<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24091
TWEETER HOME ENTERTAINMENT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3417513
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
</TABLE>
10 PEQUOT WAY
CANTON, MA 02021
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(781) 830-3000
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 9, 1999 there were outstanding 15,324,780 shares of Common
Stock, $.01 par value per share. The aggregate market value of shares of Common
Stock held by non-affiliates of the Registrant, based upon the last sales price
for such stock on that date as reported by The Nasdaq Stock Market, was
approximately $590,004,030.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2000 Special Meeting in
lieu of an Annual Meeting of Stockholders to be held on January 25, 2000 are
incorporated by reference into Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
The "Company" and "Tweeter," as used in this Annual Report on Form 10-K,
refer to Tweeter Home Entertainment Group, Inc.
This Annual Report on Form 10-K contains forward-looking statements
regarding Tweeter's performance, strategy, plans, objectives, expectations,
beliefs and intentions. The actual outcome of the events described in these
forward-looking statements could differ materially. Therefore, this report, and
especially the sections entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains a discussion
of some of the factors and risks that could contribute to those differences.
On October 25, 1999, the Company announced a 2-for-1 split of its common
stock in the form of a 100% stock dividend. This stock split was effective on
December 2, 1999. Unless otherwise noted, all references in this report relating
to our shares of common stock reflect the stock split.
ITEM 1. BUSINESS
GENERAL
The Company is a leading specialty retailer of mid to high-end audio and
video consumer electronics products. The Company currently operates 76 stores,
under the Tweeter, etc., Bryn Mawr Stereo & Video, HiFi Buys, Home
Entertainment, and DOW Stereo/Video names in New England, the Mid-Atlantic, the
Southeast, Texas and San Diego, California, respectively. The Company operates
in a single business segment of retailing audio and video consumer electronic
products. 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 consumer electronics products
such as 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 name
recognition and 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 by Audio Video International Magazine as the
"Consumer Electronics Retailer of the Year" in 1996, 1997, and 1999 and was
named the fastest growing consumer electronics retailer by the TWICE Consumer
Electronics Retail Registry in 1997 and 1998.
The Company opened its first store in 1972 in Boston under the Tweeter,
etc. 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 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. The Company
completed the Bryn Mawr Stereo & Video acquisition in May 1996, the HiFi Buys
acquisition in May 1997, the Home Entertainment acquisition in February 1999,
and the DOW Stereo/Video acquisition in July 1999. In addition, on October 4,
1999 the Company formed a joint-venture with Cyberian Outpost, Inc. (Nasdaq:
COOL), organized as Tweeter.Outpost.com, LLC, to jointly market and sell
consumer electronics over the Internet. The Tweeter.Outpost.com site was
launched on October 19, 1999.
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 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
2
<PAGE> 3
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.
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 electronic and
non-electronic 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. As a
result of its higher-end focus, a historical early adopter customer base and its
extensively trained sales force, the Company is often among the earliest
retailers to offer new technology products 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 to its targeted
customer group.
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 all sales associates receive five to fifteen
days of ongoing training per year, both at the store and at the Company's
regional training centers. The Company's 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.
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 some stores exhibiting hand-painted murals and
other decorative artwork. Innovative and interactive product displays enable
customers to audition 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.
Everyday Competitive Pricing. The Company utilizes an "everyday 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, the Company automatically sends a check
to the customer for the difference without requiring the customer to request
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, (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, and (iii) to open the
Internet as a channel of distribution to its current and potential customers.
3
<PAGE> 4
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 1999, the Company opened two Tweeter, etc. stores, two Bryn Mawr Stereo &
Video stores and one HiFi Buys store. The Company also relocated two Tweeter
etc. stores and one Bryn Mawr Stereo & Video store in fiscal 1999. The Company
intends to open sixteen stores, and to relocate four stores, in fiscal 2000. The
Company believes that its Bryn Mawr acquisition, HiFi Buys acquisition, Home
Entertainment acquisition, and DOW Stereo/Video acquisition have provided it
with platforms from which to open new stores within and around those 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 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 its Automatic Price
Protection and everyday competitive pricing programs, (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 imposed by larger format retailers, and the insufficiency
of 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 the acquired stores, (iii) has
successfully consummated four 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 potential employment and managerial
opportunities within the consolidated enterprise to employees of the targeted
retailer.
RECENT ACQUISITIONS
Acquisition of Bryn Mawr. In May 1996, the Company completed the Bryn Mawr
acquisition. Bryn Mawr Stereo & Video was a 13 store specialty consumer
electronics chain headquartered outside of Philadelphia, with stores in
Pennsylvania, New Jersey, Maryland and Delaware. Like the Tweeter, etc. stores,
the Bryn Mawr Stereo & Video stores enjoyed considerable name recognition and
targeted similar service-oriented customers. Since the Bryn Mawr Stereo & Video
stores offered a product mix similar to the Tweeter, etc. stores, the Company
consummated the Bryn Mawr acquisition with the goal of realizing increased
revenues and store contributions 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 to convert the Bryn Mawr
Stereo & Video stores to the Company's core operating model. Specifically, the
Company (i) increased advertising expenditures and refocused advertising to
emphasize radio, television and direct marketing rather than print, (ii)
implemented the Company's everyday 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.
Acquisition of HiFi Buys. In May 1997, the Company completed the HiFi Buys
acquisition. HiFi Buys was a 10 store specialty consumer electronics chain
headquartered in Atlanta, Georgia, with ten stores serving the greater Atlanta
market. Like Tweeter, etc. and Bryn Mawr Stereo & Video, HiFi Buys had created a
strong reputation among consumers as a speciality 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, etc. or Bryn Mawr Stereo & Video
stores. The HiFi Buys stores, however, carried a broader product mix, including
more entry level product offerings and marketed heavily through promotional
newspaper advertising. The Company's
4
<PAGE> 5
integration strategy in the HiFi Buys acquisition has been to convert the HiFi
Buys product mix to one compatible with the Company's, increase gross margins
and reduce 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 everyday 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.
Acquisition of Home Entertainment. In February 1999, the Company completed
the Home Entertainment acquisition. Home Entertainment was a specialty consumer
electronics chain with 7 stores serving the Houston and Dallas, Texas markets.
Like the prior acquisitions, Home Entertainment had created a strong reputation
among consumers with a specialized focus on audio and video products and custom
home installation. The Home Entertainment stores, at an average size of 7,000
square feet, are smaller than the typical Tweeter stores. The Company's
integration strategy in the Home Entertainment acquisition has been to convert
the Home Entertainment product mix to one compatible with the Company's, and
reduce operating expenses. Specifically, following the Home Entertainment
acquisition the Company (i) adjusted the merchandise mix to expand the number of
mid and high-end products offered in the stores, (ii) altered store employee
compensation to reduce the emphasis on promotional sales and focus incentives on
gross margin and store contribution, (iii) increased marketing expenditures and
shifted marketing emphasis from promotional advertising toward the Company's
traditional relationship selling and everyday competitive price message, (iv)
converted the advertising program to emphasize electronic advertising and direct
mail marketing as opposed to print media, and (v) implemented the Automatic
Price Protection program and everyday competitive pricing.
Acquisition of DOW Stereo/Video. In July 1999, the Company completed the
DOW Stereo/Video acquisition. DOW Stereo/Video was a specialty consumer
electronics chain with 9 stores serving the San Diego, California market. Like
the prior acquisitions, DOW Stereo/Video had created a strong reputation among
consumers as a place to view and purchase newly introduced electronics products
with a specialized focus on audio and video products. The DOW Stereo/Video
stores, at an average size of 12,000 square feet, are comparable in size to the
typical Tweeter, etc. stores. The Company's integration strategy in the DOW
Stereo/Video acquisition has been to convert the DOW Stereo/Video product mix to
one compatible with the Company's, increase gross margins and reduce operating
expenses. Specifically, following the DOW Stereo/ Video acquisition the Company
(i) adjusted the merchandise mix to increase the proportion of mid and high-end
products offered in the stores, and to eliminate entry-level product from the
merchandise mix (ii) altered store employee compensation to reduce the emphasis
on promotional sales and focus incentives on gross margin and store
contribution, (iii) increased marketing expenditures and shifted marketing
emphasis from promotional advertising toward the Company's traditional
relationship selling and everyday competitive price message, (iv) converted the
advertising program to emphasize electronic advertising and direct mail
marketing as opposed to print media, and (v) implemented the Automatic Price
Protection program and everyday competitive pricing.
RECENT BUSINESS DEVELOPMENTS
Launch of Tweeter@Outpost. On October 4, 1999 the Company formed a
joint-venture with Cyberian Outpost, Inc. (Nasdaq: COOL), organized as
Tweeter.Outpost.com, LLC, to jointly market and sell consumer electronics over
the Internet. The Tweeter.Outpost.com site was launched on October 19, 1999. In
conjunction with this effort, the Company made an equity investment of $1.0
million in the common stock of Cyberian Outpost, Inc. This 50/50 joint venture
was capitalized with $2.5 million from each party, primarily to fund inventory
procurement. The Company chose this method of entry into cyber-retailing to (i)
minimize execution risk by partnering with an experienced internet retailer,
(ii) minimize investment in Web infrastructure by leveraging the existing
facilities of Outpost.com, and (iii) utilize a proven fulfillment back
5
<PAGE> 6
end instead of building internal infrastructure to support customer fulfillment.
The parties also expect to utilize and leverage their respective marketing
efforts to promote the website, by tagging the existing advertising with
information about the Web presence. The joint venture is not anticipated to
engage in marketing directly. As a result of this arrangement, the Company
expects this joint-venture to be accretive to earnings in fiscal 2000.
Recent events. On October 25, 1999, the Company announced a 2-for-1 split
of its common stock payable in the form of a 100% stock dividend. This stock
split was effective on December 2, 1999.
STORE FORMAT AND OPERATIONS
As of September 30, 1999, the Company operated 73 stores, comprised of 26
Tweeter, etc. stores in New England, 20 Bryn Mawr Stereo & Video stores in the
Mid-Atlantic region, 11 HiFi Buys stores in the Southeast, 7 Home Entertainment
stores in Texas, and 9 DOW Stereo/Video stores in San Diego, CA. While the
Company's stores vary in size, the current prototype is 10,000 square feet, with
approximately 70% of its square footage devoted to selling space. Many stores
utilize mezzanine level storage space to reduce overall occupancy expense.
The Company's store concept combines 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 competitors'
stores, 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 architecturally and acoustically resemble a home
environment to enable the customer to see and hear how products will perform at
home. These sound rooms 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 to 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.
Stores are typically staffed with a store manager, an assistant manager,
twelve 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 ongoing 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.
Store managers are compensated through base pay and monthly bonuses based
on store operating income. Typically, store managers earn 25% to 45% of their
annual compensation through such bonuses. Sales associates are compensated
through a commission program that is based on the retail prices and gross margin
of products sold.
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 the policyholders of those insurance companies.
Additionally, the Company has a corporate sales division which markets and sells
Company products to businesses, institutions and other
6
<PAGE> 7
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.
The Company stocks products from over 50 vendors, including Aiwa, Alpine, B
& K, Bose, Boston Acoustics, Denon, Eclipse, JL Audio, Kenwood, Klipsch, Mirage,
Mission, Mitsubishi, Monster Cable, Panasonic, Pioneer, Samsung, Sony, Toshiba
and Yamaha. The Company seeks to manage its product mix to maximize gross margin
performance. 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 customer interest in big screen televisions.
Accordingly, the Company has adopted a "Sell Audio with Video" strategy in order
to enhance overall gross margin through increased 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, 1997, September 30, 1998 and September 30, 1999, respectively. 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, acquisitions of stores with different product mixes, and the timing of
marketing events. The historical percentages set forth below may not be
indicative of revenue percentages for future periods:
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
SEPTEMBER 30,
--------------------
PRODUCT CATEGORY 1997 1998 1999
---------------- ---- ---- ----
<S> <C> <C> <C>
Audio Equipment(1).......................................... 33% 33% 32%
Video Equipment(2).......................................... 36% 43% 42%
Mobile Equipment and Other(3)............................... 31% 24% 26%
</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 satellites.
(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. The purchasing decisions are made by
the Company's buying team, which has primary responsibility for product
selection, stocking levels and pricing. Purchasing decisions are 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 its product mix. In order to
remain current with new and developing products, the Company regularly hosts
presentations by its major suppliers.
In addition to making direct purchases, the Company is a member of the
Progressive Retailers Organization (the "PRO"), a volume-buying group of 14
specialty electronics retailers across the country. This affiliation often
provides the Company with the ability 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 50 vendors, the largest of
whom, Sony, accounted for 25% of fiscal 1999 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
in making its purchasing decisions. The
7
<PAGE> 8
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 vendors is
excellent and that its focused merchandising and high degree of customer service
makes it an important distribution channel, particularly for the introduction of
new products.
The Company distributes products to stores through six regional
distribution centers and five service centers. The Canton, Massachusetts
facility is 80,000 square feet and currently serves as the Company's
headquarters and distribution and service center for the Tweeter etc. stores.
The King of Prussia, Pennsylvania distribution center is 50,000 square feet and
services the Bryn Mawr Stereo & Video stores. The Atlanta, Georgia facility is
80,000 square feet and services the HiFi Buys stores. The Houston, Texas
facility is 11,700 square feet and services the Home Entertainment stores in
Houston. The Dallas, Texas facility is 3,900 square feet and services the Dallas
area Home Entertainment stores. The San Diego facility is 19,700 square feet and
services the DOW Stereo/Video stores. The Company believes that these facilities
are sufficient to handle the Company's planned expansion in these markets
through at least the year 2001.
ADVERTISING AND MARKETING
The Company targets consumers seeking informed advice concerning product
selection and system integration of audio and video consumer electronic
products. The Company's marketing strategy differs from its primary 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 and staffed with a knowledgeable,
attentive sales force. The Company complements its radio strategy with print
advertisements in its primary markets. 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 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 twice a year an award-winning
one hundred-twenty page Buyer's Guide and a smaller thirty-six-page catalog
three times per year. In addition, the Company frequently mails to new home
buyers surrounding each of its existing stores, as well as other prospective
customers located near its new store openings. Management believes that its
relatively inexpensive direct mail activities leverage and complement its
general media advertising campaigns to garner new customers, and is an effective
means through which to retain existing customers.
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 strategy and adopted an
everyday 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 policy. 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 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 of purchase and 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
8
<PAGE> 9
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.
SITE SELECTION
The Company's stores average approximately 10,000 square feet and are
typically located in freestanding 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 superstore 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 the
proximity of superstore competitors is, on balance, a positive factor due to
increased customer traffic. Most of the Company's stores are leased and the
stores are open seven days a week.
The following table presents the number and locations of stores operated by
Tweeter at the end of each of the last three fiscal years.
<TABLE>
<CAPTION>
STATE 1997 1998 1999
----- ---- ---- ----
<S> <C> <C> <C>
Alabama................................................. 1
California.............................................. 9
Connecticut............................................. 6 6 6
Delaware................................................ 2 2 2
Georgia................................................. 10 10 10
Maine................................................... 1
Maryland................................................ 3 3 3
Massachusetts........................................... 12 13 14
New Hampshire........................................... 3 4 4
New Jersey.............................................. 2 3 3
Pennsylvania............................................ 8 10 12
Rhode Island............................................ 1 1 1
Texas................................................... 7
-- -- --
TOTAL......................................... 47 52 73
== == ==
</TABLE>
INFORMATION SYSTEMS
The Company utilizes a sophisticated, fully integrated mainframe based
management information system which updates after every transaction, and which
is accessible on a real time basis to Company management, sales associates and
product buyers. Extensive sales reporting and tracking are provided real time on
screen to store managers and sales associates. These screens track category
sales and benchmark 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 have required
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 have been modified to correctly handle dates in the year
2000, and the cost of the changes was not material to the Company's financial
condition or results of operations. The Company does not, however, have complete
information concerning the compliance status of its suppliers (see further
discussion in the section entitled Management's Discussion and Analysis of
Financial Condition and Results of Operations).
EMPLOYEES
As of September 30, 1999, the Company had 1,598 employees, comprised of
1,500 full-time and 98 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.
9
<PAGE> 10
RISK FACTORS
The value of an investment in Tweeter will be subject to the significant
risks inherent in its business. Investors should consider carefully the risks
and uncertainties described below. If any of the events described below actually
occur, our business, financial condition or operating results could be adversely
affected in a material way. This could cause the trading price of our common
stock to decline, perhaps significantly.
This annual report contains forward-looking statements regarding Tweeter's
performance, strategy, plans, objectives, expectations, beliefs and intentions.
The actual outcome of the events described in these forward-looking statements
could differ materially. The following is a discussion of some of the factors
and risks that could contribute to those differences.
RISKS ASSOCIATED WITH GROWTH
Tweeter's success depends 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 profitably. We may not be able to achieve
our planned expansion or to effectively integrate any new stores into our
existing operations. The opening of additional stores in new geographic markets
could present competitive and merchandising challenges different from those we
currently or previously faced within our existing geographic markets. In
addition, we may incur higher costs related to advertising, administration and
distribution as we enter new markets.
There are a number of factors that could affect our ability to open or
acquire new stores consistent with our business plan. These factors also affect
the ability of any newly opened or acquired stores to achieve sales and
profitability levels comparable with our existing stores, or to become
profitable at all. These factors include:
- 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;
- The successful consummation of such acquisitions;
- The obtaining of governmental and other third-party consents, permits and
licenses needed to operate such additional sites;
- The hiring, training and retention of skilled personnel;
- The availability of adequate management and financial resources;
- The adaptation of our distribution and other operational and management
systems to an expanded network of stores;
- The ability and willingness of vendors to supply on a timely basis at
competitive prices; and
- Continued consumer demand for our products at levels that can support
acceptable profit margins.
In addition, our rapid expansion through the opening or acquisition of new
stores will place significant demands on our management, resources, operations
and information systems. Such expansion requires us to expend significant effort
and additional resources to ensure the continuing adequacy of our financial
controls, operating procedures, information systems, product purchasing and
distribution systems and employee training programs. We also need to attract and
retain additional qualified personnel, including new store managers, for such
new stores.
Our continued growth also depends on our ability to increase sales in our
existing stores. The opening of additional stores in an existing market could
result in lower net sales at our existing stores in that market.
10
<PAGE> 11
RISKS ASSOCIATED WITH ACQUISITIONS
Integration of newly acquired stores may involve significant delay or
expense. Additional suitable acquisition candidates may not be identified.
Further, we may not consummate acquisitions of any identified candidates and new
stores acquired through such acquisitions may not operate profitably or
integrate successfully into our operations. Previously acquired stores have had,
and newly acquired stores may have, different merchandising, advertising, store
format and operating approaches from ours, and our success in integrating such
stores will depend on our ability to effect significant changes in the
operations of such stores to conform to our approach in these areas. We may not
be successful in effecting such changes without an adverse effect on the
revenues or profitability of such stores. In addition, future acquisitions could
involve the issuance of equity securities which could dilute the holdings of
existing stockholders. Future acquisitions could also involve the incurrence of
debt and contingent liabilities, and amortization expenses related to goodwill
and other intangible assets, any of which could have a material adverse effect
on our results of operations or financial condition.
DEPENDENCE ON KEY PERSONNEL
Our success depends upon the active involvement of senior management
personnel, particularly Samuel J. Bloomberg, Tweeter's Chief Executive Officer
and Chairman of the Board, and Jeffrey Stone, Tweeter'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 Tweeter'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 Tweeter, Tweeter
does not have employment agreements with any members of its senior management
team.
RISKS ASSOCIATED WITH COMPETITION
The retail consumer electronics industry is highly competitive. Tweeter
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 electronics products similar and often identical to those Tweeter
sells. Tweeter also competes in particular markets with a substantial number of
retailers that specialize in one or more types of consumer electronic products
that Tweeter sells. Certain of these competitors have substantially greater
financial resources than Tweeter 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.
A number of different competitive factors could have a material adverse effect
on Tweeter'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 Tweeter is currently
operating; or
- Adoption by existing competitors of innovative store formats or retail
sales methods.
11
<PAGE> 12
SEASONAL AND QUARTERLY FLUCTUATIONS IN SALES
Seasonal shopping patterns affect our business, like that of many
retailers. The fourth calendar quarter, which is Tweeter'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
Tweeter's operating income for its entire fiscal year. As a result, any factors
negatively affecting Tweeter during such calendar quarter of any year, including
adverse weather or unfavorable economic conditions, would have a material
adverse effect on Tweeter's results of operations for the entire year. More
generally, Tweeter's quarterly results of operations 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;
- Profitability of sales of particular products; and
- Other competitive factors.
FLUCTUATIONS IN COMPARABLE STORE SALES
A number of factors have historically affected, and will continue to
affect, Tweeter's comparable store sales results, including, among other
factors:
- Competition;
- General regional and national economic conditions;
- Consumer trends;
- Changes in Tweeter's product mix;
- Timing of promotional events;
- New product introductions; and
- Tweeter's ability to execute its business strategy effectively.
Tweeter does not expect comparable store sales to increase at historical
rates, and comparable store sales may decrease in the future. Changes in
Tweeter's comparable store sales results could cause the price of the common
stock to fluctuate substantially.
POTENTIAL NEED FOR ADDITIONAL FINANCING
Financing for the opening and acquisition of new stores may be in the form
of debt or equity or both and may not be available on terms acceptable to
Tweeter, if at all. We estimate that the average cash investment, for tenant
fit-out, demonstration and inventory (net of payables), required to open a store
to be approximately $985,000. The actual cost of opening a store may be
significantly greater than such current estimates, however, and we may need to
seek additional debt and/or equity financing in order to fund our continued
expansion through 2000 and beyond. In addition, our 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 Tweeter may result in dilution to existing stockholders.
CHANGES IN CONSUMER DEMAND AND PREFERENCES
Tweeter'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 Tweeter sells, are affected by, among other things, prevailing
economic conditions. In addition, the
12
<PAGE> 13
periodic introduction and availability of new products and technologies at price
levels which generate wide consumer interest stimulate the demand for audio and
video consumer electronics products. 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. It is possible that these products or other new products will
never achieve widespread consumer acceptance. Furthermore, the introduction or
expected introduction of new products or technologies may depress sales of
existing products and technologies. Significant deviations from the projected
demand for products Tweeter sells would have a material adverse effect on its
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
Tweeter to identify and respond to changes in consumer demand and preferences
would have a material adverse effect on Tweeter's results of operations and
financial condition.
DEPENDENCE ON SUPPLIERS
The success of Tweeter's business and growth strategy depends 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. Tweeter does not have any supply agreements or exclusive
arrangements with any vendors. Tweeter typically orders its inventory through
the issuance of individual purchase orders to vendors. In addition, Tweeter
relies heavily on a relatively small number of suppliers. Tweeter's two largest
suppliers accounted for approximately 36% of its sales during fiscal 1999. The
loss of any of these key vendors or the failure by Tweeter to establish and
maintain relationships with these or other vendors could have a material adverse
effect on Tweeter's results of operations and financial condition and its
expansion. It is possible, especially given Tweeter's growth strategy, that
Tweeter will be unable to acquire sufficient quantities or an appropriate mix of
consumer electronic products at acceptable prices, if at all. Specifically,
Tweeter's ability to establish additional stores in existing markets and to
penetrate new markets depends to a significant extent on the willingness and
ability of vendors to supply those additional stores, and vendors may not be
willing or able to do so. As we continue to open or acquire new stores, the
inability or unwillingness of suppliers to supply some or all of their products
to us at acceptable prices in one or more markets could have a material adverse
effect on our results of operations and financial condition.
UNCERTAINTY OF INTELLECTUAL PROPERTY RIGHTS
Our "Tweeter, etc.," "Bryn Mawr Stereo," "DOW" and "DOW Stereo/Video"
service marks have been registered with the United States Patent and Trademark
Office. Tweeter has not registered the "HiFi Buys" and "Home Entertainment"
service marks. Tweeter is aware that other consumer electronics retailers use
the name "HiFi Buys" outside Tweeter's current geographical markets. Tweeter has
submitted applications for registration of certain other of its service marks,
which applications are currently pending. Tweeter may be unable to successfully
register such service marks. In addition, Tweeter's service marks, whether
registered or unregistered, and patents may not be effective to protect its
intellectual property rights, and infringement or invalidity claims may be
asserted by third parties in the future. Any such assertions, if proven to be
true, could have a material adverse effect on Tweeter's results of operations
and financial condition.
SIGNIFICANT OWNERSHIP BY PRINCIPAL STOCKHOLDERS
Tweeter's executive officers, directors and principal stockholders and
their affiliates own approximately 12% of Tweeter's outstanding common stock. As
a result, those parties might be able to significantly influence Tweeter's
affairs if they were to act together.
EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER PROVISIONS
Tweeter's corporate charter and 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 Tweeter, even if such a change in
control would be in the interest of a significant number of Tweeter's
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, the charter authorizes Tweeter's Board of Directors to issue one or
more
13
<PAGE> 14
classes of preferred stock, having such designations, rights and preferences as
they determine, and such issuances may, among other things, have an adverse
effect on the rights of holders of common stock.
Tweeter's stockholders have no right to take action by written consent and
may not 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.
In addition, under the terms of Tweeter's 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 Tweeter would
have the right to purchase securities from Tweeter 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.
VOLATILITY OF STOCK PRICE
The trading price of our common stock has been and is likely to continue to
be highly volatile and could be subject to wide fluctuations in response to a
variety of internal and external factors. The stock market in general, and the
Nasdaq National Market in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of particular companies. The trading prices of many companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and multiples
may not be sustained. These broad market factors may have a material adverse
effect on the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on Tweeter's results of
operations and financial condition.
YEAR 2000 COMPLIANCE
We have contacted our suppliers to determine whether Year 2000 issues will
affect their supply of goods to us. Any disruption in our supply chain could
have a material adverse affect on our results of operation and financial
condition. In addition, although we anticipate minimal internal business
interruption due to Year 2000 problems, we expect any problems which may arise
to develop during our peak sales period. During this time, it is possible that
Tweeter may lose communications links with certain store locations, that
Tweeter's stores may close due to loss of electric power, that Tweeter's stores'
and storage facilities' security systems may not operate and that individual
stores may be unable to process transactions, send purchase orders or engage in
similar normal business activities. Any large scale failure to operate during
this period may have a material adverse effect on Tweeter's results of
operations and financial condition.
ITEM 2. PROPERTIES
The Company's corporate offices and the New England distribution and
service centers are located in an 80,000 square foot facility it owns in Canton,
Massachusetts. In addition, the Company leases over 180,000 square feet of
regional operating facilities including distribution and service centers in King
of Prussia, Pennsylvania, Atlanta, Georgia, Houston, Texas, Dallas, Texas and
San Diego, California.
The Company's stores, most of which are leased, include selling space,
inventory storage, management offices and employee areas. The majority of the
leases provide for a fixed minimum rent with scheduled escalation dates and
amounts. Leases for nineteen of the stores have a percentage rent provision that
range from 1.5% to 4% of gross sales at each location in excess of certain
specified sales amounts. The initial terms of
14
<PAGE> 15
the leases range from 5 to 20 years and generally allow the Company to renew for
up to three additional five-year terms. The terms of a majority of the leases,
including renewal options, extend beyond the year 2020.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market, under
the symbol "TWTR." Public trading in the Company's common stock commenced on
July 16, 1998. Prior to that date, there was no public market for the Company's
common stock. The following table sets forth the high, low and last sale prices
for the common stock for the quarters in which the common stock was publicly
traded, adjusted for the stock split effective on December 2, 1999:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW LAST
------------- ------- ------- -------
<S> <C> <C> <C>
September 30, 1998............................ $10.565 $ 5.625 $ 6.815
December 31, 1998............................. $15.500 $ 5.313 $14.375
March 31, 1999................................ $20.000 $13.375 $16.125
June 30, 1999................................. $ 20.75 $11.063 $19.625
September 30, 1999............................ $ 19.00 $13.297 $18.688
</TABLE>
The last sale price of the common stock on December 9, 1999, as reported by
Nasdaq, was $38.50 per share. As of December 9, 1999, there were approximately
1,800 holders of record of the common stock.
The Company does not anticipate paying any cash dividends for the
foreseeable future. In addition, current lending arrangements prohibit the
payment of cash dividends or will limit the Company's ability to declare or pay
such dividends.
RECENT SALES OF UNREGISTERED SECURITIES
None
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT SHARE, PER SHARE
AND NUMBER OF STORES DATA)
Set forth below is selected financial and operating data for each of the
five years ended September 30, 1999. The selected statement of operations and
balance sheet data for each of the five years ended September 30, 1999 have been
derived from financial statements of the Company, which have been audited by its
independent auditors. 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 Report.
<TABLE>
<CAPTION>
1995 1996(4) 1997(5) 1998 1999(6)
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenue................................... $60,121 $80,607 $132,525 $232,289 $283,287
Cost of sales................................... 39,167 51,816 86,315 151,265 182,748
------- ------- -------- -------- --------
Gross profit................................ 20,954 28,791 46,210 81,024 100,539
Selling expenses................................ 15,404 21,993 35,568 56,907 69,225
Corporate, general and administrative
expenses...................................... 3,247 4,716 8,102 11,128 14,822
Amortization of goodwill........................ 65 129 487 917 1,056
------- ------- -------- -------- --------
Income from operations.......................... 2,238 1,953 2,053 12,072 15,436
Interest expense................................ 629 617 1,808 2,753 310
------- ------- -------- -------- --------
Income before income taxes...................... 1,609 1,336 245 9,319 15,126
Income tax expense (benefit) (1)................ (174) (453) 99 3,724 6,050
------- ------- -------- -------- --------
Income before extraordinary item................ 1,783 1,789 146 5,595 9,076
Extraordinary item (less applicable income
taxes)........................................ -- -- -- (340) --
------- ------- -------- -------- --------
Net income...................................... 1,783 1,789 146 5,255 9,076
======= ======= ======== ======== ========
Accretion of preferred stock.................... 1,036 2,156 2,514 --
======= ======= ======== ======== ========
Net income (loss) available to common
stockholders.................................. $ 1,783 $ 753 $ (2,010) $ 2,741 $ 9,076
======= ======= ======== ======== ========
Basic earnings (loss) per share
Net income (loss) available to common
stockholders before extraordinary item........ 0.26 0.19 (0.60) 0.62 0.63
Extraordinary item.......................... -- -- -- (0.07) --
------- ------- -------- -------- --------
Net income.................................. $ 0.26 $ 0.19 $ (0.60) $ 0.55 $ 0.63
======= ======= ======== ======== ========
Diluted earnings (loss) per share
Net income (loss) available to common
stockholders before extraordinary item........ 0.26 0.19 (0.60) 0.55 0.57
Extraordinary item............................ -- -- -- (0.03) --
------- ------- -------- -------- --------
Net income (loss)............................. $ 0.26 $ 0.19 $ (0.60) $ 0.52 $ 0.57
======= ======= ======== ======== ========
Weighted average shares outstanding(2)
Basic....................................... 6,742 3,880 3,346 4,972 14,386
======= ======= ======== ======== ========
Diluted..................................... 6,742 3,966 3,346 10,068 15,972
======= ======= ======== ======== ========
OPERATING DATA:
Stores open at beginning of period.............. 16 18 33 47 52
New stores...................................... 2 2 4 5 5
Remodeled stores................................ 1 1 1 2 3
Closed stores................................... 0 0 0 0 0
Stores acquired................................. 0 13 10 0 16
Stores open at end of period.................... 18 33 47 52 73
Comparable Store Sales Growth(3)................ 12.5% 5.6% -7.2% 12.5% 5.0%
BALANCE SHEET DATA:
Working capital................................. $ 1,590 $ 1,897 $ 11,857 $ 18,263 $ 31,323
Total assets.................................... 15,162 38,619 78,688 91,643 141,619
Long term debt, excluding current portion....... 8,705 10,700 30,875 5,250 5,717
Redeemable convertible preferred stock.......... -- 11,597 20,591 -- --
Stockholder's equity (deficit).................. (2,457) (3,984) (5,669) 51,610 87,245
</TABLE>
(footnotes on following page)
16
<PAGE> 17
- ---------------
(1) 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.
If the Company had been taxed as a C corporation, it would have recorded
income tax expense of $661,000 and $550,000 for the fiscal years ended
September 30, 1995 and 1996, respectively.
(2) Shares outstanding include 1,044,820 and 1,587,470 shares issuable upon
exercise of stock options and warrants outstanding as of September 30, 1998
and 1999, respectively, after applying the treasury stock method.
(3) 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. 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.
(4) The fiscal year 1996 data includes results of the Bryn Mawr acquisition from
May 13, 1996, which was accounted for using the purchase method (see Note 11
to the consolidated financial statements).
(5) The fiscal year 1997 data includes results of the HiFi Buys acquisition from
June 1, 1997, which was accounted for using the purchase method (see Note 11
to the consolidated financial statements).
(6) The fiscal year 1999 data includes the results of the Home Entertainment
acquisition from February 1, 1999, which was accounted for using the
purchase method; and the DOW Stereo/Video acquisition from July 1, 1999,
which was accounted for using the purchase method (see Note 11 to the
consolidated financial statements).
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This annual report contains certain statements regarding Tweeter's
performance, strategy, plans, objectives, expectations, beliefs and intentions.
The actual outcome of the events described in these forward-looking statements
could differ materially. Therefore, this report, and especially this section and
the section entitled "Risk Factors," contains a discussion of some of the
factors and risks that could contribute to those differences.
GENERAL
The Company is a leading specialty retailer of audio and video consumer
electronics under the Tweeter, etc., Bryn Mawr Stereo & Video, HiFi Buys, Home
Entertainment and Dow Stereo/Video names. The Company opened its first Tweeter,
etc. store in New England in 1972. Over 27 years, the Company has refined its
retail concept to meet the needs of consumers seeking mid to high-end 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.
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 its 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. In May 1996, the
Company completed the Bryn Mawr Stereo & Video acquisition. In May 1997, the
Company raised an additional $22 million, comprised of $7 million of equity and
$15 million of subordinated debt. The proceeds were used primarily to finance
the HiFi Buys acquisition. Both acquisitions were accounted for by the purchase
method of accounting. By September 30, 1998, the Company had grown to 52 stores.
In February 1999, the Company completed a secondary offering, raising $24.3
million, the proceeds of which were used to pay off debt, and fund the
acquisitions of Home Entertainment and DOW Stereo/Video. In February 1999, the
Company completed the Home Entertainment acquisition. In July of 1999, the
Company completed the DOW Stereo/Video acquisition. Both acquisitions were
accounted for as a purchase. By September 30, 1999, the Company had grown to 73
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 equipment and more
stringent operating controls. The Company has also aggressively expanded its
corporate infrastructure over the past three 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, as well as to its distribution and
administrative infrastructure to enable the Company to support all five regions
on an integrated basis.
THE FOLLOWING ARE SYNOPSES OF RECENT ACQUISITIONS:
BRYN MAWR
Subsequent to the Bryn Mawr Stereo & Video acquisition, the Company
implemented a variety of strategic initiatives to convert Bryn Mawr Stereo &
Video 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) increased
advertising expenditures and refocused advertising to emphasize radio,
television and direct marketing rather than print, (ii) the implementation of
the Company's everyday competitive pricing and Automatic Price Protection
programs, (iii) the initiation of 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.
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.
18
<PAGE> 19
Comparable store sales at Bryn Mawr increased 4.7% during fiscal 1997 and 19.3%
during fiscal 1998. On a pro forma basis, assuming the Bryn Mawr acquisition as
of October 1, 1995, store contribution increased to 6.8% in fiscal 1997 from
3.1% in fiscal 1996. Store contribution margin rose to 7.8% in the year ended
September 30, 1998 from 6.8% in the prior year period, primarily due to the
leveraging of expenses on a higher sales base as well as an increase in gross
margin. Store contribution increased to 10.2% for the year ended September 30,
1999.
The following table sets forth total revenues in thousands and store
contribution as a percentage of total revenues for Bryn Mawr on a standalone
basis:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/96(1) 9/30/97 9/30/98 9/30/99
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenue........................ $33,525 $35,432 51,768 63,638
Store contribution................... 3.1% 6.8% 7.8% 10.2%
</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 and certain assumptions that the Company believes are reasonable
under the circumstances. The pro forma results are not necessarily
indications 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, however, these initiatives combined a planned decrease of revenues
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 everyday
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.
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, June
1, 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 5.2% in the year ended
September 30, 1998. Pro forma for the HiFi Buys acquisition as of October 1,
1996, store contribution improved to 9.9% in the year ended September 30, 1998
from 6.9% in the prior year, and improved to 11.4% for the year ended September
30, 1999.
The following table sets forth total revenues in thousands and store
contribution as a percentage of total revenues for HiFi Buys on a standalone
basis:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
9/30/97(1) 9/30/98 9/30/99
---------- ---------- ----------
<S> <C> <C> <C>
Total revenue............................ $87,968 82,810 85,021
Store contribution....................... 6.9% 9.9% 11.4%
</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 and certain assumptions that the Company believes are reasonable
under the circumstances. The pro forma results are not necessarily
indications 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.
19
<PAGE> 20
HOME ENTERTAINMENT
As with prior acquisitions, the Company implemented a variety of strategic
initiatives to convert Home Entertainment to its core operating model. These
initiatives included: (i) adjusted the merchandise mix to expand the number of
mid and high end products offered in the stores, (ii) increased advertising
expenditures and refocused advertising to emphasize radio and direct marketing
rather than print, (iii) the implementation of the Company's everyday
competitive pricing and Automatic Price Protection programs, (iv) the initiation
of a substantial sales associate training program to improve product knowledge
and enhance relationship selling skills, and (v) introducing several new product
categories, including camcorders and portable audio.
As a result of these initiatives, comparable store sales increased 7.8% at
Home Entertainment during the period from the acquisition, February 1, 1999,
through September 30, 1999 versus the same period for the prior year.
The following table sets forth total revenues in thousands and store
contribution as a percentage of total revenues for Home Entertainment on a
standalone basis:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
9/30/99(1)
----------
<S> <C>
Total revenue............................................. $25,577
Store contribution........................................ 5.6%
</TABLE>
- ---------------
(1) The pro forma results are presented as if the Home Entertainment acquisition
had occurred on October 1, 1998 and reflect the results of Home
Entertainment for a period under prior ownership. The pro forma results are
based upon available information and certain assumptions that the Company
believes are reasonable under the circumstances. The pro forma results are
not necessarily indications of what the Company's results would have been
for the period had the Company completed the Home Entertainment acquisition
as of the date indicated.
DOW STEREO/VIDEO
As with prior acquisitions, the Company implemented a variety of strategic
initiatives to convert DOW Stereo/Video to its core operating model. These
initiatives included: (i) adjusted the merchandise mix to expand the number of
mid and high end products offered in the stores and to eliminate entry-level
product from the merchandise mix, (ii) increased advertising expenditures and
refocused advertising to emphasize radio, television and direct marketing rather
than print, (iii) the implementation of the Company's everyday competitive
pricing and Automatic Price Protection programs, (iv) the initiation of a
substantial sales associate training program to improve product knowledge and
enhance relationship selling skills, and (v) focusing the sales staff on higher
margin products, particularly audio products.
The following table sets forth total revenues in thousands and store
contribution as a percentage of total revenues for Dow Stereo/Video on a
standalone basis:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
9/30/99(1)
----------
<S> <C>
Total revenue............................................. $39,753
Store contribution........................................ 3.9%
</TABLE>
- ---------------
(1) The pro forma results are presented as if the Dow Stereo/Video acquisition
had occurred on October 1, 1998 and reflect the results of Dow Stereo/Video
for a period under prior ownership. The pro forma results are based upon
available information and certain assumptions that the Company believes are
reasonable under the circumstances. The pro forma results are not
necessarily indications of what the Company's results would have been for
the period had the Company completed the Dow Stereo/Video acquisition as of
the date indicated.
20
<PAGE> 21
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 YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenue................... $132,525 100.0% $232,289 100.0% $283,287 100.0%
Gross profit.................... 46,210 34.9% 81,024 34.9% 100,539 35.5%
Selling expenses................ 35,568 26.8% 56,907 24.5% 69,225 24.4%
Store Contribution.............. 10,642 8.0% 24,117 10.4% 31,314 11.1%
Corporate, general and
administrative expenses...... 8,102 6.1% 11,128 4.8% 14,822 5.2%
Amortization of goodwill........ 487 0.4% 917 0.4% 1,056 0.4%
-------- ----- -------- ----- -------- -----
Income from operations.......... 2,053 1.5% 12,072 5.2% 15,436 5.4%
Interest expense................ 1,808 1.4% 2,753 1.2% 310 0.1%
-------- ----- -------- ----- -------- -----
Income before income taxes...... 245 0.2% 9,319 4.0% 15,126 5.3%
Income tax expense.............. 99 0.1% 3,724 1.6% 6,050 2.1%
-------- ----- -------- ----- -------- -----
Income before extraordinary
item......................... 146 0.1% 5,595 2.4% 9,076 3.2%
Extraordinary item (less
applicable income taxes)..... -- 0.0% (340) -0.1% -- 0.0%
-------- ----- -------- ----- -------- -----
Net income...................... 146 0.1% 5,255 2.3% 9,076 3.2%
======== ===== ======== ===== ======== =====
Accretion of preferred stock.... 2,156 1.6% 2,514 1.1% -- 0.0%
-------- ----- -------- ----- -------- -----
Net income (loss) available to
common stockholders.......... $ (2,010) -1.5% $ 2,741 1.2% $ 9,076 3.2%
======== ===== ======== ===== ======== =====
</TABLE>
FISCAL 1999 AS COMPARED TO FISCAL 1998
Total Revenue. Total revenue includes delivered sales, completed service
center work orders, insurance replacement and corporate sales. Total revenue
increased $51.0 million, or 22%, to $283.3 million in the year ended September
30, 1999 from $232.3 million for the year ended September 30, 1998. The increase
was primarily comprised of revenues of $16.3 million derived from Home
Entertainment from the date of acquisition, $8.0 million from DOW Stereo/Video
revenues from the date of acquisition, $14.4 million from new stores, and $9.7
million from comparable store sales growth. Comparable store sales increased by
5.0%. This excludes a 7.6% increase in comparable store sales at Home
Entertainment from February 1, 1999, and a 17.9% decrease in comparable store
sales at DOW Stereo/Video from July 1, 1999. The Company is planning for
comparable store sales decreases to continue for 9 to 12 months at DOW
Stereo/Video as it abandons entry-level product and refines the merchandise mix
to reflect the core Tweeter mix. The increase at Home Entertainment resulted
from the conversion to the Company's operating model, and the introduction of
product lines not previously carried by the chain.
Gross Profit. Cost of sales includes merchandise, net delivery costs,
distribution costs, purchase discounts, and vendor volume rebates. Cost of sales
increased $31.5 million, or 20.8%, to $182.7 million in the year ended September
30, 1999 from $151.3 million in the year ended September 30, 1998. Gross profit
increased $19.5 million, or 24.1% to $100.5 million in the year ended September
30, 1999 from $81.0 million for the year ended September 30, 1998. The gross
margin for the year ended September 30, 1999 and 1998 was 35.5% and 34.9%,
respectively. The increase in gross margin is due to higher sales of new,
digital based products, which tend to have higher margins than their analog
counterparts.
Selling Expenses. Selling expenses include the compensation of store
personnel, occupancy costs, store level depreciation, advertising, pre-opening
expenses and bank fees and excludes corporate overhead. Selling expenses
increased $12.3 million, or 21.6%, to $69.2 million in the year ended September
30, 1999 from
21
<PAGE> 22
$56.9 million for the year ended September 30, 1998. The increase, on an
absolute basis, was principally associated with advertising, commissions related
to increased sales, fees related to private label credit card promotions, and
rent and related staff positions for the additional stores acquired as part of
both the Home Entertainment and DOW Stereo/Video acquisitions. As a percentage
of total revenue, selling expenses declined to 24.4% for the year ended
September 30, 1999 from 24.5% in the prior year period.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses include the costs of finance, purchasing, information
systems, human resources, training, executive officers and related support
functions. Corporate, general and administrative expenses for the year ended
September 30, 1999 increased 33.2% to $14.8 million from $11.1 million for the
year ended September 30, 1998. As a percentage of total revenue, corporate,
general and administrative expenses increased to 5.2% for the year ended
September 30, 1999 from 4.8% for the prior year period as the Company continued
to add corporate infrastructure to support its recent and planned acquisitions,
as well as support new store growth.
Amortization of Goodwill. Amortization of goodwill increased to
$1,056,000, for the year ended September 30, 1999 from $917,000 for the year
ended September 30, 1998. This increase is attributable to goodwill recorded in
connection with the recent acquisitions of Home Entertainment and Dow
Stereo/Video.
Interest Expense. Interest expense decreased to $310,000 for the year
ended September 30, 1999 from $2.8 million for the year ended September 30, 1998
due primarily to the elimination of outstanding debt with proceeds from the
Company's secondary offering on February 2, 1999.
Income Taxes. The effective tax rate for the years ended September 30,
1999 and September 30, 1998 was 40.0%. Management expects that the effective tax
rate will remain substantially unchanged in the near future.
FISCAL 1998 AS COMPARED TO FISCAL 1997
Total Revenue. Total revenue increased $99.8 million, or 75%, to $232.3
million in the year ended September 30, 1998 from $132.5 million for the year
ended September 30, 1997. The increase was comprised of $59.8 million from a
full year of HiFi Buys revenues, $9.4 million from new stores, and $20.9 million
from comparable store sales growth. Comparable store sales increased by 12.5%,
made up of a 28.6% increase at Tweeter, etc., a 19.3% increase at Bryn Mawr
Stereo & Video, and 5.2% decrease at HiFi Buys. The exit from the New England
market of competing retail chains has had a favorable impact on comparable store
sales at Tweeter, etc., while the increase at Bryn Mawr Stereo & Video 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 increased $65.0 million, or 75%, to $151.3
million in the year ended September 30, 1998 from $86.3 million in the year
ended September 30, 1997. Gross profit increased $34.8 million, or 75% to $81.0
million in the year ended September 30, 1998 from $46.2 million for the year
ended September 30, 1997. The gross margin remained the same for both periods at
34.9%.
Selling Expenses. Selling expenses increased $21.3 million, or 60%, to
$56.9 million in the year ended September 30, 1998 from $35.6 million for the
year ended September 30, 1997. The increase, on an absolute basis, was
principally associated with advertising, commissions related to increased sales,
fees related to private label credit card promotions, and rent and related staff
positions for the additional stores acquired as part of the HiFi Buys
acquisition. As a percentage of total revenue, selling expenses declined to
24.5% for the year ended September 30, 1998 from 26.8% in the prior year period.
This decline was primarily the result of 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 a single 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 for the year ended September 30, 1998 increased 37% to
$11.1 million from $8.1 million for the year ended September 30, 1997. As a
percentage of total revenue, corporate, general and administrative expenses
22
<PAGE> 23
decreased to 4.8% for the year ended September 30, 1998 from 6.1% for the prior
year period as the Company benefited from a larger sales base.
Amortization of Goodwill. Amortization of goodwill increased to $917,000,
for the year ended September 30, 1998 from $487,000 for the year ended September
30, 1997. This increase is attributable to goodwill recorded for a full year in
connection with the HiFi Buys acquisition.
Interest Expense. Interest expense increased to $2.8 million for the year
ended September 30, 1998 from $1.8 million for the year ended September 30, 1997
due primarily to the increased debt incurred to fund the HiFi Buys acquisition.
Income Taxes. The effective tax rates for the years ended September 30,
1998 and September 30, 1997 was 40.0% and 40.3%, respectively. For an analysis
of changes in the Company's effective tax rate, see Note 10 to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily for working capital to support its
inventory requirements and capital expenditures, pre-opening expenses and
beginning inventory for new stores and for remodeling or relocating older
stores. Additionally, the Company pursues an active acquisition strategy, and
capital needs are created as acquisition opportunities are pursued.
Historically, the Company's primary sources of financing have been net cash
from operations, borrowings under its Credit Facility, and proceeds from the
sale of equity or subordinated notes. At September 30, 1999 and September 30,
1998, the Company's working capital was $31.3 million and $18.3 million,
respectively. Cash provided by operations was $4.0 million for the year ended
September 30, 1999. The increase in working capital is a result of $9.1 million
in net income, an increase in accounts payable and accrued expenses of $8.2
million and depreciation and amortization of $5.2 million. This was offset by
increases in inventory of $14.2 million and accounts receivable of $2.7 million
and a decrease in deferred warranty of $1.1 million, as well as minor changes in
other operating accounts.
Net cash used in investing activities during fiscal 1999 was approximately
$32.8 million. Approximately $18.8 million was used to fund acquisitions, and
$6.1 million was used to open five new stores and relocate three stores. The
balance of $6.6 million was used for other miscellaneous capital expenditures
for equipment, fixtures and leasehold improvements. Additionally, the Company
used $1.2 million to purchase marketable equity securities. During fiscal 1998,
net cash used in investing activities was approximately $9.0 million and was
primarily used to open five new stores and relocate two stores. In addition $5.2
million was used to purchase a facility in Canton, Massachusetts to serve as the
corporate headquarters, service center and distribution center. During fiscal
1997, net cash used 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 to open four new stores and relocate one store. 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.
At September 30, 1999, the Company had outstanding approximately $5.7
million under its Credit Facility. The Credit Facility currently has a maximum
availability of $50.0 million and a maturity date of July 31, 2001, and is
secured by the inventory of the Company and certain other assets.
On February 2, 1999, the Company completed a secondary offering of
5,000,000 shares of common stock. The Company sold 1,000,000 shares and
4,000,000 shares were sold by existing shareholders. The Company also covered
the underwriters over allotment and issued 750,000 additional shares. Net
proceeds received by the Company were $24.3 million.
The Company used these net proceeds to repay existing indebtedness under
its revolving credit facility of $6.9 million, fund the Home Entertainment
acquisition for approximately $9.3 million, and fund the DOW Stereo/Video
acquisition for approximately $8.2 million, and for working capital and general
corporate purposes.
23
<PAGE> 24
On October 4, the Company formed a joint-venture with Cyberian Outpost,
Inc. (Nasdaq: COOL) to jointly market and sell consumer electronics over the
Internet, incorporated as Tweeter.Outpost.com, LLC. This Internet site was
launched on October 19, 1999, with a primary URL of Tweeter.Outpost.com. In
conjunction with this effort, the Company made an equity investment of $1.0
million in the common stock of Cyberian Outpost, Inc. This 50/50 joint venture
was capitalized with $2.5 million from each party, primarily to fund inventory
procurement. The Company chose this method of entry into cyber-retailing to (i)
minimize execution risk by partnering with an experienced internet retailer,
(ii) minimize investment in Web infrastructure by leveraging the existing
facilities of Outpost.com, and (iii) utilize a proven fulfillment back end
instead of building internal infrastructure to support customer fulfillment. The
parties also expect to utilize and leverage their respective marketing efforts
to promote the website, by tagging the existing advertising with information
about the Web presence. The joint venture is not anticipated to engage in
marketing directly. As a result of this arrangement, the Company expects this
joint-venture to be accretive to earnings in fiscal 2000.
The Company believes that cash expected to be generated from operations,
and available borrowings under the Credit Facility, will be sufficient to
finance its working capital and capital expenditure requirements, exclusive of
acquisitions, for at least the next 12 months.
YEAR 2000 READINESS DISCLOSURE
The Company has been evaluating and adjusting all known date-sensitive
systems and equipment for Year 2000 compliance. The assessment phase of the Year
2000 project is complete. All of the required coding conversions on information
technology have been substantially completed.
The final phase of the Company's Year 2000 project, complete system
testing, is ongoing and will continue until January 1, 2000. Testing will
continue for all existing systems and ongoing new releases and enhancements to
ensure readiness.
The total estimated cost of the conversion was not significant, and
continues to be handled in due course by the Company's MIS department. These
costs are an immaterial part of the Company's information technology budget. The
Company's Information Systems Division has not deferred any information
technology projects to address the Year 2000 issue.
In addition to internal Year 2000 implementation activities, the Company is
communicating with others with which our systems interface or on which they rely
to determine the extent to which those companies are addressing their Year 2000
compliance. Testing is ongoing and will continue through December 1999. There
can be no assurance that there will not be an adverse effect on the Company if
third parties, such as utility companies or merchandise suppliers, do not
convert their systems in a timely manner and in a way that is compatible with
the Company's systems. However, management believes that ongoing communication
with and assessment of these third parties will minimize these risks.
Although the Company anticipates minimal business disruption will occur as
a result of Year 2000 issues, possible consequences include, but are not limited
to, loss of communications links with certain store locations, loss of electric
power, inability to process transactions, send purchase orders, or engage in
similar normal business activities.
The Company has established a contingency plan for possible Year 2000
issues. This plan provides that its stores will be able to manually process
transactions in the event of a system failure. Where needed, the Company will
establish other contingency plans based on our actual testing experience with
our supplier base and assessment of outside risks.
The cost of the conversions and the completion dates are based on
management's best estimates and may be updated, as additional information
becomes available.
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.
24
<PAGE> 25
SEASONALITY
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 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 or changes in cooperative advertising policies
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.
RECENT 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 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and in its
financial position is the potential for loss arising from adverse changes in
interest rates. The Company does not enter into financial instruments for
trading purposes.
At September 30, 1999, the Company has $5,700,000 of variable rate
borrowings outstanding under its revolving credit facility, which approximate
fair market value. A hypothetical 10% adverse change in current interest rates
for this variable rate debt would have an approximate $42,750 negative impact on
the Company's earnings and cash flows.
At September 30, 1999, the Company has approximately $1.8 million in
marketable equity securities classified as "available-for-sale." Equity market
fluctuations can impact fair values (although not earnings, unless such equity
positions are actually liquidated). A 10% fluctuation in the value of such
securities would either reduce or increase total assets by $180,000.
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditors' Report................................ 27
Consolidated Balance Sheets as of September 30, 1998 and
1999...................................................... 28
Consolidated Statements of Income for the Years Ended
September 30, 1997, 1998 and 1999......................... 29
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended September 30, 1997, 1998 and 1999..... 30
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1998 and 1999......................... 31
Notes to Consolidated Financial Statements.................. 32
</TABLE>
26
<PAGE> 27
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. and subsidiaries as of September 30, 1998 and
1999, and the related consolidated statements of income, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
September 30, 1999. 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 consolidated financial statements present fairly, in
all material respects, the financial position of Tweeter Home Entertainment
Group, Inc. and subsidiaries as of September 30, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1999, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
November 18, 1999
27
<PAGE> 28
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 776,709 $ 999,495
Accounts receivable, net of allowance for doubtful
accounts of $560,000 at September 30, 1998 and $650,000
at September 30, 1999.................................. 6,207,837 9,556,846
Inventory................................................. 38,362,311 62,135,516
Deferred tax assets....................................... 1,598,352 1,899,604
Prepaid expenses and other current assets................. 590,788 678,804
------------ ------------
Total current assets................................... 47,535,997 75,270,265
Long-term investments..................................... -- 1,846,366
Property and equipment, net............................... 23,978,118 34,243,241
Other assets, net......................................... 35,789 191,616
Goodwill, net............................................. 20,093,107 30,067,691
------------ ------------
TOTAL.................................................. $ 91,643,011 $141,619,179
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt......................... $ -- $ 35,551
Amount due to bank........................................ 4,071,310 6,023,056
Accounts payable.......................................... 10,663,216 18,377,139
Accrued expenses.......................................... 12,006,824 16,197,306
Customer deposits......................................... 1,422,557 2,440,090
Deferred warranty......................................... 1,109,325 673,139
------------ ------------
Total current liabilities.............................. 29,273,232 43,746,281
------------ ------------
LONG-TERM DEBT:
Note payable to bank...................................... 5,250,000 5,716,805
------------ ------------
OTHER LONG-TERM LIABILITIES:
Rent related accruals..................................... 2,821,202 3,197,657
Deferred warranty......................................... 1,066,251 338,238
Deferred tax liabilities.................................. 1,423,283 1,095,527
Other long-term liabilities............................... 198,660 279,500
------------ ------------
Total other long-term liabilities...................... 5,509,396 4,910,922
------------ ------------
TOTAL.................................................. 40,032,628 54,374,008
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
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; 15,043,526 shares issued in September 30,
1998 and 17,129,622 in September 30, 1999.............. 75,217 85,648
Additional paid in capital................................ 46,840,737 73,287,886
Accumulated other comprehensive income.................... -- 301,520
Retained earnings......................................... 6,701,244 15,482,982
------------ ------------
Total.................................................. 53,617,198 89,158,036
Less treasury stock: 2,878,146 shares in September 30,
1998, and 1,905,586 shares in September 30, 1999, at
cost................................................... (2,006,815) (1,912,865)
------------ ------------
Total stockholders' equity............................. 51,610,383 87,245,171
------------ ------------
TOTAL.................................................. $ 91,643,011 $141,619,179
============ ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Total revenue................................ $ 132,523,037 $ 232,288,571 $ 283,287,075
Cost of sales................................ (86,314,918) (151,265,382) (182,747,729)
------------- ------------- -------------
Gross profit................................. 46,210,119 81,023,189 100,539,346
Selling expenses............................. 35,567,940 56,906,541 69,225,160
Corporate, general and administrative
expenses................................... 8,102,190 11,127,540 14,821,844
Amortization of goodwill..................... 487,084 917,442 1,056,470
------------- ------------- -------------
Income from operations....................... 2,052,905 12,071,666 15,435,872
Interest expense............................. 1,807,660 2,752,810 309,980
------------- ------------- -------------
Income before income taxes................... 245,245 9,318,856 15,125,892
Income taxes................................. 98,962 3,723,969 6,050,357
------------- ------------- -------------
Income before extraordinary item............. 146,283 5,594,887 9,075,535
Extraordinary item -- early extinguishment of
debt (less applicable income taxes of
$244,557).................................. -- 339,687 --
------------- ------------- -------------
NET INCOME................................... 146,283 5,255,200 9,075,535
============= ============= =============
Accretion of preferred stock................. 2,156,356 2,514,043 --
------------- ------------- -------------
Net income (loss) available to common
stockholders............................... $ (2,010,073) $ 2,741,157 $ 9,075,535
============= ============= =============
Basic earnings (loss) per share:
Income (loss) available to common
stockholders before extraordinary
item.................................... $ (0.60) $ 0.62 $ 0.63
Extraordinary item......................... -- (0.07) --
------------- ------------- -------------
Net income (loss).......................... $ (0.60) $ 0.55 $ 0.63
============= ============= =============
Diluted earnings (loss) per share:
Income (loss) before extraordinary item.... $ (0.60) $ 0.55 $ 0.57
Extraordinary item......................... -- (0.03) --
------------- ------------- -------------
Net income (loss).......................... $ (0.60) $ 0.52 $ 0.57
============= ============= =============
Weighted-average shares outstanding:
Basic...................................... 3,345,014 4,972,542 14,385,032
============= ============= =============
Diluted.................................... 3,345,014 10,067,606 15,972,502
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED NOTE
COMMON STOCK ADDITIONAL RETAINED OTHER RECEIVABLE
-------------------- PAID-IN EARNINGS COMPREHENSIVE FROM
SHARES AMOUNT CAPITAL (DEFICIT) INCOME OFFICER
------ ------ ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996.......... 5,510,404 $27,552 $(3,057,683) $ 627,727 $ -- $(31,500)
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)
Comprehensive Income:
Net income.................... 146,283
Comprehensive income............
---------- ------- ----------- ----------- -------- --------
BALANCE, SEPTEMBER 30, 1997....... 5,510,404 27,552 (2,732,300) (1,382,346) -- (31,500)
Accretion of Series A
Convertible Preferred Stock
through July 16, 1998......... (1,640,863)
Accretion of Series B
Convertible Preferred Stock
through July 16, 1998......... (873,180)
Exercises of warrants........... (363,908)
Additional payment for Treasury
stock.........................
Conversion of Series A
Convertible Preferred Stock... 3,400,272 17,001 10,543,922 4,479,325
Conversion of Series B
Convertible Preferred Stock... 1,732,850 8,664 6,828,721 1,227,016
Issuance of common stock, net... 4,400,000 22,000 32,200,394
Payment received on note
receivable.................... 31,500
Comprehensive income:
Net income.................... 5,255,200
Comprehensive income............
---------- ------- ----------- ----------- -------- --------
BALANCE, SEPTEMBER 30, 1998....... 15,043,526 75,217 46,840,737 6,701,244 -- --
Issuance of common stock, net... 1,794,822 8,974 25,123,557
Issuance of shares under stock
option plan................... 291,274 1,456 604,546
Exercises of warrants........... 19,050 (293,797)
Treasury stock acquired......... 609,681
Issuance of treasury stock under
employee stock purchase
plan.......................... 90,316
Comprehensive income:
Net income.................... 9,075,535
Net unrealized gain on
investments, net of tax of
$200,960.................... 301,520
Comprehensive income............
---------- ------- ----------- ----------- -------- --------
BALANCE, SEPTEMBER 30, 1999....... 17,129,622 $85,648 $73,287,886 $15,482,982 $301,520 $ --
========== ======= =========== =========== ======== ========
<CAPTION>
TOTAL
TREASURY STOCK STOCKHOLDERS'
------------------------ COMPREHENSIVE EQUITY
SHARES AMOUNT INCOME (DEFICIT)
------ ------ ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996.......... 3,397,858 $(1,550,017) (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)
Comprehensive Income:
Net income.................... $ 146,283 146,282
----------
Comprehensive income............ $ 146,283
---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1997....... 3,397,858 (1,550,017) (5,668,611)
Accretion of Series A
Convertible Preferred Stock
through July 16, 1998......... (1,640,863)
Accretion of Series B
Convertible Preferred Stock
through July 16, 1998......... (873,180)
Exercises of warrants........... (519,712) 363,908 --
Additional payment for Treasury
stock......................... (820,706) (820,706)
Conversion of Series A
Convertible Preferred Stock... 15,040,248
Conversion of Series B
Convertible Preferred Stock... 8,064,401
Issuance of common stock, net... 32,222,394
Payment received on note
receivable.................... 31,500
Comprehensive income:
Net income.................... $5,255,200 5,255,200
----------
Comprehensive income............ $5,225,200
---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1998....... 2,878,146 (2,006,815) 51,610,383
Issuance of common stock, net... 25,132,531
Issuance of shares under stock
option plan................... 606,002
Exercises of warrants........... (1,006,820) 699,543 424,796
Treasury stock acquired......... 40,100 (609,681) --
Issuance of treasury stock under
employee stock purchase
plan.......................... (5,840) 4,088 94,404
Comprehensive income:
Net income.................... $9,075,535 9,075,535
Net unrealized gain on
investments, net of tax of
$200,960.................... $ 301,520 301,520
----------
Comprehensive income............ $9,377,055
---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1999....... 1,905,586 $(1,912,865) $87,245,171
========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 31
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 146,283 $ 5,255,200 $ 9,075,535
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Extraordinary item........................................ -- 566,145 --
Depreciation and amortization............................. 2,798,404 3,920,362 5,215,252
(Gain) loss on disposal of equipment...................... 18,845 58,749 (37,800)
Deferred income tax provision (benefit)................... 71,040 1,104,809 (829,969)
Changes in operating assets and liabilities, net of
effects from acquisition of businesses:
Increase in accounts receivable......................... (1,251,986) (703,558) (2,650,210)
Increase in inventory................................... (6,534,336) (7,202,268) (14,167,839)
(Increase) decrease in prepaid expenses and other
assets............................................... (227,537) 185,123 (105,863)
Increase (decrease) in accounts payable and accrued
expenses............................................. (936,490) 2,306,134 8,012,555
Increase (decrease) in customer deposits................ (242,565) 167,533 632,038
Increase in deferred rent............................... 357,195 400,120 376,455
Decrease in deferred warranty........................... (710,610) (1,509,482) (1,164,199)
Increase (decrease) in other liabilities................ 318,780 (120,120) 80,840
------------ ------------ -------------
Net cash provided by (used in) operating
activities......................................... (6,242,977) 4,428,747 4,436,795
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (3,972,465) (8,996,521) (12,698,632)
Proceeds from sale of property and equipment................ -- 13,350 37,800
Purchase of marketable equity securities.................... -- -- (1,343,833)
Acquisition of businesses, net of cash acquired............. (19,539,800) -- (18,087,358)
------------ ------------ -------------
Net cash used in investing activities................ (23,512,265) (8,983,171) (32,092,023)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount due to bank.......................................... 3,067,959 (877,392) 1,951,746
Proceeds from long-term borrowings, net of debt issue
costs..................................................... 20,668,128 -- 467,954
Payments of long-term debt.................................. (100,000) (26,350,000) --
Issuance of preferred stock................................. 6,837,385 -- --
Issuance of common stock, net of issuance costs............. -- 32,222,394 24,427,516
Additional payment for treasury stock....................... -- (820,706) --
Proceeds from warrants & options exercised.................. -- -- 1,030,798
------------ ------------ -------------
Net cash provided by financing activities............ 30,473,472 4,174,296 27,878,014
------------ ------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 718,230 (380,128) 222,786
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 438,607 1,156,837 776,709
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 1,156,837 $ 776,709 $ 999,495
============ ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 1,538,077 $ 3,179,757 $ 324,523
============ ============ =============
Taxes................................................... $ 358,000 $ 3,552,989 $ 6,090,000
============ ============ =============
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 32
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
1. BUSINESS OF THE COMPANY
Tweeter Home Entertainment Group, Inc. and subsidiaries (the "Company")
sells home audio, video, entertainment and electronic products through a chain
of seventy-three retail stores in the New England, Mid-Atlantic, Southeast,
Texas and San Diego, California markets. The Company operates under the names
"Tweeter, etc.," "Bryn Mawr Stereo & Video," "HiFi Buys," "Home Entertainment,"
and "DOW Stereo/ Video." The Company operates in a single business segment of
retailing audio and video consumer electronic products.
The consolidated financial statements include the accounts of Tweeter Home
Entertainment Group, Inc. and its wholly owned subsidiaries including New
England Audio Co., Inc., NEA Delaware, Inc., THEG USA, LP, DOW Stereo/Video,
Inc., and the Tweeter Home Entertainment Group Financing Trust.
On October 25, 1999, the Company announced a 2-for-1 stock split payable in
the form of a 100% stock dividend. This stock split became effective on December
2, 1999. The accompanying consolidated financial statements reflect the effects
of this conversion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of the Company. All material intercompany transactions have been
eliminated in consolidation.
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.
INVENTORY -- Inventory, which consists primarily of goods for resale, are
stated at the lower of cost (average cost basis) or market.
LONG-TERM INVESTMENTS -- Long-term investments consist primarily of
investments in marketable equity securities. The Company considers its
investments as available-for-sale and carries the investments at market value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are included in other comprehensive income, which
is reflected in stockholders' equity (deficit).
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 lives of the leases. Buildings owned by the Company are depreciated
over a period of fifteen years.
GOODWILL -- Goodwill and other acquisition costs are being amortized on a
straight-line basis over twenty-five years. All goodwill is evaluated for
impairment using the methodology described in "long-lived assets."
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. A portion of the deferred financing
costs were written off during 1998 (see Note 14).
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS -- The fair value of the
Company's assets and liabilities, which constitutes 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
non-discounted cash flows relying on a number of factors, including operating
results, business plans and certain economic projections. In addition, the
Company's evaluation
32
<PAGE> 33
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
considers non-financial 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 does 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.
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 twenty-five miles of the store advertises a lower price within thirty
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 cost of sales and carries a reserve based on management's estimate of
future liability under the program.
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 (the "Warrantor") on most of its products. These
contracts are on a non-recourse basis to the Company. The Company acts solely as
an agent for the Warrantor and has no liability to the customer under the
extended service contract, nor any other material obligation to the customer or
the Warrantor. The Company includes revenue from the sale of extended warranty
contracts in net sales and records as cost of sales the amounts due to the
Warrantor for the cost for such contracts at the time of sale as the earnings
process has been completed.
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 twelve and sixty 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 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.
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 twelve and
sixty 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.
33
<PAGE> 34
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
INCOME TAXES -- The Company accounts for income taxes in accordance with
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 financial reporting and taxable income and for loss
carry-forwards based on enacted tax laws and rates.
STORE OPENING COSTS -- Costs of a non-capital nature incurred prior to
store openings are expensed as incurred.
STOCK-BASED COMPENSATION -- The Company, for the purposes of presentation
in its consolidated 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 12.
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 $3,561,573, $3,957,746 and $4,404,776 for the years ended September 30, 1997,
1998 and 1999, respectively.
COMPREHENSIVE INCOME -- In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires that certain components
of stockholders' equity from non-owner sources be identified as "other
comprehensive income." The Company adopted SFAS No. 130 during the year ended
September 30, 1999. For the year ended September 30, 1999, the Company's
comprehensive income was comprised of net income and a net unrealized gain on
investments. The adopting of SFAS No. 130 had no impact on the year ended
September 30, 1998 and 1997. Comprehensive income is included in the
consolidated statements of stockholders' equity (deficit).
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 Preferred Stock outstanding, when dilutive, and dilutive potential
common shares (common stock options and warrants).
34
<PAGE> 35
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE ("EPS"):
Numerator:
Net income............................... $ 146,283 $ 5,255,200 $ 9,075,535
Accretion of preferred stock dividends... 2,156,356 $ 2,514,043 $ --
----------- ----------- -----------
Net income (loss) available to common
stockholders............................. $(2,010,073) $ 2,741,157 $ 9,075,535
=========== =========== ===========
Denominator:
Weighted average common shares
outstanding........................... 2,605,752 4,233,280 14,212,598
Nominal issuance of warrants............. 739,262 739,262 172,434
----------- ----------- -----------
Weighted average shares outstanding........ 3,345,014 4,972,542 14,385,032
----------- ----------- -----------
Basic EPS.................................. $ (0.60) $ 0.55 $ 0.63
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Numerator.................................. $(2,010,073) $ 5,255,200 $ 9,075,535
----------- ----------- -----------
Denominator:
Weighted average common shares
outstanding........................... 3,345,014 4,972,542 14,385,032
Potential common stock outstanding....... -- 5,095,064 1,587,470
----------- ----------- -----------
Total...................................... 3,345,014 10,067,606 15,972,502
----------- ----------- -----------
Diluted EPS................................ $ (0.60) $ 0.52 $ 0.57
=========== =========== ===========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS -- During 1999, the Company implemented
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company operates in one business segment and therefore SFAS
No. 131 had no impact on the Company's consolidated financial statements.
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, 1997, September 30, 1998 and September 30, 1999, respectively. 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, acquisitions of stores with different product mixes, and the timing of
marketing events. The historical percentages set forth below may not be
indicative of revenue percentages for future periods:
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
SEPTEMBER 30,
--------------------
PRODUCT CATEGORY 1997 1998 1999
---------------- ---- ---- ----
<S> <C> <C> <C>
Audio Equipment(1).......................................... 33% 33% 32%
Video Equipment(2).......................................... 36% 43% 42%
Mobile Equipment and Other(3)............................... 31% 24% 26%
</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 satellites.
(3) Includes car decks, amplifiers and speakers, car security products,
navigation equipment, cellular phones, audio and video accessories, and
extended performance guaranties.
35
<PAGE> 36
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
During 1998, the FASB issued 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.
RECLASSIFICATIONS -- Various financial statement amounts for 1997 and 1998
have been reclassified to conform to the classifications used in the September
30, 1999 consolidated financial statements.
3. CHANGES IN CAPITAL STRUCTURE
On July 21, 1998, the Company successfully completed an IPO of its common
stock, resulting in net proceeds to the Company of $32.2 million, which was used
to retire outstanding debt. The offering also required the mandatory conversion
of all of the outstanding Preferred Stock into common stock, thereby eliminating
significant rights enjoyed by the preferred stockholders, and significantly
changing the capital structure of the Company. Among other rights, the Preferred
Stock had redemption provisions that guaranteed the holders a minimum return on
investment of 15% if the shares were redeemed. Mandatory redemption was to begin
in 2001, if the Company had not successfully completed an IPO resulting in net
proceeds to the Company of at least $15.0 million. In periods prior to the IPO,
the Company accreted Preferred Stock to its redemption value with a charge to
retained earnings. Upon conversion of the Preferred Stock to common stock, the
Company eliminated all balances related to the Preferred Stock through retained
earnings and additional paid-in capital.
4. PROPERTY AND EQUIPMENT
Major classifications of property and equipment are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Leasehold improvements.............................. $18,006,620 $24,445,597
Furniture and equipment............................. 10,185,549 13,941,439
Buildings........................................... 4,000,003 4,650,762
Land................................................ 940,000 1,717,518
Automobiles and trucks.............................. 370,074 616,126
Capitalized leases.................................. -- 113,702
Construction in progress............................ 475,912 2,899,539
Leasehold interests................................. 165,000 165,000
----------- -----------
34,143,158 48,549,683
Less accumulated depreciation and amortization...... 10,165,040 14,306,442
----------- -----------
$23,978,118 $34,243,241
=========== ===========
</TABLE>
Depreciation and amortization (excluding amortization of goodwill) for the
fiscal years ended September 30, 1997, 1998 and 1999 aggregated $2,258,121,
$2,913,808 and $4,141,182, respectively.
36
<PAGE> 37
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Merchandise received not invoiced................... $ 1,748,947 2,583,516
Fringe benefits..................................... 1,446,030 1,953,789
Compensation........................................ 2,465,064 1,729,685
Sales taxes payable................................. 1,069,249 1,574,034
Advertising......................................... 1,832,127 1,567,523
Federal income taxes payable........................ -- 1,159,878
Group insurance..................................... 255,000 390,948
Other............................................... 3,190,407 5,237,933
----------- -----------
$12,006,824 $16,197,306
=========== ===========
</TABLE>
6. DEFERRED WARRANTY REVENUE
As part of the acquisition of Bryn Mawr in May of 1996, the Company assumed
the deferred revenue on Bryn Mawr's books at that time. Amortization of the
deferred warranty revenue for the years ended September 30, 1997, 1998 and 1999
was $468,418, $326,247 and $203,163, respectively (see Note 2).
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 for the years ended
September 30, 1997, 1998 and 1999 was $478,145, $1,183,234 and $906,163,
respectively (see Note 2). Self-funded extended warranty contract sales were
$276,720 in the year ended September 30, 1997.
7. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Revolving term bank loan.............................. $5,250,000 $5,700,000
Other................................................. -- 52,356
---------- ----------
Subtotal.............................................. 5,250,000 5,752,356
Less current portion.................................. -- 35,551
---------- ----------
$5,250,000 $5,716,805
========== ==========
</TABLE>
The Company has a credit facility that matures on July 31, 2001. On March
22, 1999, the Company amended its loan agreement with the bank. Among other
things, this amendment changed (a) the maximum availability from $30,000,000 to
$50,000,000 and (b) certain financial covenants, the most restrictive of which
continue to be the maintenance of certain debt coverage and leverage ratios.
This facility also restricts the Company from paying cash dividends. The amount
outstanding under the agreement totaled $5,250,000 and $5,700,000 at September
30, 1998 and 1999, respectively, and is collateralized by the Company's
inventory, and certain other assets. The unpaid balances under this agreement
bear interest at the lender's base rate (8.25% at September 30, 1999), or LIBOR
plus 1% if the Company commits the balances for a period of thirty days or more.
37
<PAGE> 38
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
8. EMPLOYEE SAVINGS PLAN
The Company has 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, 1997, 1998 and 1999. The Company's contribution expense was
$100,000, $290,000 and $425,000 for the years ended September 30, 1997, 1998 and
1999, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases the majority of its stores, installation centers,
warehouses and administrative facilities under operating leases. The lives of
these leases range from five to twenty years with varying renewal options. The
leases provide for base rentals, real estate taxes, common area maintenance
charges and, in some instances, the payment of percentage rents based on sales
volume. Rent expense for the years ended September 30, 1997, 1998 and 1999 was
$5,978,819, $8,637,505 and $10,309,850, respectively. Percentage rent expense
was $47,243, $41,833 and $127,923 for the years ended September 30, 1997, 1998
and 1999, respectively.
Future minimum rental commitments under non-cancelable operating leases as
of September 30, 1999 are as follows:
<TABLE>
<S> <C>
Year ended September 30, 2000............................... $ 13,704,010
Year ended September 30, 2001............................... 12,195,255
Year ended September 30, 2002............................... 11,603,730
Year ended September 30, 2003............................... 10,967,086
Year ended September 30, 2004............................... 10,177,433
Thereafter.................................................. 45,920,380
------------
Total.................................................. $104,567,894
============
</TABLE>
On June 23, 1998 the Company completed the purchase of a facility in
Massachusetts to serve as the corporate headquarters, service center and
distribution center in Massachusetts. The purchase price for this facility was
$3,950,000, and the Company spent an additional $1,590,000 in related building
improvements.
Effective upon the consummation of the IPO, the Company entered 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 an amount up to three times their
annual base salary.
38
<PAGE> 39
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
10. INCOME TAXES
The provision (benefit) for income taxes under SFAS No. 109 consisted of
the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 21,821 $2,081,039 $5,533,879
State............................................ 6,101 538,121 1,346,447
---------- ---------- ----------
27,922 2,619,160 6,880,326
Deferred:
Current deferral................................. 71,040 1,104,809 (829,969)
---------- ---------- ----------
$ 98,962 $3,723,969 $6,050,357
========== ========== ==========
</TABLE>
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,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Accruals and reserves....................................... $1,129,773 $1,611,959
Deferred revenue............................................ 468,579 287,645
---------- ----------
Net deferred tax assets--current............................ 1,598,352 1,899,604
---------- ----------
Deferred rent............................................... 1,191,676 1,366,422
Depreciation................................................ 663,705 1,425,802
Deferred revenue............................................ 450,384 144,536
Unrealized gain on marketable equity securities............. -- (200,960)
Intangible - excess of tax amortization over book
amortization.............................................. (3,729,048) (3,831,327)
---------- ----------
Net deferred tax liabilites--long-term...................... (1,423,283) (1,095,527)
---------- ----------
Total net deferred tax assets............................... $ 175,069 $ 804,077
========== ==========
</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, 1998 and 1999. A reconciliation between the
statutory and effective income tax rates is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Statutory income tax free......................... 34.0% 34.0% 35.0%
State income taxes, net of federal benefit........ 5.8 5.5 5.1
Other............................................. 0.5 0.5 (0.1)
----- ----- -----
Effective income tax rate......................... 40.3% 40.0% 40.0%
===== ===== =====
</TABLE>
11. ACQUISITIONS
HIFI BUYS -- On May 30, 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 consolidated
statements of income since the acquisition date. The allocation of the purchase
price resulted in goodwill of
39
<PAGE> 40
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
$15,826,949, which is being amortized over twenty-five 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...................... 20,054,249
-----------
Goodwill.................................................. $15,826,949
===========
</TABLE>
HOME ENTERTAINMENT, INC. -- On February 1, 1999, the Company acquired the
principal operating assets and assumed certain liabilities of Home
Entertainment, 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, Inc. have been included in the consolidated statements of
income since the acquisition date. The allocation of the purchase price resulted
in goodwill of $5,358,452, 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................................................... $3,489,009
Property and equipment...................................... 1,021,202
Accounts receivable......................................... 286,674
Other assets................................................ 41,632
Accounts payable and accrued expenses....................... (636,732)
----------
Net assets acquired....................................... 4,201,785
Total purchase price and related costs...................... 9,560,237
----------
Goodwill.................................................. $5,358,452
==========
</TABLE>
The following unaudited pro forma financial information reflects the
consolidated results of operations for the Company for the twelve months ended
September 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>
TWELVE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net sales......................................... $256,981,310 $292,551,314
Net income........................................ 5,901,493 9,453,977
Net income available to common stockholders....... 3,387,450 9,453,977
Basic earnings per share.......................... 0.68 0.66
Diluted earnings per share........................ 0.59 0.59
</TABLE>
40
<PAGE> 41
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
DOW STEREO/VIDEO, INC. -- On July 1, 1999, the Company acquired the capital
stock of DOW Stereo/ Video, Inc. This transaction has been accounted for as a
purchase and, accordingly, the results of operations of the Company's business
relating to DOW Stereo/Video, Inc. have been included in the consolidated
statements of income since the acquisition date. The allocation of the purchase
price resulted in goodwill of $5,363,992, which is being amortized over
twenty-five years using the straight-line method. The net assets acquired at
fair market value on July 1, 1999 were allocated as follows:
<TABLE>
<S> <C>
Inventory................................................... $ 6,091,953
Property and equipment...................................... 503,259
Accounts receivable......................................... 383,250
Other assets................................................ 113,947
Accounts payable and accrued expenses....................... (3,650,015)
-----------
Net assets acquired....................................... 3,442,394
Total purchase price and related costs (including the
issuance of 32,290 shares of common stock for $600,000)... 8,806,386
-----------
Goodwill.................................................. $ 5,363,992
===========
</TABLE>
The following unaudited pro forma financial information reflects the
consolidated results of operations for the Company for the twelve months ended
September 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>
TWELVE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Net sales............................................... $272,994,316 $315,031,844
Net income.............................................. 5,751,243 10,101,475
Net income available to common stockholders............. 3,237,200 10,101,475
Basic earnings per share................................ 0.65 0.70
Diluted earnings per share.............................. 0.57 0.63
</TABLE>
Accumulated amortization of goodwill was approximately $2,144,000 and
$3,200,000 for the years ended September 30, 1998 and 1999, respectively.
ELECTRONIC ENVIRONMENTS -- On September 3, 1999, the Company purchased
certain assets and assumed certain liabilities of Electronic Environments, a
custom home installation company. Total purchase price and related cost amounted
to approximately $520,000, including the issuance of 12,532 shares of common
stock for $200,000. The purchase price was allocated primarily to goodwill and
property and equipment. This transaction has been accounted for as a purchase.
The results of operations for the acquired entity in 1999 were not significant.
Accordingly, pro forma information has not been presented.
12. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK -- Holders of common stock are entitled to dividends if
declared by the Board of Directors, and each share carries one vote. Currently
the Company's credit facility contains a restriction preventing the payment of
cash dividends. The common stock has no cumulative voting, redemption or
preemptive rights.
During the period from March 7, 1997 through May 30, 1997, the Company
issued warrants to purchase 74,276 shares of common stock to certain
stockholders who participated in a Warrant and Debenture Commitment relating to
a certain bridge loan financing agreement. The warrants had a five year term and
an
41
<PAGE> 42
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
exercise price of $3.43 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. As of September 30, 1999 there were 16,796 warrants outstanding and
exercisable.
The weighted average exercise price for all warrants outstanding at
September 30, 1998 and 1999, respectively, is $1.07 and $3.23. The following
table summarizes information regarding stock warrants outstanding at September
30, 1999:
<TABLE>
<CAPTION>
NUMBER
OUTSTANDING
AND WEIGHTED-
AVERAGE EXERCISABLE AVERAGE
EXERCISE AT SEPTEMBER 30, REMAINING
PRICES 1999 LIFE (YEARS)
- -------- ---------------- ------------
<S> <C> <C>
$3.23 16,796 7.40
</TABLE>
INITIAL PUBLIC OFFERING -- On July 21, 1998, the Company completed an IPO
of 5,420,000 shares of common stock. The Company sold 4,400,000 shares, and
1,020,000 shares were sold by existing stockholders. Net proceeds received by
the Company were $32,200,000. Net proceeds were used to repay indebtedness.
There were no payments made to directors or officers of the Company, or to
persons owning ten percent or more of any class of equity securities of the
Company or to any affiliate of the Company, except that the Company repaid
approximately $5.0 million on account of a promissory note to one of the
institutional investors. This investor beneficially owned 11.2% of the Company's
common stock, immediately prior to the Offering.
SECONDARY PUBLIC OFFERING -- On February 2, 1999, the Company completed a
secondary offering of 5,000,000 shares of common stock. The Company sold
1,000,000, and existing stockholders sold 4,000,000 shares. The Company also
covered the underwriter's overallotment and issued 750,000 additional shares.
Total net proceeds received by the Company were $24,300,000. The Company used
these net proceeds to repay $5,900,000 of existing indebtedness under its
revolving credit facility, fund the Home Entertainment acquisition for
approximately $9,600,000, and fund the DOW Stereo/Video acquisition for
approximately $8,800,000, and for working capital and general corporate
purposes.
SHELF REGISTRATION STATEMENT -- On April 13, 1999, the Company filed a
shelf registration statement on Form S-4 with the Securities and Exchange
Commission, which became effective on May 4, 1999. The registration statement
related to 4,000,000 shares of common stock of the Company. These shares may be
issued from time to time in the future by the Company in connection with the
acquisition of assets, business or securities of other companies, whether by
purchase, merger or any other form of business combination.
COMMON STOCK INCENTIVE PLANS -- In November of 1995, the Company
implemented a 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 $0.31 to $18.688 per share. Options are generally exercisable over a period
from one to ten years from the date of the grant and are dependent on the
vesting schedule associated with the grant. Options for 1,136,548, 1,316,152 and
1,283,362 shares were exercisable under the 1995 Stock Option Plan at September
30, 1997, 1998 and 1999, respectively.
On June 1, 1998, the Company terminated the 1995 Stock Option Plan and
adopted the 1998 Stock Option and Incentive Plan (the "1998 Plan") to provide
incentives to attract and retain executive officers, directors, key employees
and consultants. 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
42
<PAGE> 43
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
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) 300,000 shares of common stock.
As options granted under the 1998 Plan are exercised, the number of shares
represented by such previously outstanding options will again become available
for issuance under the 1998 Plan up to a maximum of 200,000 shares of common
stock annually. There were 135,760 shares exercisable under the 1998 Stock
Option Plan at September 30, 1999. There were 2,131,372 shares available for
future grants at September 30, 1999.
The 1998 Plan is 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 (incentive stock options 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"). The 1998 Plan will expire five years
following its adoption. Awards made thereunder and outstanding at the expiration
of the 1998 Plan will survive in accordance with their terms. Other than stock
options, no Plan Awards were granted during 1998 and 1999.
In any plan year no more than 25% of the shares reserved for issuance under
the 1998 Plan may be used for Plan Awards consisting of restricted stock. All
grants of restricted stock under the 1998 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 also provides 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, 1999, the Board of
Directors authorized the grant of options ("June 1999 Options") under the 1998
Plan, exercisable for a total of 28,000 shares of common stock, to certain
officers, directors and employees of the Company.
The following summarizes transactions under the stock option plans:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF PER SHARE EXERCISE
SHARES OPTION PRICE PRICE
--------- ---------------- ---------
<S> <C> <C> <C>
October 1, 1996............................ 1,208,848 $ 0.31 to $ 3.55 $ 1.16
Granted.................................. 465,204 $ 3.23 to $ 4.04 $ 3.69
Exercised................................ -- -- --
Canceled................................. 22,578 $ 0.31 to $ 3.23 $ 0.89
--------- ---------------- ------
September 30, 1997......................... 1,651,474 $ 0.31 to $ 4.04 $ 1.86
Granted.................................. 467,140 $ 3.62 to $ 8.50 $ 7.88
Exercised................................ -- -- --
Canceled................................. 20,564 $ 0.31 to $ 3.62 $ 1.62
--------- ---------------- ------
September 30, 1998......................... 2,098,050 $ 0.31 to $ 8.50 $ 3.24
Granted.................................. 707,300 $13.50 to $18.69 $15.89
Exercised................................ 291,274 $ 0.31 to $ 8.50 $ 2.08
Canceled................................. 57,074 $ 0.31 to $15.31 $10.12
--------- ---------------- ------
September 30, 1999......................... 2,457,002 $ 0.31 to $18.69 $ 6.84
</TABLE>
43
<PAGE> 44
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
The following summarizes information about all stock options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED- NUMBER OF
SHARES AVERAGE OPTIONS
OUTSTANDING REMAINING EXERCISABLE
EXERCISE AT SEPTEMBER 30, CONTRACTUAL AT SEPTEMBER 30,
PRICES 1999 LIFE (YEARS) 1999
-------- ---------------- ------------ ----------------
<S> <C> <C> <C>
$ 0.31........................ 335,460 6.3 322,276
$ 0.34........................ 223,756 6.4 223,756
$ 0.76........................ 165,168 6.2 165,168
$ 3.23........................ 185,764 6.6 160,396
$ 3.55........................ 88,296 6.7 88,296
$ 3.62........................ 283,576 7.8 217,362
$ 4.04........................ 105,780 7.8 105,780
$ 7.11........................ 656 8.4 328
$ 8.50........................ 389,246 4.8 135,760
$13.50........................ 12,000 5.5 --
$14.50........................ 8,000 5.9 --
$14.82........................ 28,000 5.6 --
$15.32........................ 41,000 5.3 --
$15.50........................ 3,000 5.9 --
$16.07........................ 580,300 5.8 --
$16.13........................ 5,000 6.0 --
$18.69........................ 2,000 6.0 --
--------- ---------
Total......................... 2,457,002 6.2 1,419,122
========= =========
</TABLE>
The weighted-average exercise price of all options outstanding as of
September 30, 1998 and 1999 is $3.24 and $6.84, respectively.
For purposes of determining the disclosures required by SFAS No. 123, the
fair value of each stock option granted in 1997, 1998 and 1999 under the
Company's stock option plan was estimated on the date of grant using the
Black-Scholes option-pricing model. Key assumptions used to apply this pricing
model were as follows:
<TABLE>
<CAPTION>
---------------------
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Risk free interest rate............................... 5.69% 5.67% 5.53%
Expected life of option grants (years)................ 4.0 3.3 3.0
Expected volatility of underlying stock............... 54.5% 54.5% 80.57%
</TABLE>
Had compensation cost for stock option grants during the years ended
September 30, 1997, 1998 and 1999 been determined under the provisions of SFAS
No. 123, the Company's net income (before accretion on Preferred Stock) would
have been approximately $143,000, $5,197,000 and $8,873,000, respectively. Pro
forma diluted earnings (loss) per share would have been $(.60), $.52 and $.56
for the years ended September 30, 1997, 1998 and 1999, respectively.
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
44
<PAGE> 45
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
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 1,000,000.
13. 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 a monthly salary of approximately
$21,000 for each month during the first year after the commencement date of the
agreement, and approximately $4,200 for each month during years three and four
of the Consulting Period plus out-of-pocket expenses. No compensation or
expenses were to be paid to BMFO for the second year of the Consulting Period.
The Company also entered into certain lease agreements for three facilities in
Pennsylvania with an affiliate of BMFO. Total yearly payments under these
agreements aggregates to approximately $670,000.
14. EXTRAORDINARY ITEM
In connection with the IPO completed on July 21, 1998, the Company recorded
an extraordinary charge for the early extinguishment of debt. The Company wrote
off deferred financing costs of $286,009 related to the 1997 Notes. The Company
also wrote off $280,136 representing the unamortized portion of the discount
related to the warrants issued in conjunction with the 1997 Notes. The gross
amount of the extraordinary item was $566,145. The net effect of $339,687, after
tax benefit of $244,557, was recorded in the consolidated statement of income as
an extraordinary item.
15. LONG-TERM INVESTMENTS
The cost and fair value of long-term investments at September 30, 1999 were
as follows:
<TABLE>
<CAPTION>
HISTORICAL FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Marketable equity securities....................... $1,343,886 $1,846,366
</TABLE>
At September 30, 1999 the unrealized gain of $301,520 (net of tax effect)
was included in accumulated other comprehensive income reflected in
stockholders' equity (deficit).
45
<PAGE> 46
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the quarterly results of operations for
the fiscal years ended September 30, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1998 1998 1998
------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL YEAR 1998
Total revenue............................. $74,617 $54,512 $49,676 $53,483
Gross profit.............................. 25,381 19,468 17,419 18,754
Net income................................ 3,173 1,139 204 738
Net income (loss) available to common
stockholders............................ 2,381 347 (588) 599
Basic earnings (loss) per share........... 0.71 0.11 (0.18) 0.06
Diluted earnings (loss) per share......... 0.35 0.09 (0.18) 0.06
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 1999 1999
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1999
Total revenue............................. $86,784 $62,236 $59,653 $74,614
Gross profit.............................. 29,551 21,337 21,568 27,083
Net income................................ 4,557 1,440 969 2,110
Basic earnings per share.................. 0.36 0.10 0.07 0.14
Diluted earnings per share................ 0.32 0.09 0.06 0.13
</TABLE>
17. SUBSEQUENT EVENTS
On October 4, the Company formed a joint-venture with Cyberian Outpost,
Inc. (Nasdaq: COOL), organized as Tweeter.Outpost.com, LLC, to jointly market
and sell consumer electronics over the Internet. The Tweeter.Outpost.com site
was launched on October 19, 1999, with a primary URL of Tweeter.Outpost.com. The
Company also made an equity investment of $1.0 million dollars in the common
stock of Cyberian Outpost. This 50/50 joint venture was capitalized with
$2,500,000 from each party, primarily to fund inventory procurement.
**********
46
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the definitive Proxy
Statement for the Company's 2000 Annual Meeting of Stockholders, to be filed
with the Commission on or about December 22, 1999 (the "2000 Proxy Statement"),
under "Election of Directors" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 2000 Proxy
Statement under "Executive Compensation" and is incorporated herein by reference
(excluding, however, the "Compensation Committee Report Regarding Executive
Compensation" and the Performance Graph contained in the 2000 Proxy Statement,
which shall not be deemed incorporated herein).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the 2000 Proxy
Statement under "Security Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 a monthly salary of approximately
$21,000 for each month during the first year after the commencement date of the
agreement, and approximately $4,200 for each month during years three and four
of the Consulting Period plus out-of-pocket expenses. No compensation or
expenses were to be paid to BMFO for the second year of the Consulting Period.
The Company also entered into certain lease agreements for three facilities in
Pennsylvania with an affiliate of BMFO. Total yearly payments under these
agreements aggregate approximately $670,000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The Financial Statements required to be filed
by Item 8 of this Annual Report on Form 10-K, and filed herewith, are as
follows:
(a)(2) Financial Statement Schedules.
Schedule II attached
All other schedules are omitted because they are not required, not
applicable, or the information is included in the financial
statements.
(a)(3) Exhibits.
See the Exhibit Index included immediately preceding the Exhibits to
this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1999.
47
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Tweeter Home Entertainment Group, Inc.
We have audited the consolidated financial statements of Tweeter Home
Entertainment Group, Inc. as of September 30, 1998 and 1999, and for each of the
three years in the period ended September 30, 1999, and have issued our report
thereon dated November 18, 1999; such consolidated financial statements and
report are included in your 1999 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the consolidated
financial statement schedule of Tweeter Home Entertainment Group, Inc., listed
in Item 14(a)(2). This consolidated 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, present fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
November 18, 1999
48
<PAGE> 49
SCHEDULE II
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
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
Years ended
September 30, 1999...................... $560 -- $103 $13 $650
September 30, 1998...................... 631 13 -- 84 560
September 30, 1997...................... 440 191 -- -- 631
</TABLE>
49
<PAGE> 50
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
<TABLE>
<S> <C>
December 10, 1999 By: /s/ JEFFREY STONE
- --------------------- --------------------------------------------------------
Date Jeffrey Stone, President
December 10, 1999 By: /s/ JOSEPH MCGUIRE
- --------------------- --------------------------------------------------------
Date Joseph McGuire, Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
December 10, 1999 By: /s/ SAMUEL BLOOMBERG
- --------------------- --------------------------------------------------------
Date Samuel Bloomberg, Chairman of the Board
December 10, 1999 By: /s/ JEFFREY STONE
- --------------------- --------------------------------------------------------
Date Jeffrey Stone, Director and President
December 10, 1999 By: /s/ MICHAEL CRONIN
- --------------------- --------------------------------------------------------
Date Michael Cronin, Director
December 10, 1999 By: /s/ MATTHEW BRONFMAN
- --------------------- --------------------------------------------------------
Date Matthew Bronfman, Director
December 10, 1999 By: /s/ STEVEN FISCHMAN
- --------------------- --------------------------------------------------------
Date Steven Fischman, Director
</TABLE>
50
<PAGE> 51
EXHIBIT INDEX
(a) EXHIBIT:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
***3.1 -- Amended and Restated Certificate of Incorporation of the
Company.
*3.2 -- Amended and Restated By-Laws of the Company.
*4.1 -- Specimen Certificate representing the Company's common
stock.
*4.2 -- Shareholder's Rights Agreement.
*10.1 -- Amended and Restated Registration Rights Agreement, dated as
of May 30, 1997, among the Company and the shareholders and
warrant holders 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.
*10.4 -- 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 -- Common Stock Warrant issued to HiFi Buys Incorporated dated
June 5, 1998 for 104,960 shares of common stock of the
Company.
*10.6 -- Form of common stock Purchase Warrant dated June 5, 1998
issued by the Company pursuant to the Warrant and Debenture
Commitment.
*10.7 -- 1995 Stock Option Plan.
*10.8 -- 1998 Stock Option and Incentive Plan.
*10.9 -- Employment Agreement between the Company and Samuel
Bloomberg.
*10.10 -- Employment Agreement between the Company and Jeffrey Stone.
*10.11 -- Employment Agreement between the Company and Joseph McGuire.
*10.12 -- Employment Agreement between the Company and Fred Lokoff,
dated as of May 13, 1996 and amended as of April 23, 1997.
*10.13 -- Asset Purchase Agreement, dated as of May 30, 1997, between
the company and HiFi Buys Incorporated.
*10.14 -- 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.
*10.15 -- Progressive Retailers Organization, Inc. Policy and
Procedures Manual.
**10.16 -- Employee Stock Purchase Plan.
***21 -- Subsidiaries of the Company.
***23 -- Consent of Deloitte & Touche LLP.
***27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration Number 333-51015) or amendments thereto and incorporated
herein by reference.
** Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration Number 333-70543) or amendments thereto and incorporated
herein by reference.
*** Filed herewith.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
Tweeter Home Entertainment Group, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
1. The name of the Corporation is Tweeter Home Entertainment Group,
Inc. The date of the filing of its original Certificate of Incorporation with
the Secretary of State of the State of Delaware was April 14, 1998 (the
"Original Certificate of Incorporation"). The Original Certificate of
Incorporation was amended and restated on June 5, 1998 (the "First Amended and
Restated Certificate of Incorporation").
2. This Amended and Restated Certificate of Incorporation (the
"Certificate"), which amends, restates and integrates the provisions of the
First Amended and Restated Certificate of Incorporation, was duly adopted by the
Board of Directors of the Corporation in accordance with the provisions of
Sections 141(f), 242 and 245 of the General Corporation Law of the State of
Delaware, as amended from time to time (the "DGCL"), and was duly adopted by the
written consent of the stockholders of the Corporation in accordance with the
applicable provisions of Sections 228, 242 and 245 of the DGCL.
3. The text of the First Amended and Restated Certificate of
Incorporation, as amended to date, is hereby amended and restated in its
entirety to provide as herein set forth in full.
ARTICLE I
NAME
The name of the corporation is Tweeter Home Entertainment Group, Inc.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
<PAGE> 2
ARTICLE III
PURPOSES
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
A. AUTHORIZED CAPITAL. The Corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares of stock which the Corporation shall have authority to
issue is Forty Million (40,000,000) shares, consisting of Thirty Million
(30,000,000) shares of Common Stock, $.01 par value, and Ten Million
(10,000,000) shares of Preferred Stock, $.01 par value.
B. COMMON STOCK.
1. The holders of shares of Common Stock shall be entitled to one vote
for each share so held with respect to all matters voted on by the stockholders
of the Corporation.
2. Subject to any preferential dividend rights of the Preferred Stock,
dividends may be paid on the Common Stock as and when declared by the Board of
Directors or any authorized committee thereof.
3. Upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, after payment shall have been made to the holders
of the Preferred Stock having a prior and superior right to any assets of the
Corporation of the full amount to which they are entitled, the net assets of the
Corporation available for distribution to the holders of Common Stock shall be
distributed pro rata to such holders in proportion to the number of shares of
Common Stock held by each.
C. PREFERRED STOCK. The Board of Directors of the Corporation is hereby
expressly vested with the power by resolution to designate one or more series of
the Preferred Stock of the Corporation from time to time and by resolution to
designate the powers, preferences and relative, participating, optional or other
special rights of any such series, and the qualifications, limitations or
restrictions thereof, to the extent not in conflict with the powers,
designations, preferences or relative, participating, optional or other special
rights, or the qualifications, limitations or restrictions of any other series
fixed by resolution of the Board of Directors and set forth in a certificate of
designation filed with the Secretary of State of Delaware. The power of the
Board of Directors as describe in this paragraph shall include the right to fix
one or more of the following with respect to each series of Preferred Stock to
the extent permitted by law:
-2-
<PAGE> 3
1. the annual or other periodic dividend rate or amount of dividends to
be paid on the shares of such series, the dividend payment dates, the date from
which dividends on all shares of such series issued shall be cumulative, if
applicable, and the extent of participation and other rights, if any;
2. whether the shares of such series shall be redeemable and, if so,
the redemption price or prices, if any, for such series and other terms and
conditions on which such series may be retired and redeemed;
3. the distinctive serial designation and maximum number of shares of
such series issuable;
4. the right to vote, if any, with holders of shares of any other class
or series, either generally or as a condition to specified corporate action;
5. the amount payable upon shares of such series and the preferences
applicable thereto in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
6. the rights, if any, of the holders of shares of such series to
convert such shares into other classes of stock of the Corporation or into any
other securities, or to exchange such shares for other securities, and, if so,
the conversion price or prices, or the rate or rates of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be made
and any other terms and conditions of any such conversion or exchange;
7. the price or other consideration for which the shares of such series
shall be issued;
8. whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of Preferred Stock (or
series thereof) and whether such shares may be reissued as shares of the same or
any other class or series of stock; and
9. such other powers, preferences and relative, participating, optional
or other special rights, and the qualifications, limitations or restrictions
thereof, as the Board of Directors may deem advisable and as are not prohibited
by law.
All shares of Preferred Stock shall be identical with each other in all
respects except as provided herein or in the resolution or resolutions providing
for the issue of a particular series. All shares of Preferred Stock of any one
series shall be identical with each other in all respects except, if so
determined by the Board of Directors, as to the dates from which dividends
thereon shall be cumulative.
Any action by the Board of Directors under this Section C of Article IV
shall require the affirmative vote of a majority of the directors then in
office.
-3-
<PAGE> 4
ARTICLE V
STOCKHOLDER ACTION
Except as may be provided in the resolutions of the Board of Directors
designating any series of Preferred Stock solely with respect to action taken by
the holders of that series, any action required or permitted to be taken by
stockholders of the Corporation at any annual or special meeting of stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders and may not be taken or effected by a written consent of
stockholders in lieu thereof.
ARTICLE VI
DIRECTORS
A. GENERAL POWERS OF THE BOARD OF DIRECTORS. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors. In furtherance, and not in limitation, of the powers conferred by the
State of Delaware, the Board of Directors of the Corporation is expressly
authorized to:
1. adopt, amend, or repeal the By-laws of the Corporation; provided,
however, that no By-laws hereafter adopted shall invalidate any prior act of the
directors that would have been valid if such new By-laws had not been adopted.
2. determine the rights, powers, duties, rules and procedures that
affect the power of the Board of Directors to manage the business and affairs of
the Corporation, including the power to designate and empower committees of the
Board of Directors, to elect, appoint and empower the officers and other agents
of the Corporation, and to determine the time and place of, and the notice
requirements for, Board meetings, as well as quorum and voting requirements for,
and manner of taking, Board action; and
3. exercise all such powers and do all such acts as may be exercised or
done by the Corporation, subject to the provisions of the laws of the State of
Delaware, this Certificate of Incorporation, and the By-laws of the Corporation.
B. NUMBER OF DIRECTORS. The number of directors constituting the Board of
Directors shall be fixed by, or in the manner provided in, the By-laws.
C. CLASSIFIED BOARD OF DIRECTORS. Effective as of the filing of this
Certificate, the directors shall be divided into three classes, with each class
to be as nearly equal in number as possible, and shall be referred to Class I
Directors, Class II Directors and Class III Directors, respectively. The initial
Class I Directors shall serve for a term expiring at the annual meeting of
stockholders to be held in 1999; the initial Class II Directors shall serve for
a term expiring at the annual meeting of stockholders to be held in 2000; and
the initial Class III Directors shall serve for a term expiring at the annual
meeting of stockholders to be held in 2001. At each annual meeting of
stockholders, the successor or successors of the class of directors whose term
expires at that meeting shall
-4-
<PAGE> 5
be elected by a plurality of the votes of the shares present in person or
represented by proxy at such meeting and entitled to vote on the election of
directors, and shall hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
directors elected to each class shall hold office until their successors are
duly elected and qualified or until their earlier resignation or removal. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain or attain, if possible, the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of an incumbent director.
D. REMOVAL OF DIRECTORS. Subject to the rights, if any, of the holders of any
series of Preferred Stock to elect directors and to remove any director whom
such holders have the right to elect, any director (including persons elected by
directors to fill vacancies in the Board of Directors) may be removed from
office (a) only for cause and (b) only by the affirmative vote of the holders of
at least 75% of the voting power of all of the shares of capital stock of the
Corporation then entitled to vote generally in the election of directors, voting
together as a single class.
E. VACANCIES. Subject to the rights, if any, of the holders of any series of
Preferred Stock to elect directors and to fill vacancies in the Board of
Directors relating thereto, any vacancies in the Board of Directors, however
occurring, including, without limitation, by reason of an increase in size of
the Board of Directors, or the resignation or removal of a director, may filled
only by the affirmative vote of a majority of the remaining directors then in
office, even if less than a quorum of the Board of Directors. Any director
appointed in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been duly elected and qualified or until such director's
earlier resignation or removal. Subject to the rights, if any, of the holders of
any series of Preferred Stock, when the number of directors is increased or
decreased, the Board of Directors shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned, but in no
case will a decrease in the number of directors shorten the term of an incumbent
director. In the event of a vacancy in the Board of Directors, the remaining
directors, except as otherwise provided by law, may exercise the powers of the
full Board of Directors until such vacancy is filled.
F. AMENDMENT OF BY-LAWS. Except as may be may be provided otherwise in the
By-laws, the Board of Directors shall have the power to adopt, amend, or repeal
any By-laws of the Corporation, subject to the right of the stockholders of the
Corporation to amend or repeal the By-laws as provided therein.
G. CONSIDERATION OF CERTAIN FACTORS BY DIRECTORS. In determining what he or she
reasonably believes to be in the best interests of the Corporation in the
performance of his or her duties as a director, a director may consider, both in
the consideration of tender and exchange offers, mergers, consolidations and
sales
-5-
<PAGE> 6
of all or substantially all of the corporation's assets and otherwise, such
factors as the Board of Directors determines to be relevant, including without
limitation:
1. the long-term and short-term interests of the Corporation and its
stockholders, including the possibility that these interests may be best served
by the continued independence of the Corporation;
2. whether the proposed transaction might violate federal or state
laws;
3. if applicable, not only the consideration being offered in a
proposed transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market price for
such capital stock of the Corporation over a period of years, the estimated
price that might be achieved in a negotiated sale of the Corporation as a whole
or in part or through orderly liquidation, the premiums over market price for
the securities or other corporations in similar transactions, current political,
economic and other factors bearing on securities prices and the Corporation's
financial condition and future prospects; and
4. the social, legal and economic effects of the proposed transaction
upon the Corporation's employees, suppliers, customers, creditors and others
having similar relationships with the Corporation, upon the communities in which
the Corporation conducts business and upon the economy of the state, region and
nation.
ARTICLE VII
LIMITATION OF LIABILITY OF DIRECTORS
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Certificate to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the DGCL, as so amended.
Any amendment or repeal of this Article VII by either (i) the stockholders
of the Corporation or (ii) an amendment to the DGCL shall not adversely affect
any right or protection existing at the time of such amendment or repeal with
respect to any acts or omissions occurring before such amendment or repeal of a
person who has served as a director prior to, or is then serving as a director
at the time of, such amendment or repeal.
-6-
<PAGE> 7
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS
The corporation shall, to the fullest extent permitted by Section 145 of
the DGCL, indemnify all persons whom it shall have the power to indemnify under
that section from and against all of the expenses, liabilities or other matters
referred to in or covered by that section and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Certificate in
the manner now or hereafter prescribed by statute and this Certificate, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
No amendment or repeal of this Certificate shall be made unless the same is
first approved by the Board of Directors pursuant to a resolution adopted by the
Board of Directors in accordance with Section 242 of the DGCL, and, except as
otherwise provided by law, thereafter approved by the stockholders. Whenever any
vote of the holders of voting stock is required to amend or repeal any provision
of this Certificate, then in addition to any other vote of the holders of voting
stock that is required by this Certificate or by law, the affirmative vote of at
least a majority of the outstanding shares of capital stock of the Corporation
entitled to vote on such amendment or repeal, voting together as a single class,
and the affirmative vote of at least a majority of the outstanding shares of
each class entitled to vote thereon as a class, shall be required to amend or
repeal any provision of this Certificate; provided, however, that the
affirmative vote of not less than 75% of the outstanding shares entitled to vote
on such amendment or repeal, voting together as a single class, and the
affirmative vote of not less than 75% of the outstanding shares of each class
entitled to vote thereon as a class, shall be required in any event to amend,
adopt any provision inconsistent with, or repeal any of the provisions of
Articles V through X of this Certificate.
IN WITNESS WHEREOF, the undersigned has executed this Amended and
Restated Certificate of Incorporation this 21st day of July, 1998.
/s/ Jeffrey Stone
------------------------
Jeffrey Stone
President
-7-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Subsidiaries of Tweeter Home Entertainment Group, Inc.:
- New England Audio Co., Inc.
Dow Stereo/Video
Subsidiaries of New England Audio Co., Inc.:
- NEA Delaware, Inc.
Subsidiaries of NEA Delaware, Inc.
- None.
THEG USA, L.P.:
New England Audio Co., Inc. - 1% General Partner
NEA Delaware, Inc. - 99% Limited Partner
Tweeter Home Entertainment Group Financing Company Trust
(a Massachusetts business trust):
Grantor: New England Audio Co., Inc.
Trustees: Samuel Bloomberg
Jeffrey Stone
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-67865 and 333-84607 of Tweeter Home Entertainment Group, Inc. and
Subsidiaries on Forms S-8 of our reports dated November 18, 1999, appearing in
this Annual Report on Form 10-K of Tweeter Home Entertainment Group, Inc. and
Subsidiaries for the year ended September 30, 1999.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
December 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 999,495
<SECURITIES> 0
<RECEIVABLES> 9,556,846
<ALLOWANCES> (650,000)
<INVENTORY> 62,135,516
<CURRENT-ASSETS> 75,270,265
<PP&E> 34,243,241
<DEPRECIATION> (14,306,442)
<TOTAL-ASSETS> 141,614,179
<CURRENT-LIABILITIES> 43,746,281
<BONDS> 0
0
0
<COMMON> 85,648
<OTHER-SE> 87,159,523
<TOTAL-LIABILITY-AND-EQUITY> 141,619,179
<SALES> 283,287,075
<TOTAL-REVENUES> 283,287,075
<CGS> 182,747,729
<TOTAL-COSTS> 182,747,729
<OTHER-EXPENSES> 85,103,474
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309,980
<INCOME-PRETAX> 15,125,892
<INCOME-TAX> 6,050,357
<INCOME-CONTINUING> 9,075,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,075,535
<EPS-BASIC> .63
<EPS-DILUTED> .57
</TABLE>
