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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 JUNE 30, 1999
Commission file number: 0-24091
TWEETER HOME ENTERTAINMENT GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3417513
-------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of 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 AUGUST 2, 1999
Common Stock, $.01 par value 7,554,704
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TWEETER HOME ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1999
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 776,709 $ 8,381,783
Accounts receivable, net of allowance for doubtful accounts of $560,000
at September 30, 1998 and $562,000 at June 30, 1999 ...................................... 6,207,837 7,590,155
Inventory ................................................................................ 38,362,311 46,778,679
Deferred tax assets ...................................................................... 1,598,352 1,598,352
Prepaid expenses and other current assets ................................................ 590,788 445,623
----------- ------------
Total current assets ..................................................................... 47,535,997 64,794,592
Property and equipment, net .............................................................. 23,978,118 31,500,624
Other assets, net ........................................................................ 35,789 67,590
Goodwill, net ............................................................................ 20,093,107 23,788,560
----------- ------------
TOTAL .................................................................................... 91,643,011 $120,151,366
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Amount due to bank ....................................................................... 4,071,310 $ 3,857,619
Accounts payable ......................................................................... 10,663,216 8,351,043
Accrued expenses ......................................................................... 12,006,824 17,053,390
Customer deposits ........................................................................ 1,422,557 1,200,420
Deferred warranty ........................................................................ 1,109,325 948,163
----------- ------------
Total current liabilities ................................................................ 29,273,232 31,410,635
----------- ------------
LONG-TERM DEBT:
Note payable to bank ..................................................................... 5,250,000 --
----------- ------------
OTHER LONG TERM LIABILITIES:
Rent related accruals .................................................................... 2,821,202 3,148,689
Deferred warranty ........................................................................ 1,066,251 308,451
Deferred tax liabilities ................................................................. 1,423,283 1,423,283
Other long-term liabilities .............................................................. 198,660 106,260
----------- ------------
Total other long-term liabilities ........................................................ 5,509,396 4,986,683
----------- ------------
Total liabilities ........................................................................ 40,032,628 36,397,318
----------- ------------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 10,000,000 shares authorized, no shares
issued and outstanding ................................................................... -- --
Common stock, $.01 par value, 20,000,000 shares authorized;
7,521,763 shares issued in September 30, 1998 and
8,505,829 in June 30,1999 ................................................................ 75,217 85,058
Additional paid in capital ............................................................... 46,840,737 72,212,701
Retained earnings ........................................................................ 6,701,244 13,373,242
Total .................................................................................... 53,617,198 85,671,001
Less treasury stock: 1,439,073 shares in September 30, 1998 and
955,713 shares in June 30, 1999, at cost ................................................. (2,006,815) (1,916,953)
----------- ------------
Total stockholders' equity ............................................................... 51,610,383 83,754,048
----------- ------------
TOTAL .................................................................................... $91,643,011 $120,151,366
=========== ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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TWEETER HOME ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- -----------------------------
1998 1999 1998 1999
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Total revenue $49,675,691 $59,653,369 $178,805,403 $208,673,818
Cost of sales (32,256,264) (38,085,472) (116,536,620) (135,218,061)
----------- ----------- ------------ ------------
Gross Profit 17,419,427 21,567,897 62,268,783 73,455,757
Selling expenses 13,379,069 16,245,895 43,586,722 50,168,113
Corporate, general and administrative expenses 2,733,932 3,451,084 8,121,283 10,713,619
Amortization of goodwill 221,301 215,400 677,214 686,200
----------- ----------- ------------ ------------
Income from operations 1,085,125 1,655,518 9,883,564 11,887,825
Interest expense 745,498 41,125 2,355,944 278,163
----------- ----------- ------------ ------------
Income before income taxes 339,627 1,614,393 7,527,620 11,609,662
Income tax expense 135,850 645,760 3,011,048 4,643,867
----------- ----------- ------------ ------------
NET INCOME $ 203,777 $ 968,633 $ 4,516,572 $ 6,965,795
=========== =========== ============ ============
Accretion of preferred stock 791,815 -- 2,375,455 --
----------- ----------- ------------ ------------
Net income (loss) available to common stockholders $ (588,038) $ 968,633 $ 2,141,117 $ 6,965,795
=========== =========== ============ ============
Basic earnings (loss) per share $ (0.35) $ 0.13 $ 1.28 $ 1.01
=========== =========== ============ ============
Diluted earnings (loss) per share $ (0.35) $ 0.12 $ 0.96 $ 0.90
=========== =========== ============ ============
Weighted average shares outstanding
Basic 1,672,507 7,273,477 1,672,507 6,925,847
Diluted 1,672,507 8,024,551 4,694,321 7,734,004
</TABLE>
See notes to unaudited condensed consolidated financial statements
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TWEETER HOME ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-----------------------------
1998 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................................ 4,516,572 6,965,795
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................................................. 2,878,919 3,728,674
Gain on disposal of equipment ............................................................. (13,350) (23,800)
Deferred income tax provision (benefit) ................................................... (104,747) --
Changes in operating assets and liabilities, net of effects from
acquisition of business:
Increase in accounts receivable ........................................................... (738,290) (1,020,644)
Increase in inventory ..................................................................... (5,231,844) (4,823,721)
(Increase) decrease in prepaid expenses and other current assets .......................... (797,140) 6,246
Increase in accounts payable and accrued expenses ......................................... 1,692,022 2,533,155
Increase (decrease) in customer deposits .................................................. 164,290 (607,631)
Increase in deferred rent ................................................................. 376,554 327,487
Decrease in deferred warranty ............................................................. (1,164,229) (918,962)
Decrease in other liabilities ............................................................. (97,020) (92,400)
---------- ----------
Net cash provided by operating activities ................................................. 1,481,737 6,074,199
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................................................ (6,612,020) (9,205,101)
Proceeds from sale of property and equipment .............................................. 13,350 23,800
Acquisition of business ................................................................... -- (9,002,003)
---------- ----------
Net cash used in investing activities ..................................................... (6,598,670) (18,183,304)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount due to bank ........................................................................ (1,468,376) (213,691)
Proceeds from long-term borrowings ........................................................ 7,000,000 --
Payments of long term debt ................................................................ -- (5,250,000)
Payments of subordinated debt ............................................................. (300,000) --
Issuance of common stock, net of issuance costs ........................................... -- 24,336,376
Other Equity Transactions ................................................................. -- 841,494
---------- ----------
Net cash provided by financing activities ................................................. 5,231,624 19,714,179
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS ..................................................... 114,691 7,605,074
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .............................................. 1,156,837 776,709
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................................. $1,271,528 $ 8,381,783
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .................................................................................. $2,699,274 $ 669,121
========== ===========
Taxes ..................................................................................... $2,629,985 $ 2,628,936
========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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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" or the "Company"),
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
nine-month period ended June 30, 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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1999 1998 1999
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Numerator:
Net income $ 203,777 $ 968,633 $ 4,516,572 $ 6,965,795
Accretion of preferred stock dividends 791,815 -- 2,375,455 --
---------- --------- ----------- -----------
Net income (loss) available to common stockholders (588,038) 968,633 2,141,117 6,965,795
Denominator:
Weighted average common shares outstanding 1,512,670 7,270,120 1,512,670 6,810,575
Nominal issuance of warrants 159,837 3,357 159,837 115,272
---------- --------- ----------- -----------
Weighted average shares outstanding 1,672,507 7,273,477 1,672,507 6,925,847
---------- --------- ----------- -----------
Basic earnings (loss) per share $ (0.35) $ 0.13 $ 1.28 $ 1.01
========== ========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Numerator $ 348,141 $ 968,633 $ 4,516,572 $ 6,965,795
Denominator:
Weighted average shares outstanding 1,672,507 7,273,477 1,672,507 6,925,847
Potential common stock outstanding -- 751,074 3,021,814 808,157
---------- --------- ----------- -----------
Total 1,672,507 8,024,551 4,694,321 7,734,004
---------- --------- ----------- -----------
Diluted earnings (loss) per share $ (0.35) $ 0.12 $ 0.96 $ 0.90
---------- --------- ----------- -----------
</TABLE>
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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 $24,325,000.
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 $4,242,000, 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:
<TABLE>
<S> <C>
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 9,002,000
-----------
Goodwill $ 4,242,000
===========
</TABLE>
The following unaudited pro forma financial information reflects the
consolidated results of operations for the Company for the nine months ended
June 30, 1998 and 1999 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net sales $191,413,218 $217,938,057
Net income 5,108,706 7,344,236
Net income available to common 2,733,251 7,344,236
stockholders
Basic earnings per share 1.63 1.06
Diluted earnings per share 1.09 0.95
</TABLE>
6. Shelf Registration Statement
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.
7. Employee Stock Purchase Plan
During fiscal 1999, the Company adopted an Employee Stock Purchase Plan
(ESPP). The ESPP was effective upon approval by the stockholders of the Company
and will continue in effect for a term of twenty (20) years, unless terminated
sooner. The Company has the right to terminate the Plan at any time. The Plan
is intended to be an Employee Stock Purchase Plan under Section 423 of the
Internal Revenue Code of 1986, as amended. Subject to adjustment pursuant to
the Stock Purchase Plan, the aggregate number of shares of Common Stock which
may be sold under the Stock Purchase Plan is 500,000.
8. Subsequent Events
On July 1, 1999, Tweeter completed the acquisition of DOW Stereo/Video, Inc., by
acquiring all of its outstanding capital stock. This transaction will be
accounted for as a purchase and, accordingly, the results of operations of the
Company's business relating to DOW Stereo/Video will be included in the
consolidated statements of income from the acquisition date. The total purchase
price was approximately $8,000,000 of which $7,400,000 was paid in cash and
$600,000 was paid through the issuance of 16,145 shares of the Company's common
stock. Included in the assets was $1,700,000 of cash.
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On July 30, 1999, Tweeter made a $1,000,000 investment in Cyberian Outpost, Inc.
(Nasdaq: COOL), a global e-commerce Internet company. On August 2, 1999, the
Company announced plans to form a joint venture with Cyberian Outpost to market
consumer electronics via the Internet.
9. New Accounting Pronouncements
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 was not required to be
implemented until fiscal year 2000. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133." SFAS No. 137 delayed the original implementation date of SFAS No. 133 by
one year. This will require that the Company implement this statement in fiscal
year 2001. Management is currently evaluating the effects that the adoption of
SFAS No. 133 will have on the consolidated financial statements.
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 63 stores under the Tweeter, etc., Bryn
Mawr Stereo & Video, HiFi Buys and Home Entertainment names.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Total Revenue. Total revenue includes delivered sales, completed service
center work orders, insurance replacement and corporate sales. Total revenue
increased $10.0 million, or 20.1%, to $59.7 million in the three months ended
June 30, 1999 from $49.7 million for the three months ended June 30, 1998. The
increase was mainly comprised of $3.2 million from new stores and $6.6 million
from the acquisition of Home Entertainment of Texas. Comparable store sales,
including Home Entertainment, increased by 1.1%. New technology products helped
both sales and gross margin performance for the second quarter of fiscal 1999.
DVD players represented approximately 5.2% of total revenue for the three months
ended June 30, 1999, as compared to 3.3% for the same period in the prior year
and grew in absolute sales dollars by 91.5%. Camcorder business is up 17% and
receiver business is up 35%, new digital products are driving much of this
increase.
Gross Profit. Cost of sales includes merchandise, net delivery costs,
distribution costs, purchase discounts, and vendor volume rebates. Cost of sales
increased $5.8 million, or 18.1% to $38.1 million in the three months ended June
30, 1999 from $32.3 million in the three months ended June 30, 1998. Gross
profit increased $4.1 million, or 23.8% to $21.6 million in the three months
ended June 30, 1999 from $17.4 million for the three months ended June 30, 1998.
The gross margin percentage increased 110 basis points to 36.2% from 35.1% 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 $2.9 million, or 21.4%, to $16.2 million in
the three months ended June 30, 1999 from $13.4 million for the three months
ended June 30, 1998. As a percentage of revenue, selling expenses increased to
27.2% in the three months ended June 30, 1999 from 26.9% in the prior year
period. This increase was primarily due to heavier than normal advertising
spending in new markets, particularly Alabama
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and Texas, as well as a commission paid on higher margin sales.
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 June 30, 1999 increased 26.2% to $3.5 million from $2.7 million for the
three months ended June 30, 1998. As a percentage of total revenue, corporate
general and administrative expenses increased to 5.8% for the three months ended
June 30, 1999 from 5.5% 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 decreased slightly to
$215,000 in the three months ended June 30, 1999 from $221,000 in the three
months ended June 30, 1998 The decrease was due to the completed amortization of
goodwill associated with the repurchase franchise, which fully amortized during
fiscal 1998.
Interest Expense. Interest expense decreased to $41,000 in the three months
ended June 30, 1999 from $745,000 in the three months ended June 30, 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 June 30, 1999
and June 30, 1998 was 40.0%. Tweeter expects that the income tax rate for the
year ending September 30, 1999 will approximate 40%.
New Stores. In May 1999, Tweeter opened its 62nd store in Northeast
Philadelphia, Pennsylvania, operating under the Bryn Mawr Stereo & Video name.
In June 1999, the Company opened its 63rd store in Portland, Maine, operating
under the Tweeter name.
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.
NINE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
Total Revenue. Total revenue increased $29.9 million, or 16.7%, to $208.7
million in the nine months ended June 30, 1999 from $178.8 million for the nine
months ended June 30, 1998. The increase was mainly comprised of $10.2 million
from new stores, $7.8 million from comparable store sales growth and $9.7
million from the acquisition of Home Entertainment of Texas. Comparable store
sales increased by 4.6% including the Home Entertainment chain. New technology
products fueled sales performance for the first nine months of fiscal 1999. DVD
players represented approximately 5.3% of total revenue for the nine months
ended June 30, 1999 as compared to approximately 2.4% of total revenue for the
nine months ended June 30, 1998.
Gross Profit. Cost of sales increased $18.7 million, or 16.0% to $135.2
million in the nine months ended June 30, 1999 from $116.5 million in the nine
months ended June 30, 1998. Gross profit increased $11.2 million, or 18.0% to
$73.5 million in the nine months ended June 30, 1999 from $62.3 million for the
nine months ended June 30, 1998. The gross margin increased 40 basis points to
35.2% from 34.8% 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 $6.6 million, or 15.1%, to
$50.2 million in the nine months ended June 30, 1999 from $43.6 million for the
nine months ended June 30, 1998. However, as a percentage of revenue, selling
expenses decreased slightly to 24.0% in the nine months ended June 30, 1999 from
24.4% in the prior year period. This decrease was the result of
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<PAGE> 9
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 nine months ended June 30, 1999 increased 31.9%
to $10.7 million from $8.1 million for the nine months ended June 30, 1998. As a
percentage of total revenue, corporate general and administrative expenses
increased to 5.1% for the nine months ended June 30, 1999 from 4.5% 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 $686,000 in
the nine months ended June 30, 1999 from $677,000 in the nine months ended June
30, 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.
Interest Expense. Interest expense decreased to $278,000 for the nine
months ended June 30, 1999 from $2.4 million in the nine months ended June 30,
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 nine months ended June 30,
1999 and June 30, 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 $6.1 million for the nine
months ended June 30, 1999 compared to $1.5 million for the nine-month period
ended June 30, 1998. Cash provided by operations in 1999 was primarily the
result of $7.0 million in net income, an increase in accounts payable and
accrued expenses of $2.5 million and depreciation and amortization of $3.7
million. This was offset by increases in inventory of $4.8 million and accounts
receivable of $1.0 million, as well as minor changes in other operating
accounts.
At June 30, 1999, working capital was $33.4 million, compared to $18.3
million at September 30, 1998. The ratio of current assets to current
liabilities was 2.06 to 1 at June 30, 1999 and 1.62 to 1 at September 30, 1998.
Capital expenditures for the nine months ended June 30, 1999 were $9.2
million, primarily used for the building of new stores and the re-siting of
existing stores. On February 1, 1999, $9.0 million was used to acquire the
retail operations of Home Entertainment of Texas, Inc.
Net cash provided in financing activities during the nine months ended June
30, 1999 was $19.7 million, comprised mainly of proceeds received from the
Follow-on Offering of $24.3 million offset by payments of long term debt of $5.3
million.
The Company had available at June 30, 1999 a $50,000,000 revolving credit
facility, and there were no balances outstanding at June 30, 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 $24,325,000.
On July 1, 1999, Tweeter completed the acquisition of DOW Stereo/Video, Inc., by
acquiring all of its outstanding capital stock. This transaction will be
accounted for as a purchase and, accordingly, the results of operations of the
Company's business relating to DOW Stereo/Video will be included in the
consolidated statements of income from the acquisition date. The total purchase
price was approximately $8,000,000 of which $7,400,000 was paid in cash and
$600,000 was paid through the issuance of 16,145 shares of the Company's common
stock. Included in the assets was $1,700,000 of cash.
9
<PAGE> 10
On July 30, 1999, Tweeter made a $1,000,000 investment in Cyberian Outpost, Inc.
(Nasdaq: COOL), a global e-commerce Internet company. On August 2, 1999, the
Company announced plans to form a joint venture with Cyberian Outpost to market
consumer electronics via the Internet.
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, including the acquisition of Dow Stereo/Video Inc. and the
investment in Cyberian Outpost, Inc., 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- 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
10
<PAGE> 11
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.
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 June 30, 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.
11
<PAGE> 12
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 May 19, 1999, Tweeter filed with the Securities and Exchange Commission
a Current Report on Form 8-K to announce that it had reached an agreement in
principle to acquire DOW Stereo/Video, Inc., located in San Diego, California.
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: August 5, 1999
12
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