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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
Commission file number: 0-24091
TWEETER HOME ENTERTAINMENT GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3417513
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10 PEQUOT WAY
CANTON, MA 02021
(Address of principal executive offices including zip code)
781-830-3000
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT MAY 3, 2000
Common Stock, $.01 par value 17,766,891
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
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PAGE
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999 and March 31, 2000 .................... 3
Condensed Consolidated Statements of Operations For the Three and Six Months Ended March 31,
1999 and 2000 ........................................................................................ 4
Condensed Consolidated Statements of Cash Flows For the Six Months Ended March 31,
1999 and 2000 ....................................................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements ....................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk ........................................... 11
Part II. OTHER INFORMATION..................................................................................... 11
</TABLE>
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 999,495 $ 45,263,716
Accounts receivable, net of allowance for doubtful accounts of
$650,000 at September 30, 1999 and $653,000 at March 31, 2000........... 9,556,846 13,992,429
Inventory............................................................... 62,135,516 72,437,218
Deferred tax assets..................................................... 1,899,604 1,899,604
Prepaid expenses and other current assets............................... 678,804 360,490
------------- -------------
Total current assets................................................. 75,270,265 133,953,457
Investment in joint venture............................................. - 2,919,367
Long-term investments................................................... 1,846,366 2,459,783
Property and equipment, net............................................. 34,243,241 39,444,427
Other assets, net....................................................... 191,616 124,167
Goodwill, net........................................................... 30,067,691 30,469,864
------------- -------------
TOTAL.............................................................. $ 141,619,179 $ 209,371,065
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt....................................... $ 35,551 $ 33,384
Amount due to bank...................................................... 6,023,056 6,452,688
Accounts payable........................................................ 18,377,139 14,057,833
Accrued expenses........................................................ 16,197,306 20,492,428
Customer deposits....................................................... 2,440,090 3,596,764
Deferred warranty....................................................... 673,139 610,470
------------- -------------
Total current liabilities.......................................... 43,746,281 45,243,567
------------- -------------
LONG-TERM DEBT:
Notes payable to bank................................................... 5,716,805 24,179
------------- -------------
OTHER LONG-TERM LIABILITIES:
Rent related accruals................................................... 3,197,657 3,424,774
Deferred warranty....................................................... 338,238 20,941
Deferred tax liabilities................................................ 1,095,527 1,398,066
Other long-term liabilities............................................. 279,500 18,480
------------- -------------
Total other long-term liabilities....................................... 4,910,922 4,862,261
------------- -------------
Total liabilities....................................................... 54,374,008 50,130,007
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares
issued and outstanding.......................................... - -
Common stock, $.01 par value, 60,000,000 shares authorized;
17,129,622 shares issued in September 30, 1999 and
19,428,797 in March 31, 2000.................................... 171,296 194,288
Additional paid in capital.............................................. 73,202,238 134,023,095
Accumulated other comprehensive income.................................. 301,520 612,398
Retained earnings....................................................... 15,482,982 26,311,268
------------- -------------
TOTAL.............................................................. 89,158,036 161,141,049
Less treasury stock: 1,905,586 shares in September 30, 1999 and
1,887,195 shares in March 31, 2000, at cost..................... (1,912,865) (1,899,991)
------------- -------------
Total stockholders' equity......................................... 87,245,171 159,241,058
------------- -------------
TOTAL.............................................................. $ 141,619,179 $ 209,371,065
============= =============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------- ------------------------------
1999 2000 1999 2000
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Total revenue $ 62,236,297 $ 87,492,253 $ 149,020,450 $ 212,305,816
Cost of sales (39,899,306) (55,256,770) (97,132,590) (134,421,837)
------------ ------------ ------------- -------------
Gross Profit 22,336,991 32,235,483 51,887,860 77,883,979
Selling expenses 16,423,470 22,804,151 33,922,218 49,786,100
Corporate, general and administrative expenses 3,221,843 4,586,196 7,262,535 9,233,498
Amortization of goodwill 255,400 337,650 470,800 669,542
------------ ------------ ------------- -------------
Income from operations 2,436,278 4,507,486 10,232,307 18,194,839
Income from joint venture - 90,985 - 198,334
Interest expense 36,540 87,887 237,038 346,084
------------ ------------ ------------- -------------
Income before income taxes 2,399,738 4,510,584 9,995,269 18,047,089
Income taxes 959,895 1,804,201 3,998,107 7,218,803
------------ ------------ ------------- -------------
NET INCOME $ 1,439,843 $ 2,706,383 $ 5,997,162 $ 10,828,286
============ ============ ============= =============
Basic earnings per share $ 0.10 $ 0.16 $ 0.44 $ 0.68
============ ============ ============= =============
Diluted earnings per share $ 0.09 $ 0.15 $ 0.39 $ 0.61
============ ============ ============= =============
Weighted average shares outstanding
Basic 14,518,524 16,604,852 13,702,744 15,937,210
Diluted 16,226,994 18,348,423 15,368,232 17,700,307
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
----------------------------------------
1999 2000
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 5,997,162 $ 10,828,286
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................................... 2,365,578 3,313,169
Equity earnings in joint venture investment................................. - (198,334)
Gain on disposal of equipment............................................... - (20,300)
Changes in operating assets and liabilities, net of effects from
acquisition of business:
Increase in accounts receivable........................................... (1,635,233) (4,435,583)
Increase in inventory..................................................... (2,483,768) (10,301,702)
Decrease (increase) in prepaid expenses and other current assets.......... 279,642 (490,379)
Increase (decrease) in accounts payable and accrued expenses.............. 3,291,767 (24,184)
Increase in customer deposits............................................. 208,140 1,156,674
Increase in deferred rent................................................. 214,158 227,117
Decrease in deferred warranty............................................. (597,995) (379,966)
Decrease in other liabilities............................................. (60,060) (261,020)
--------------- ---------------
Net cash provided by (used in) operating activities..................... 7,579,391 (586,222)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................. (6,319,867) (7,783,105)
Proceeds from sale of property and equipment................................... - 20,300
Acquisition of business........................................................ (8,837,927) (100,321)
--------------- ---------------
Net cash used in investing activities.................................. (15,157,794) (7,863,126)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount due to bank............................................................. 1,408,105 429,632
Payments of long-term debt..................................................... (5,250,000) (5,717,827)
Issuance of common stock, net of issuance cost................................. 24,433,242 60,067,269
Other equity transactions...................................................... 826,076 679,528
Investment in joint venture.................................................... - (2,745,033)
--------------- ---------------
Net cash provided by financing activities.............................. 21,417,423 52,713,569
--------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS........................................... 13,839,020 44,264,221
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 776,709 999,495
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 14,615,729 $ 45,263,716
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................... $ 218,328 $ 343,218
=============== ===============
Taxes........................................................................ $ 2,613,936 $ 5,303,528
=============== ===============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements of Tweeter Home
Entertainment Group, Inc. and its subsidiaries ("Tweeter" or the "Company"),
included herein, should be read in conjunction with the consolidated financial
statements and notes thereto included in Tweeter's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999.
2. Accounting Policies
The unaudited consolidated financial statements of Tweeter have been
prepared in accordance with U.S. generally accepted accounting principles. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation of the interim
consolidated financial statements have been included. Operating results for the
six-month period ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 2000.
Tweeter typically records its highest revenue and earnings in the first fiscal
quarter.
3. Earnings per Share
Tweeter computed earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings per share is calculated based on the weighted average number of common
shares outstanding, adjusted, in 1999, for the nominal issuance of certain
warrants. Diluted earnings per share is based on the weighted average number of
common shares outstanding, adjusted for the nominal issuance of certain
warrants, and dilutive potential common shares (common stock options and
warrants).
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2000 MARCH 31, 2000
----------------------------------- ---------------------------------
1999 2000 1999 2000
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Numerator:
Net income $ 1,439,843 $ 2,706,383 $ 5,997,162 $ 10,828,286
Denominator:
Weighted average common shares outstanding 14,348,614 16,604,852 13,360,288 15,937,210
Nominal issuance of warrants 169,910 - 342,456 -
----------- ------------ ----------- ------------
Weighted average shares outstanding 14,518,524 16,604,852 13,702,744 15,937,210
----------- ------------ ----------- ------------
Basic earnings per share $ 0.10 $ 0.16 $ 0.44 $ 0.68
=========== ============ =========== ============
DILUTED EARNINGS PER SHARE:
Numerator $ 1,439,843 $ 2,706,383 $ 5,997,162 $ 10,828,286
Denominator:
Weighted average shares outstanding 14,518,524 16,604,852 13,702,744 15,937,210
Potential common stock outstanding 1,708,470 1,743,571 1,665,488 1,763,097
----------- ------------ ----------- ------------
Total 16,226,994 18,348,423 15,368,232 17,700,307
----------- ------------ ----------- ------------
Diluted earnings per share $ 0.09 $ 0.15 $ 0.39 $ 0.61
=========== ============ =========== ============
</TABLE>
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4. Comprehensive Income
Comprehensive income for the three and six months ended March 31, 1999 and
March 31, 2000 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------- --------------------------------
1999 2000 1999 2000
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net income $ 1,439,843 $ 2,706,384 $ 5,997,162 $ 10,828,286
Change in fair value of long-term investments
(net of tax) - (142,931) - 310,878
----------- ------------ ----------- ------------
Comprehensive income $ 1,439,843 $ 2,563,453 $ 5,997,162 $ 11,139,164
=========== ============ =========== ============
</TABLE>
5. Investment in Joint Venture
On October 4, 1999, Tweeter formed a joint venture with Outpost.com,
organized as Tweeter.Outpost.com, LLC, to jointly market and sell consumer
electronics over the Internet. The joint venture is accounted for by the Company
under the equity method. The investment is presented on the balance sheet as
"Investment in joint venture." As of March 31, 2000, total assets and total
liabilities of the joint venture amounted to $6,882,459 and $1,485,790,
respectively. For the three and six months ended March 31, 2000, the joint
venture had total revenue of $1,541,525 and $3,080,377, respectively. Income
before income taxes for the joint venture for the three and six months ended
March 31, 2000 was $181,970 and $396,668, respectively.
6. Sound Installations
On November 1, 1999, the Company purchased certain assets and assumed
certain liabilities of Sound Installations, Inc., a custom home installation
company. Total purchase price and related costs amounted to approximately
$210,000, including the issuance of 5,124 shares of common stock with a market
value at issuance of $110,000. 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 this fiscal
quarter were not significant. Accordingly, pro forma information has not been
presented.
7. Follow-on Offering
On February 7, 2000, Tweeter completed a follow-on public offering of
2,550,000 shares of common stock. The primary purpose of the offering was to
raise cash for Tweeter's working capital and for potential acquisitions. The
Company sold 2,000,000 shares in the offering and selling stockholders sold
550,000 shares. Net proceeds to the Company from the offering were approximately
$60,100,000.
8. Subsequent Events
On April 1, 2000, Tweeter completed the acquisition of certain assets and
liabilities of United Audio Centers, Inc. This transaction will be accounted for
as a purchase and, accordingly, the results of operations of the Company's
business relating to United Audio Centers will be included in the consolidated
statements of operations from the acquisition date. The total purchase price was
approximately $6,500,000, all of which was paid through the issuance of 200,000
shares of the Company's common stock.
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9. New Accounting Pronouncements
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 was not required to
be implemented until fiscal year 2000. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement
No. 133." SFAS No. 137 delayed the original implementation date of SFAS No. 133
by one year. This will require that the Company implement this statement in
fiscal year 2001. Management is currently evaluating the effects that the
adoption of SFAS No. 133 will have on the consolidated financial statements.
On December 3, 1999, the Securities and Exchange Commission published Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. This SAB requires, among other things, that revenues derived from
products or services in which companies typically act as an agent be reported on
a net basis. This SAB is required to be implemented by the Company in fiscal
year 2001. Had SAB No. 101 been implemented for all periods presented, total
revenue and cost of sales would have decreased by approximately $1.5 million for
the three months ended March 31, 2000, $0.9 million for the three months ended
March 31, 1999, $2.8 million for the six months ended March 31, 2000 and $1.7
million for the six months ended March 31, 1999. The adoption of SAB No. 101 is
not expected to have any other impact on results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Tweeter is a specialty retailer of mid to high-end audio and video consumer
electronics products. Tweeter currently operates 83 stores under the Tweeter,
etc., Bryn Mawr Stereo & Video, HiFi Buys, Home Entertainment, Dow Stereo/Video
and United Audio Centers names.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
Total Revenue. Total revenue includes delivered sales, completed service
center work orders, insurance replacement and corporate sales. Total revenue
increased $25.3 million, or 40.5%, to $87.5 million for the three months ended
March 31, 2000 from $62.2 million for the three months ended March 31, 1999. The
increase was mainly comprised of $6.4 million from new stores, comparable store
sales increase of $7.8 million, $2.6 million from the acquisition of Home
Entertainment, and $8.4 million from the acquisition of Dow Stereo/Video.
Comparable store sales, excluding Home Entertainment and Dow Stereo/Video,
increased by 12.2%. The Home Entertainment stores had a total comparable store
sales increase of 50.7%, and the DOW Stereo/Video stores had a comparable store
sales decrease of 5.9%. New technology products contributed to the sales
increase for the second quarter of fiscal 2000. DVD players represented
approximately 6.3% of total revenue for the three months ended March 31, 2000,
as compared to 4.1% for the same period in the prior year. Camcorder business
was up 20.3% and digital camcorders accounted for 65.7% of the camcorder sales.
Digital televisions accounted for 62.8% of all projection television sets sold
in the fiscal quarter ended March 31, 2000.
Gross Profit. Cost of sales includes merchandise, net delivery costs,
distribution costs, purchase discounts, and vendor volume rebates. Cost of sales
increased $15.4 million, or 38.5%, to $55.3 million for the three months ended
March 31, 2000 from $39.9 million for the three months ended March 31, 1999.
Gross profit increased $9.9 million, or 44.3%, to $32.2 million for the three
months ended March 31, 2000 from $22.3 million for the three months ended March
31, 1999. The gross margin percentage increased 90 basis points, to 36.8% for
the three months ended March 31, 2000, from 35.9% for the three months ended
March 31, 1999. The increase in margin was primarily due to increased sales of
new digital technology products, such as DVD players, digital televisions and
digital camcorders. These digital products realize higher gross margin and
higher average ticket than their analog counterparts. This increase was offset
by growth in the video category relative to other categories that Tweeter sells.
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Video products generally realize lower gross margin than audio products.
Tweeter expects sales of digital televisions to accelerate over the next few
years, which will tend to increase video sales as a percentage of the Company's
overall mix. It is a particular challenge for Tweeter to enact strategies such
as its "Sell Audio with Video" strategy in order to offset the margin erosion
that could occur due to an increase in sales of video products relative to the
other categories of products that Tweeter sells.
Selling Expenses. Selling expenses include the compensation of store
personnel, occupancy costs, store level depreciation, advertising expenses,
pre-opening expenses and credit card fees and excludes corporate, general and
administrative expenses. Selling expenses increased $6.4 million, or 38.9%, to
$22.8 million for the three months ended March 31, 2000 from $16.4 million for
the three months ended March 31, 1999. As a percentage of revenue, selling
expenses decreased to 26.1% for the three months ended March 31, 2000 from 26.4%
for the three months ended March 31, 1999. This decrease was primarily due to
lower net advertising costs resulting from additional coop advertising money
received from our vendors.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses include the costs of executive officers, finance,
merchandising, marketing, information systems, human resources, training, and
related support functions. Corporate, general and administrative expenses
increased 42.4% to $4.6 million for the three months ended March 31, 2000 from
$3.2 million for the three months ended March 31, 1999. As a percentage of total
revenue, corporate general and administrative expenses remained constant at
5.2%.
Amortization of Goodwill. Amortization of goodwill increased to $338,000
for the three months ended March 31, 2000 from $255,000 for the three months
ended March 31, 1999. The increase was due to the completion of the Home
Entertainment acquisition on February 1, 1999 and the Dow Stereo/Video
acquisition on July 1, 1999.
Interest Expense. Interest expense increased to $88,000 for the three months
ended March 31, 2000 from $37,000 for the three months ended March 31, 1999. The
increase was due to the incurrence of higher debt levels for the fiscal 2000
period in order to facilitate the building of new stores and the relocation of
existing stores.
Income Taxes. The effective tax rate for the fiscal quarters ended March
31, 2000 and March 31, 1999 was 40.0%. Tweeter expects that the income tax rate
for the fiscal year ending September 30, 2000 will remain substantially
unchanged.
Seasonality. Tweeter's operations, in common with other retailers, are
subject to seasonal influences. Historically, Tweeter has realized more of its
revenue and net earnings in the first fiscal quarter, which includes the holiday
season, than in any other fiscal quarter. The net earnings of any interim
quarter are seasonally disproportionate to net sales since certain selling
expenses and administrative expenses are relatively fixed during the year.
Therefore, interim results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
SIX MONTHS ENDED MARCH 31, 2000 AS COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
Total Revenue. Total revenue increased $63.3 million, or 42.5%, to $212.3
million for the six months ended March 31, 2000 from $149.0 million for the six
months ended March 31, 1999. The increase was mainly comprised of $14.1 million
from new stores, $17.1 million from comparable store sales growth, $12.0 million
from the acquisition of Home Entertainment of Texas and $19.3 million from the
acquisition of Dow Stereo/Video. Comparable store sales increased by 12.0%
excluding the Home Entertainment and Dow Stereo/Video chains. New technology
products fueled sales performance for the first six months of fiscal 2000. DVD
players represented approximately 7.7% of total revenue for the six months ended
March 31, 2000 as compared to approximately 5.1% of total revenue for the six
months ended March 31, 1999.
Gross Profit. Cost of sales increased $37.3 million, or 38.4% to $134.4
million for the six months ended March 31, 2000 from $97.1 million for the six
months ended March 31, 1999. Gross profit increased $26.0 million, or 50.1% to
$77.9 million for the six months ended March 31, 2000 from $51.9 million for the
six months ended March 31, 1999. The gross margin increased 190 basis points to
36.7% from 34.8% last year. The increase in margin is primarily due to increased
sales of new digital technology products, such as DVD players, digital
televisions and digital camcorders.
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<PAGE> 10
These digital products realize higher gross margin and higher average ticket
than their analog counterparts. This increase was offset by growth in the video
category relative to other categories that Tweeter sells. Video products
generally realize lower gross margin than audio products. The Company expects
sales of digital televisions to accelerate over the next few years, which will
tend to increase video sales as a percentage of the Company's overall mix.
Selling Expenses. Selling expenses increased $15.9 million, or 46.8%, to
$49.8 million for the six months ended March 31, 2000 from $33.9 million for the
six months ended March 31, 1999. As a percentage of revenue, selling expenses
increased to 23.5% for the six months ended March 31, 2000 from 22.8% in the
prior year period. This increase was primarily the result of increased payroll
costs associated with higher gross margin sales, increased bank fees due to
extended credit card financing promotions offset by lower net advertising costs.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses for the six months ended March 31, 2000 increased 27.1%
to $9.2 million from $7.3 million for the six months ended March 31, 1999. As a
percentage of total revenue, corporate general and administrative expenses
decreased to 4.3% for the six months ended March 31, 2000 from 4.9% for the
prior year period. This decrease was the result of leveraging the additional
sales volume of new stores and the acquisitions of Home Entertainment and Dow
Stereo/Video.
Amortization of Goodwill. Amortization of goodwill increased to $670,000 for
the six months ended March 31, 2000 from $471,000 for the six months ended March
31, 1999. The increase was due to the Home Entertainment acquisition on February
1, 1999, the Dow Stereo acquisition on July 1, 1999 as well as the acquisition
of two custom installation companies.
Interest Expense. Interest expense increased to $346,000 for the six months
ended March 31, 2000 from $237,000 for the six months ended March 31, 1999. The
increase was due to the incurrence of higher debt levels for the fiscal 2000
period in order to facilitate the building of new stores and the relocation of
existing stores.
Income Taxes. The effective tax rate for the six months ended March 31, 2000
and March 31, 1999 was 40.0%. Tweeter expects that the income tax rate for the
year ending September 30, 2000 will approximate 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $586,000 for the six months ended
March 31, 2000 compared to $7.6 million in cash provided by operating activities
for the six months ended March 31, 1999. Cash used by operations in 2000 was
primarily the result of increases in inventory of $10.3 million and accounts
receivable of $4.4 million. Inventory was maintained at a higher level due to
the lack of availability of the newer digital products. This was offset by $10.8
million in net income, depreciation and amortization of $3.3 million and an
increase in customer deposits of $1.2 million, as well as minor changes in other
operating accounts.
At March 31, 2000, working capital was $88.7 million, compared to $31.5
million at September 30, 1999. The increase was primarily due to the follow-on
public offering completed on February 7, 2000. The ratio of current assets to
current liabilities was 2.96 to 1 at March 31, 2000 and 1.72 to 1 at September
30, 1999. Capital expenditures for the six months ended March 31, 2000 were $7.8
million, primarily used for the building of new stores and the relocation of
existing stores.
Net cash provided by financing activities during the six months ended March
31, 2000 was $52.7 million, comprised mainly of proceeds generated from the sale
of 2,000,000 shares of common stock on February 7, 2000. This was offset by
payments made for long-term debt of $5.7 million and an investment in our
Tweeter.Outpost.com joint venture of $2.7 million.
The Company had available at March 31, 2000 a $50,000,000 revolving credit
facility, and there were no balances outstanding at March 31, 2000.
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<PAGE> 11
On January 11, 2000, Tweeter filed a registration statement with the
Securities and Exchange Commission for a public offering of both primary shares
and shares that were sold by certain selling stockholders. The offering
consisted of 2,550,000 shares of common stock, 550,000 of which were offered by
selling stockholders and 2,000,000 of which were offered by the Company. The
Company raised proceeds of $60.1 million net of related expenses.
On April 1, 2000, Tweeter completed the acquisition of certain assets and
liabilities of United Audio Centers, Inc. This transaction will be accounted for
as a purchase and, accordingly, the results of operations of the Company's
business relating to United Audio Centers will be included in the consolidated
statements of operations from the acquisition date. The total purchase price was
approximately $6,500,000, all of which was paid through the issuance of 200,000
shares of the Company's common stock.
Tweeter believes that the net proceeds from the February 2000 offering,
together with cash generated by operations and available borrowings under its
credit facility will be sufficient to finance its working capital and capital
expenditure requirements for at least the next twelve months. If management
pursues additional acquisitions within this period, however, such acquisitions
could strain Tweeter's capital resources. Furthermore, due to the seasonality of
its business, Tweeter's working capital needs are significantly higher the
fiscal third and fourth quarters and there is the possibility that this could
cause unforeseen capital constraints in the future.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "expects,"
"anticipates," "believes" and words of similar import, constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward looking statements are subject to various
risks and uncertainties, including those relating to Company growth and
acquisitions, dependence on key personnel, the need for additional financing,
competition and seasonal fluctuations, and those referred to in Tweeter's
Registration Statement filed on Form S-3 (SEC file number 333-94433) on January
11, 2000 and in the Company's Annual Report on Form 10-K filed on December 10,
1999, that could cause actual future results and events to differ materially
from those currently anticipated. Readers are cautioned not to place undue
reliance on these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tweeter's credit facility provides for borrowings which bear interest at
variable rates based on either (i) the higher of Fleet National Bank's Base Rate
or the Federal Funds rate plus 0.50% or (ii) the London Interbank Offering Rate
(LIBOR) plus an applicable margin varying from 100 to 175 basis points. Tweeter
had no borrowings outstanding pursuant to the credit facility as of March 31,
2000. Tweeter believes that the effect, if any, of reasonably possible near-term
changes in interest rates on Tweeter's financial position, results of
operations, and cash flows should not be material.
At March 31, 2000, the Company had approximately $2.4 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 approximately $240,000.
Currently, Tweeter does not enter into financial instrument transactions
for speculative purposes or to manage interest rate exposure.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
11
<PAGE> 12
On January 11, 2000, Tweeter filed a registration statement on Form S-3
with the Securities and Exchange Commission. The prospectus related to 2,550,000
shares of Tweeter Home Entertainment Group, Inc. common stock, of which 550,000
shares were offered by selling stockholders and 2,000,000 million shares were
offered by the Company. The primary purpose of the offering was to raise cash
for the Company for working capital and for general corporate purposes,
including possible strategic acquisitions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
On April 4, 2000, Tweeter filed with the Securities and Exchange Commission a
Current Report on form 8-K to announce that it had completed the acquisition of
United Audio Centers, Inc., located in Chicago, Illinois.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By: /s/ Joseph Mcguire
----------------------------------
JOSEPH MCGUIRE,
Chief Financial Officer
Date: May 3, 2000
13
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