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, 2003
Commission file number: 0-24091
| Tweeter Home Entertainment Group, Inc. | |
| DELAWARE | 04-3417513 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
40 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 documents and 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes[ ] No [X]
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 12, 2003 | |||
Common Stock, $.01 par value |
23,893,915 | |||
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
INDEX
| PAGE | ||||||||
| Part I. | FINANCIAL INFORMATION |
|||||||
| Item 1 | Condensed Consolidated Financial Statements (Unaudited) |
|||||||
Consolidated Balance Sheets as of September 30, 2002
and March 31, 2003 |
3 | |||||||
Consolidated Statements of Income for the Three Months and Six
Months Ended March 31, 2002 and 2003 |
4 | |||||||
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 2002 and 2003 |
5 | |||||||
Notes to Unaudited Consolidated Financial Statements |
6 | |||||||
| Item 2 | Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
9 | ||||||
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk |
12 | ||||||
| Item 4 | Controls and Procedures |
12 | ||||||
| Part II. | OTHER INFORMATION |
|||||||
| Item 4 | Submissions of Matters to a vote of Security Holders |
13 | ||||||
| Item 5 | Other Information |
13 | ||||||
| Item 6 | Exhibits and Reports on Form 8-K |
13 | ||||||
2
Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Balance Sheets
| September 30, | March 31, | |||||||||
| 2002 | 2003 | |||||||||
| (Unaudited) | ||||||||||
Assets |
||||||||||
Current Assets: |
||||||||||
Cash and cash equivalents |
$ | 2,282,635 | $ | 1,748,400 | ||||||
Accounts receivable, net of allowance for doubtful accounts of
$1,075,000 at September 30, 2002 and $1,273,000 at March 31, 2003 |
23,116,040 | 23,486,677 | ||||||||
Inventory |
143,234,060 | 143,910,846 | ||||||||
Deferred tax assets |
3,943,838 | 4,358,294 | ||||||||
Prepaid expenses and other current assets |
17,084,739 | 14,668,428 | ||||||||
Total current assets |
189,661,312 | 188,172,645 | ||||||||
Property and equipment, net |
134,310,705 | 140,714,065 | ||||||||
Long-term investments |
1,103,280 | 1,103,362 | ||||||||
Deferred tax assets |
7,273,068 | 7,613,897 | ||||||||
Intangible assets, net |
2,606,667 | 2,266,667 | ||||||||
Other assets, net |
923,169 | 1,726,454 | ||||||||
Total |
$ | 335,878,201 | $ | 341,597,090 | ||||||
Liabilities and Stockholders’ Equity |
||||||||||
Current Liabilities: |
||||||||||
Current portion of long-term debt |
$ | 288,745 | $ | 239,679 | ||||||
Amount due to bank |
4,520,513 | 11,265,450 | ||||||||
Accounts payable |
51,550,051 | 32,556,901 | ||||||||
Accrued expenses |
27,449,859 | 24,592,795 | ||||||||
Customer deposits |
16,259,734 | 16,432,535 | ||||||||
Deferred warranty |
301,583 | 301,583 | ||||||||
Total current liabilities |
100,370,485 | 85,388,943 | ||||||||
Long-Term Debt |
50,073,501 | 67,881,544 | ||||||||
Other Long-Term Liabilities: |
||||||||||
Rent related accruals |
10,338,737 | 10,488,064 | ||||||||
Deferred warranty |
484,673 | 209,590 | ||||||||
Total other long-term liabilities |
10,823,410 | 10,697,654 | ||||||||
Total liabilities |
161,267,396 | 163,968,141 | ||||||||
Stockholders’ Equity |
||||||||||
Preferred stock, $.01 par value, 10,000,000 shares authorized, no
shares issued |
— | — | ||||||||
Common stock, $.01 par value, 60,000,000 shares authorized;
25,378,308 shares issued at September 30, 2002 and 25,396,586
at March 31, 2003 |
253,783 | 253,966 | ||||||||
Additional paid in capital |
292,464,945 | 292,707,367 | ||||||||
Accumulated other comprehensive income |
49,280 | 49,329 | ||||||||
Accumulated deficit |
(116,305,296 | ) | (113,561,888 | ) | ||||||
Total |
176,462,712 | 179,448,774 | ||||||||
Less treasury stock: 1,818,503 shares at September 30, 2002 and
1,772,671 shares at March 31, 2003, at cost |
(1,851,907 | ) | (1,819,825 | ) | ||||||
Total stockholders’ equity |
174,610,805 | 177,628,949 | ||||||||
Total |
$ | 335,878,201 | $ | 341,597,090 | ||||||
See notes to unaudited condensed consolidated financial statements.
3
Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||
| March 31, | March 31, | |||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | |||||||||||||||
Total revenue |
$ | 185,822,422 | $ | 181,970,524 | $ | 437,735,369 | $ | 431,620,401 | ||||||||||
Cost of sales |
(119,459,995 | ) | (117,296,324 | ) | (279,470,570 | ) | (279,930,389 | ) | ||||||||||
Gross Profit |
66,362,427 | 64,674,200 | 158,264,799 | 151,690,012 | ||||||||||||||
Selling expenses |
51,177,133 | 57,286,706 | 109,661,596 | 123,743,800 | ||||||||||||||
Corporate, general and administrative expenses |
9,895,046 | 10,481,697 | 19,905,451 | 21,809,811 | ||||||||||||||
Amortization of intangibles |
415,635 | 170,000 | 790,885 | 340,000 | ||||||||||||||
Income (loss) from operations |
4,874,613 | (3,264,203 | ) | 27,906,867 | 5,796,401 | |||||||||||||
Income from joint venture |
— | — | 71,952 | — | ||||||||||||||
Interest expense, net |
551,045 | 834,238 | 1,149,838 | 1,220,914 | ||||||||||||||
Income (loss) before income taxes |
4,323,568 | (4,098,441 | ) | 26,828,981 | 4,575,487 | |||||||||||||
Income tax expense (benefit) |
1,731,760 | (1,637,493 | ) | 10,733,926 | 1,832,079 | |||||||||||||
NET INCOME (LOSS) |
$ | 2,591,808 | $ | (2,460,948 | ) | $ | 16,095,055 | $ | 2,743,408 | |||||||||
Basic earnings (loss) per share |
$ | 0.11 | $ | (0.10 | ) | $ | 0.69 | $ | 0.12 | |||||||||
Diluted earnings (loss) per share |
$ | 0.11 | $ | (0.10 | ) | $ | 0.66 | $ | 0.12 | |||||||||
Weighted average shares outstanding: |
||||||||||||||||||
Basic |
23,364,781 | 23,596,396 | 23,190,794 | 23,580,726 | ||||||||||||||
Diluted |
24,371,799 | 23,596,396 | 24,341,117 | 23,763,801 | ||||||||||||||
See notes to unaudited condensed consolidated financial statements.
4
Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2002 | 2003 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 16,095,055 | $ | 2,743,408 | ||||||||
Adjustments to reconcile net income to net cash used by
operating activities: |
||||||||||||
Depreciation and amortization |
8,523,327 | 10,339,374 | ||||||||||
Income from joint venture |
(71,952 | ) | — | |||||||||
(Gain) loss on disposal of equipment |
(6,950 | ) | 383,695 | |||||||||
Provision for uncollectible accounts |
334,071 | 62,100 | ||||||||||
Deferred income tax provision |
(566,413 | ) | (755,285 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Increase in accounts receivable |
(2,395,262 | ) | (432,737 | ) | ||||||||
Increase in inventory |
(24,126,513 | ) | (676,786 | ) | ||||||||
(Increase) decrease in prepaid expenses and other assets |
(1,608,446 | ) | 1,508,026 | |||||||||
Decrease in accounts payable and accrued expenses |
(15,788,859 | ) | (21,850,247 | ) | ||||||||
Increase in customer deposits |
1,240,914 | 172,801 | ||||||||||
Increase in deferred rent |
41,596 | 149,327 | ||||||||||
Decrease in deferred warranty |
(474,536 | ) | (275,083 | ) | ||||||||
Net cash used by operating activities |
(18,803,968 | ) | (8,631,407 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of property and equipment |
(28,893,692 | ) | (16,709,517 | ) | ||||||||
Net proceeds from sale of property and equipment |
6,950 | 28,088 | ||||||||||
Sale of investments |
63,519 | — | ||||||||||
Cash paid for acquisitions |
(3,799,969 | ) | — | |||||||||
Distibutions from joint venture |
1,033,175 | — | ||||||||||
Net cash used in investing activities |
(31,590,017 | ) | (16,681,429 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Increase in amount due to bank |
23,357,643 | 6,744,937 | ||||||||||
Net proceeds from revolving credit facility |
24,674,558 | 17,758,977 | ||||||||||
Proceeds from options excercised |
1,925,685 | 70,751 | ||||||||||
Proceeds from employee stock purchase plan |
170,473 | 203,936 | ||||||||||
Net cash provided by financing activities |
50,128,359 | 24,778,601 | ||||||||||
DECREASE IN CASH AND CASH EQUIVALENTS |
(265,626 | ) | (534,235 | ) | ||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
3,277,969 | 2,282,635 | ||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 3,012,343 | $ | 1,748,400 | ||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Interest |
$ | 1,144,549 | $ | 715,595 | ||||||||
Taxes |
$ | 6,602,777 | $ | 561,000 | ||||||||
Noncash
investing activities: |
||||||||||||
Issuance of common stock and assumption of options for acquisitions |
$ | 1,000,016 | $ | — | ||||||||
See notes to unaudited condensed consolidated financial statements.
5
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, 2002.
2. Accounting Policies
The unaudited consolidated financial statements of Tweeter have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) 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, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2003. Tweeter typically records its highest revenue and earnings in its first fiscal quarter.
Stock-based compensation – Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, addresses the financial accounting and reporting standards for stock or other equity-based compensation arrangements. The Company provides disclosures based on the fair value as permitted by SFAS No. 123. Stock or other equity-based compensation for non-employees must be accounted for under the fair value-based method as required by SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and other related interpretations. Under this method, the equity-based instrument is valued at either the fair value of the consideration received or the equity instrument issued on the date of grant. The resulting compensation cost is recognized and charged to operations over the service period, which is usually the vesting period.
For purposes of determining the disclosures required by SFAS No. 123, the fair value of each stock option granted in the three and six months ended March 31, 2002 and March 31, 2003 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:
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2002 | 2003 | 2002 | 2003 | |||||||||||||
Risk free interest rate |
4.18 | % | 2.84 | % | 4.12 | % | 2.71 | % | ||||||||
Expected life of options grants |
5.4 | 5.4 | 5.4 | 5.4 | ||||||||||||
Expected volatility of underlying stock |
96.53 | % | 94.62 | % | 94.40 | % | 90.17 | % | ||||||||
Had compensation cost for the Company’s stock option plans been determined consistent with SFAS No. 123, pro forma net income (loss) and pro forma diluted earnings (loss) per share would have been:
6
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2002 | 2003 | 2002 | 2003 | |||||||||||||
Net net income (loss) as reported |
$ | 2,591,808 | $ | (2,460,948 | ) | $ | 16,095,055 | $ | 2,743,408 | |||||||
Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects |
(1,268,585 | ) | (1,238,738 | ) | (2,527,461 | ) | (2,476,547 | ) | ||||||||
Pro forma net income (loss) |
$ | 1,323,223 | $ | (3,699,686 | ) | $ | 13,567,594 | $ | 266,861 | |||||||
Earnings (loss) per share |
||||||||||||||||
Basic — as reported |
$ | 0.11 | $ | (0.10 | ) | $ | 0.69 | $ | 0.12 | |||||||
Basic — pro forma |
$ | 0.06 | $ | (0.16 | ) | $ | 0.59 | $ | 0.01 | |||||||
Diluted — as reported |
$ | 0.11 | $ | (0.10 | ) | $ | 0.66 | $ | 0.12 | |||||||
Diluted — pro forma |
$ | 0.05 | $ | (0.16 | ) | $ | 0.56 | $ | 0.01 | |||||||
3. Earnings per Share
The weighted average shares used in computing basic and diluted net income per share are presented in the table below. Certain options are not included in the earnings per share calculation when the exercise price is greater than the average market price for the period. The number of options excluded in each period is reflected in the table.
| Three Months Ended | Six Months Ended | ||||||||||||||||
| March 31, | < | ||||||||||||||||