high-end audio and video consumer
electronics products. Tweeter operates 61 stores under the Tweeter, etc., Bryn
Mawr Stereo & Video, HiFi Buys and Home Entertainment names.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
Total Revenue. Total revenue includes delivered sales, completed service
center work orders, insurance replacement and corporate sales. Total revenue
increased $7.7 million, or 14.2%, to $62.2 million in the three months ended
March 31, 1999 from $54.5 million for the three months ended March 31, 1998. The
increase was mainly comprised of $3.7 million from new stores and $3.3 million
from the acquisition of Home Entertainment of Texas. Comparable store sales,
excluding Home Entertainment increased by 1.0%. New technology products help
both sales and gross margin performance for the second quarter of fiscal 1999.
DVD players represented approximately 4.1% of total revenue for the three months
ended March 31, 1999, as compared to 2.1% for the same period in the prior year
and grew in absolute sales dollars by 128%. Camcorder business is up 23% and our
receiver business is up 28%, much of this increase is being driven by new
digital products.
Gross Profit. Cost of sales includes merchandise, net delivery costs,
distribution costs, purchase discounts, and vendor volume rebates. Cost of sales
increased $4.9 million, or 13.9% to $39.9 million in the three months ended
March 31, 1999 from $35.0 million in the three months ended March 31, 1998.
Gross profit increased $2.9 million, or 14.7% to $22.3 million in the three
months ended March 31, 1999 from $19.5 million for the three months ended March
31, 1998. The gross margin percentage increased 20 basis points to 35.9% from
35.7% last year. The increase in margin is primarily due to increased sales of
new digital technology products, such as DVD players, digital televisions and
digital camcorders. These digital products realize higher gross margin and
higher average ticket than their analog counterparts. This increase was offset
by growth in the video category relative to other categories that Tweeter sells.
Video products generally realize lower gross margin than audio products. Tweeter
expects sales of digital televisions to accelerate over the next few years,
which will tend to increase video sales as a percentage of the Company's overall
mix. It is a particular challenge for Tweeter to enact strategies such as its
"Sell Audio with Video" strategy in order to offset the margin erosion that
could occur due to an increase in sales of video products relative to the other
categories of products that Tweeter sells.
Selling Expenses. Selling expenses include the compensation of store
personnel, occupancy, store level depreciation, advertising, preopening expenses
and credit card fees and excludes corporate, general and administrative
expenses. Selling expenses increased $2.6 million, or 18.9%, to $16.4 million in
the three months ended March 31, 1999 from $13.8 million for the three months
ended March 31, 1998. As a percentage of revenue, selling expenses increased to
26.4% in the three months ended March 31, 1999 from 25.3% in the prior year
period. This increase was primarily due to heavier than normal advertising
spending in new markets, particularly Alabama and Texas, as well as a small
decrease in cooperative advertising funds as compared to the prior year.
Additionally, Tweeter incurred heavier than normal payroll expense in the newly
acquired Home Entertainment stores as Tweeter guaranteed year over year earnings
to the staff during February.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses include the costs of accounting, purchasing, information
systems, human resources, training, executive officers and related support
functions. Corporate, general and administrative expenses for the three months
ended March 31, 1999 increased 16.3% to $3.2 million from $2.8 million for the
three months ended March 31, 1998. As a percentage of total revenue, corporate
general and administrative expenses increased to 5.2% for the three months ended
March 31, 1999 from 5.1% for the prior year period. This increase was the result
of increased administrative infrastructure, consisting of additional support
personnel added since the comparable prior year period. Tweeter is continuing to
build corporate infrastructure in anticipation of future acquisitions.
Amortization of Goodwill. Amortization of goodwill increased slightly to
$255,000 in the three months ended March 31, 1999 from $235,000 in the three
months ended March 31, 1998 The increase was due to the Home Entertainment
acquisition on February 1, 1999 offset partially by the goodwill associated with
the repurchase of a franchise, which fully amortized during fiscal 1998.
9
<PAGE> 10
Interest Expense. Interest expense decreased to $37,000 in the three months
ended March 31, 1999 from $745,000 in the three months ended March 31, 1998. The
decrease was due to the Initial Public Offering completed in July 1998 and the
Follow-on Offering completed in February 1999 in which the proceeds received
were used to pay off all long term debt outstanding.
Income Taxes. The effective tax rate for the quarters ended March 31, 1999
and March 31, 1998 was 40.0%. Tweeter expects that the income tax rate for the
year ending September 30, 1999 will approximate 40%.
New Stores. On February 19, 1999, the Tweeter opened its 61st store in
Auburn, Massachusetts. Operating under the Tweeter name, the 9,000 square foot
facility includes a 2 bay mobile installation center with complete custom
fabrication capabilities. In addition, on February 1, 1999, Tweeter assumed the
operation of seven retail stores as part of the Home Entertainment acquisition.
Seasonality. Tweeter's operations, in common with other retailers, are
subject to seasonal influences. Historically, the Tweeter has realized more of
its revenue and net earnings in the first fiscal quarter, which includes the
holiday season, than in any other fiscal quarter. The net earnings of any
interim quarter are seasonally disproportionate to net sales since certain
selling expenses and administrative expenses are relatively fixed during the
year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
SIX MONTHS ENDED MARCH 31, 1999 AS COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
Total Revenue. Total revenue increased $19.9 million, or 15.4%, to $149.0
million in the six months ended March 31, 1999 from $129.1 million for the six
months ended March 31, 1998. The increase was mainly comprised of $7.0 million
from new stores, $7.6 million from comparable store sales growth and $3.3
million from the acquisition of Home Entertainment of Texas. Comparable store
sales increased by 6.5% excluding the Home Entertainment chain. New technology
products fueled sales performance for the first six months of fiscal 1999. DVD
players represented approximately 5.1% of total revenue for the six months ended
March 31, 1999 as compared to approximately 2.2% of total revenue for the six
months ended March 31, 1998.
Gross Profit. Cost of sales increased $12.9 million, or 15.2% to $97.1
million in the six months ended March 31, 1999 from $84.2 million in the six
months ended March 31, 1998. Gross profit increased $7.0 million, or 15.7% to
$51.9 million in the six months ended March 31, 1999 from $44.8 million for the
six months ended March 31, 1998. The gross margin increased slightly to 34.8%
from 34.7% last year. The increase in margin is primarily due to increased sales
of new digital technology products, such as DVD players, digital televisions and
digital camcorders. These digital products realize higher gross margin and
higher average ticket than their analog counterparts. This increase was offset
by growth in the video category relative to other categories that the Tweeter
sells. Video products generally realize lower gross margin than audio products.
The Company expects sales of digital televisions to accelerate over the next few
years, which will tend to increase video sales as a percentage of the Company's
overall mix. It is a particular challenge for the Company to enact strategies
such as its "Sell Audio with Video" strategy in order to offset the margin
erosion that could occur due to an increase in sales of video products relative
to the other categories of products that the Company sells.
Selling Expenses. Selling expenses increased $3.7 million, or 12.3%, to
$33.9 million in the six months ended March 31, 1999 from $30.2 million for the
six months ended March 31, 1998. However, as a percentage of revenue, selling
expenses decreased to 22.8% in the six months ended March 31, 1999 from 23.4% in
the prior year period. This decrease was the result of leveraging the fixed
portion of the selling expenses over a larger sales base, as well as continued
execution of the Tweeter's expense reduction initiatives.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses for the six months ended March 31, 1999 increased 34.8%
to $7.3 million from $5.4 million for the six months ended March 31, 1998. As a
percentage of total revenue, corporate general and administrative expenses
increased to 4.9% for the six months ended March 31, 1999 from 4.2% for the
prior year period. This increase was the result of increased administrative
infrastructure, consisting of additional support personnel added since the
comparable prior year period. The Company is continuing to build corporate
infrastructure in anticipation of future acquisitions.
Amortization of Goodwill. Amortization of goodwill increased to $471,000 in
the six months ended March 31, 1999 from $456,000 in the six months ended March
31, 1998. The increase was due to the Home Entertainment acquisition on February
1, 1999 offset partially by the goodwill associated with the repurchase of a
franchise, which fully amortized during fiscal 1998.
10
<PAGE> 11
Interest Expense. Interest expense decreased to $237,000 for the six months
ended March 31, 1999 from $1.6 million in the six months ended March 31, 1998.
The decrease was due to the Initial Public Offering consummated in July 1998 and
the Follow-on Offering completed in February 1999 in which the proceeds received
were used to pay off all long term debt outstanding.
Income Taxes. The effective tax rate for the six months ended March 31, 1999
and March 31, 1998 was 40.0%. Tweeter expects that the income tax rate for the
year ending September 30, 1999 will approximate 40%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7.6 million for the six
months ended March 31, 1999 compared to $1.8 million for the six-month period
ended March 31, 1998. Cash provided by operations in 1999 was primarily the
result of $6.0 million in net income, an increase in accounts payable and
accrued expenses of $3.3 million and depreciation and amortization of $2.4
million. This was offset by increases in inventory of $2.5 million and accounts
receivable of $1.6 million, as well as minor changes in other operating
accounts.
At March 31, 1999, working capital was $34.5 million, compared to $18.3
million at September 30, 1998. The ratio of current assets to current
liabilities was 2.00 to 1 at March 31, 1999 and 1.62 to 1 at September 30, 1998.
Capital expenditures for the six months ended March 31, 1999 were $6.3
million, primarily used for the building of new stores and the re-siting of
existing stores. On February 1, 1999, $8.8 million was used to acquire the
retail operations of Home Entertainment of Texas, Inc.
Net cash provided in financing activities during the six months ended March
31, 1999 was $21.4 million, comprised mainly of proceeds received from the
Follow-on Offering of $24.4 million offset by payments of long term debt of $5.3
million.
The Company had available at March 31, 1999 a $50,000,000 revolving credit
facility, and there were no balances outstanding at March 31, 1999.
In February 1999, Tweeter completed a follow-on public offering of 2,875,000
shares of common stock, including the underwriters' over allotment option. The
primary purpose of the offering was to provide the opportunity for Tweeter's
early stage investors to sell a portion of their holdings in an orderly manner,
and to raise cash for Tweeter's working capital and for potential acquisitions,
including the February 1, 1999 acquisition of Home Entertainment of Texas, Inc.
The Company sold 875,000 shares in the offering and selling stockholders sold
2,000,000 shares. Net proceeds to the Company from the offering were
approximately $24,400,000
Tweeter believes that its current cash position, together with cash
generated by operations and available borrowings under its credit facility will
be sufficient to finance its working capital and capital expenditure
requirements for at least the next twelve months. If management pursues
additional acquisitions within this period, however, such acquisitions could
strain Tweeter's capital resources. Furthermore, due to the seasonality of its
business, Tweeter's working capital needs are significantly higher in the fiscal
third and fourth quarters and there is the possibility that this could cause
unforeseen capital constraints in the future.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "expects,"
"anticipates," "believes" and words of similar import, constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward looking statements are subject to various
risks and uncertainties, including those relating to Company growth and
acquisitions, dependence on key personnel, the need for additional financings,
competition and seasonal fluctuations, and those referred to in the Company's
Registration Statement on Form S-1 (Reg. No. 333-
11
<PAGE> 12
70543), that could cause actual future results and events to differ materially
from those currently anticipated. Readers are cautioned not to place undue
reliance on these forward looking statements.
YEAR 2000 COMPLIANCE
Tweeter purchases and sells new mid to high-end consumer electronic
products, which suppliers recently manufactured. Tweeter believes that it is
unlikely that these products have Year 2000 problems or that, even if some
products were not Year 2000 compliant, the warranty expenses to Tweeter would be
material. As such, Tweeter does not intend to evaluate individual products. If a
large quantity of these products, however, are non-compliant and consumers learn
of this non-compliance, Tweeter could suffer a loss of sales.
SUPPLIERS
Tweeter has begun contacting its suppliers to ensure that Year 2000 issues
will not materially adversely affect its supply chain and inventory levels.
Tweeter expects this process to be completed by August 1999. When Tweeter has
compiled adequate information regarding the Year 2000 status of its major
suppliers, Tweeter will formulate contingency plans based upon these
assessments. Any failure of suppliers to provide inventory to Tweeter could have
a material adverse effect on its results of operations and financial condition.
INTERNAL OPERATIONS
Tweeter is currently evaluating its internal business systems, as well as
its stores and storage facilities for Year 2000 problems. Tweeter has
substantially completed its assessment of its internal systems and software, and
believes that Year 2000 issues will not materially affect its business. Tweeter
has already completed the majority of the required coding conversions on its
information technology, including its patented Automatic Price Protection
software. All of its other internal software, including its accounting software,
is recently released, off-the-shelf applications, which is certified as
compliant by their licensors. Tweeter anticipates identifying and completing all
known remaining coding conversions during the current fiscal year.
Although Tweeter anticipates minimal business disruption as a result of Year
2000 issues, possible consequences of non-compliance include, but are not
limited to, loss of communications links with certain store locations, loss of
electric power, loss of security systems, and inability to process transactions,
send purchase orders or engage in similar normal business activities.
COSTS OF COMPLIANCE
Tweeter estimates the total cost of Tweeter's Year 2000 compliance will not
be material in amount. Tweeter has not hired any outside personnel to assess the
scope of or provide solutions to Year 2000 problems. Tweeter has not diverted
material resources, including employee resources, and any costs expended are an
immaterial part of its information technology budget.
The Year 2000 expenses incurred to date and the completion dates are based
on management's best estimates and may be updated as additional information
becomes available.
12
<PAGE> 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tweeter's credit facility provides for borrowings which bear interest at
variable rates based on either (i) the higher of BankBoston's Base Rate or the
Federal Funds rate plus 0.50% or (ii) the London Interbank Offering Rate (LIBOR)
plus an applicable margin varying from 100 to 175 basis points. Tweeter had no
borrowings outstanding pursuant to the credit facility as of March 31, 1999.
Tweeter believes that the effect, if any, of reasonably possible near-term
changes in interest rates on Tweeter's financial position, results of
operations, and cash flows should not be material.
Currently, Tweeter does not enter into financial instrument transactions for
trading or other speculative purposes or to manage interest rate exposure.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 9, 1999, Tweeter filed a shelf registration statement on Form S-4
with the Securities and Exchange Commission. The prospectus relates to 2,000,000
shares of Tweeter Home Entertainment Group, Inc. common stock. These shares may
be issued from time to time in the future by Tweeter in connection with its
acquisition of the assets, business or securities of other companies, whether by
purchase, merger or any other form of business combination.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
On January 19, 1999, Tweeter filed with the Securities and Exchange
Commission a Current Report on Form 8-K to announce its quarterly earnings for
the quarter ended December 31, 1998. The Form 8-K included unaudited
consolidated operating and balance sheet data.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TWEETER HOME ENTERTAINMENT GROUP, INC.
BY: /s/ JOSEPH MCGUIRE
---------------------------------------
JOSEPH MCGUIRE, CHIEF FINANCIAL OFFICER
Date: May 6, 1999
14
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