e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2006 |
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
___________________ to ___________________ |
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Commission File Number: 0-24091
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| Tweeter Home Entertainment Group, Inc. |
| (Exact name of registrant as specified in its charter) |
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| Delaware |
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04-3417513 |
| (State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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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 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated
filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o
No þ
Indicate the number of shares outstanding of
each of the registrant’s classes of common stock,
as of the latest practicable date.
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| TITLE OF CLASS |
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OUTSTANDING AT August 2, 2006 |
| Common Stock, $0.01 par value
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25,475,516 |
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, |
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September 30, |
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June 30, |
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2006 |
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2005 |
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2005 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,001,538 |
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$ |
1,309,871 |
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$ |
1,425,126 |
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Accounts receivable, net of allowance
for doubtful accounts of $1,457,653,
$1,400,172, and $754,989, respectively |
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24,063,188 |
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28,189,414 |
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23,780,637 |
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Inventory |
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102,321,991 |
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111,506,056 |
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102,409,660 |
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Refundable income taxes |
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9,013,361 |
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9,006,740 |
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10,438,418 |
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Prepaid expenses and other current assets |
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6,011,182 |
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8,189,625 |
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9,415,727 |
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Total current assets |
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142,411,260 |
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158,201,706 |
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147,469,568 |
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Property and equipment, net |
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99,483,442 |
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115,306,933 |
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118,752,686 |
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Long-term investments |
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2,698,544 |
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2,220,353 |
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1,766,741 |
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Intangible assets, net |
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56,666 |
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566,667 |
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736,667 |
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Goodwill |
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5,250,868 |
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5,250,868 |
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5,250,868 |
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Other assets, net |
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1,635,556 |
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2,470,599 |
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1,622,969 |
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Total Assets |
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$ |
251,536,336 |
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$ |
284,017,126 |
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$ |
275,599,499 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Current portion of long-term debt |
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$ |
6,656,751 |
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$ |
9,278,849 |
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$ |
15,930,161 |
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Current portion of deferred consideration |
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451,533 |
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484,866 |
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484,866 |
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Accounts payable |
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30,679,699 |
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34,885,458 |
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36,033,843 |
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Accrued expenses |
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44,089,848 |
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48,775,158 |
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42,286,678 |
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Customer deposits |
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20,724,606 |
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25,623,763 |
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20,776,176 |
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Deferred warranty |
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— |
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— |
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19,750 |
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Total current liabilities |
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102,602,437 |
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119,048,094 |
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115,531,474 |
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Long-term debt |
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37,349,143 |
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62,617,263 |
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38,179,877 |
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Rent related accruals |
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21,045,745 |
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16,939,556 |
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16,463,630 |
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Deferred consideration |
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2,306,897 |
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2,545,547 |
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2,666,763 |
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Commitments and Contingencies
Stockholders’ Equity: |
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Preferred stock, $.01 par value,
10,000,000 shares authorized, no shares
issued |
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— |
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— |
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— |
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Common stock, $.01 par value, 60,000,000
shares authorized; 27,012,797,
26,249,725 and 26,245,750 shares issued,
respectively |
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270,128 |
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262,497 |
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262,457 |
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Additional paid in capital |
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309,606,213 |
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304,663,875 |
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304,594,395 |
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Accumulated other comprehensive income |
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222,539 |
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112,329 |
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101,327 |
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Accumulated deficit |
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(220,210,874 |
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(220,488,691 |
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(200,498,969 |
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Treasury stock, 1,538,481, 1,577,698 and
1,603,571 shares, at cost, respectively |
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(1,655,892 |
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(1,683,344 |
) |
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(1,701,455 |
) |
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Total stockholders’ equity |
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88,232,114 |
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82,866,666 |
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102,757,755 |
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Total Liabilities and Stockholders’ Equity |
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$ |
251,536,336 |
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$ |
284,017,126 |
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$ |
275,599,499 |
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See notes to unaudited condensed consolidated financial statements.
2
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months ended |
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Nine Months ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Total revenue |
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$ |
159,255,995 |
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$ |
166,577,644 |
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$ |
613,010,639 |
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$ |
606,840,001 |
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Cost of sales |
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(94,674,514 |
) |
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(103,297,849 |
) |
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(358,600,354 |
) |
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(365,521,887 |
) |
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Gross profit |
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64,581,481 |
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63,279,795 |
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254,410,285 |
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241,318,114 |
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Selling, general and administrative expenses |
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78,137,969 |
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80,100,861 |
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250,945,771 |
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255,473,856 |
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Amortization of intangibles |
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170,000 |
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170,000 |
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510,000 |
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510,000 |
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Restructuring charges |
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— |
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16,867,876 |
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483,530 |
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16,867,876 |
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Income (loss) from continuing operations |
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(13,726,488 |
) |
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(33,858,942 |
) |
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2,470,984 |
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(31,533,618 |
) |
Interest expense |
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(1,000,822 |
) |
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|
(780,137 |
) |
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(3,500,447 |
) |
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(2,008,369 |
) |
Interest income |
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— |
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30 |
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|
243 |
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|
14,071 |
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Gain on sale of equity investments |
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— |
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|
9,869,065 |
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— |
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9,869,065 |
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Loss from continuing operations before
income taxes |
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(14,727,310 |
) |
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(24,769,984 |
) |
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(1,029,220 |
) |
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(23,658,851 |
) |
Income tax provision (benefit) |
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(110,000 |
) |
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— |
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— |
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|
21,920,538 |
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Loss from continuing operations before
income from equity investments |
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(14,617,310 |
) |
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(24,769,984 |
) |
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|
(1,029,220 |
) |
|
|
(45,579,389 |
) |
Income from equity investments |
|
|
275,353 |
|
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|
248,566 |
|
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|
1,461,384 |
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|
539,511 |
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Net income (loss) from continuing operations |
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(14,341,957 |
) |
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(24,521,418 |
) |
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|
432,164 |
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(45,039,878 |
) |
Discontinued operations: |
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Net loss from discontinued operations |
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(25,733 |
) |
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|
(7,422,546 |
) |
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(154,347 |
) |
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(9,323,039 |
) |
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Net income (loss) |
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$ |
(14,367,690 |
) |
|
$ |
(31,943,964 |
) |
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$ |
277,817 |
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$ |
(54,362,917 |
) |
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Basic earnings (loss) per share: |
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Income (loss) from continuing operations |
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$ |
(0.57 |
) |
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$ |
(1.00 |
) |
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$ |
0.02 |
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$ |
(1.84 |
) |
Loss from discontinued operations |
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— |
|
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|
(0.30 |
) |
|
|
(0.01 |
) |
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|
(0.38 |
) |
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Basic net income (loss) per share |
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$ |
(0.57 |
) |
|
$ |
(1.30 |
) |
|
$ |
0.01 |
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$ |
(2.22 |
) |
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Diluted earnings (loss) per share: |
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Income (loss) from continuing operations |
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$ |
(0.57 |
) |
|
$ |
(1.00 |
) |
|
$ |
0.02 |
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|
$ |
(1.84 |
) |
Loss from discontinued operations |
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|
— |
|
|
|
(0.30 |
) |
|
|
(0.01 |
) |
|
|
(0.38 |
) |
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Diluted net income (loss) per share |
|
$ |
(0.57 |
) |
|
$ |
(1.30 |
) |
|
$ |
0.01 |
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$ |
(2.22 |
) |
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Weighted average shares outstanding: |
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Basic |
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25,369,473 |
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|
24,600,731 |
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|
25,044,992 |
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24,538,937 |
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Diluted |
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25,369,473 |
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24,600,731 |
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25,472,935 |
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24,538,937 |
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See notes to unaudited condensed consolidated financial statements.
3
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| |
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Nine Months Ended |
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| |
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June 30, |
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| |
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2006 |
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2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
|
$ |
277,817 |
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|
$ |
(54,362,917 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
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|
|
|
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Depreciation and amortization |
|
|
19,464,611 |
|
|
|
18,699,385 |
|
Accretion expense |
|
|
125,623 |
|
|
|
— |
|
Stock-based compensation — vendor |
|
|
191,000 |
|
|
|
— |
|
Stock-based compensation — employee |
|
|
547,882 |
|
|
|
75,727 |
|
Income from equity investment |
|
|
(1,461,384 |
) |
|
|
(733,475 |
) |
Distributions from equity investment |
|
|
625,727 |
|
|
|
1,435,754 |
|
Gain on sale of equity investments, net |
|
|
— |
|
|
|
(9,869,065 |
) |
Impairment charge |
|
|
37,121 |
|
|
|
7,853,925 |
|
Loss on disposal of property and equipment |
|
|
492,645 |
|
|
|
28,589 |
|
Allowance for doubtful accounts |
|
|
322,286 |
|
|
|
308,015 |
|
Tax benefit from options exercised |
|
|
— |
|
|
|
45,853 |
|
Deferred income tax provision |
|
|
— |
|
|
|
22,282,497 |
|
Amortization of deferred gain on sale leaseback |
|
|
(182,613 |
) |
|
|
(33,632 |
) |
Recognition of deferred lease incentives |
|
|
(473,871 |
) |
|
|
179,670 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,803,940 |
|
|
|
(6,292,730 |
) |
Inventory |
|
|
9,327,016 |
|
|
|
3,909,846 |
|
Prepaid expenses and other assets |
|
|
2,611,484 |
|
|
|
(3,329,642 |
) |
Accounts payable and accrued expenses |
|
|
(7,807,594 |
) |
|
|
7,928,694 |
|
Customer deposits |
|
|
(4,899,157 |
) |
|
|
(1,117,729 |
) |
Deferred warranty |
|
|
— |
|
|
|
(73,875 |
) |
Rent related accruals |
|
|
131,574 |
|
|
|
2,196,205 |
|
Deferred consideration |
|
|
(403,219 |
) |
|
|
(396,983 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
22,730,888 |
|
|
|
(11,265,888 |
) |
|
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|
|
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|
CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(13,176,748 |
) |
|
|
(19,755,118 |
) |
Proceeds from sale-leaseback transaction, net of fees |
|
|
13,521,951 |
|
|
|
2,946,707 |
|
Proceeds from sale of property and equipment |
|
|
17,416 |
|
|
|
231,638 |
|
Proceeds from sale of equity investments |
|
|
— |
|
|
|
10,248,966 |
|
Return of equity investments |
|
|
249,839 |
|
|
|
— |
|
Purchase of equity investments |
|
|
— |
|
|
|
(300,000 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
612,458 |
|
|
|
(6,627,807 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
(Decrease) increase in amount due to bank |
|
|
(2,620,704 |
) |
|
|
12,756,970 |
|
Net (repayments) proceeds of long-term debt |
|
|
(25,269,514 |
) |
|
|
3,166,864 |
|
Proceeds from options exercised |
|
|
4,015,097 |
|
|
|
337,161 |
|
Proceeds from employee stock purchase plan |
|
|
223,442 |
|
|
|
256,821 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(23,651,679 |
) |
|
|
16,517,816 |
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(308,333 |
) |
|
|
(1,375,879 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
1,309,871 |
|
|
|
2,801,005 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
1,001,538 |
|
|
$ |
1,425,126 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
4
TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited interim condensed consolidated financial statements of Tweeter Home
Entertainment Group, Inc. and its subsidiaries (“Tweeter” or the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of America. In the
opinion of management, all material adjustments (consisting only of normal and recurring
adjustments) considered necessary for a fair presentation of the interim condensed consolidated
financial statements have been included. Operating results for the nine-month period ended June
30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2006. Tweeter typically records its highest revenue and income in its first
fiscal quarter.
Certain information and footnote disclosures normally included in our annual consolidated
financial statements have been condensed or omitted. Accordingly, the accompanying financial
information should be read in conjunction with the consolidated financial statements and notes
thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September
30, 2005.
2. Summary of Selected Accounting Policies
Inventory — Inventory, which consists primarily of goods purchased for resale, is stated at
the lower of average cost or market. The Company capitalizes distribution center operating costs
in its inventory. These distribution center operating costs include compensation, occupancy,
vehicle, supplies and maintenance, utilities, depreciation, insurance and other distribution
center-related expenses.
Long-Term Investments — Long-term investments consist of investments in marketable equity
securities and investments in one privately held company as of June 30, 2006 and two privately held
companies as of June 30, 2005. Marketable equity securities are stated at fair value and
classified as available-for-sale. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are included in accumulated other comprehensive income,
which is reflected in stockholders’ equity.
The investments in the privately held companies are accounted for under the equity method.
The Company’s proportionate part of the intercompany profits and losses relating to inventory
purchased from its equity method investees is eliminated until realized as the Company does not
have a controlling interest in its equity method investees. Inventory is purchased on an arm’s
length basis.
Revenue Recognition — Revenue from merchandise sales is recognized upon shipment or delivery
of goods. The Company sells its products directly to retail customers, through its direct
business-to-business division and through its Internet web site. Generally, revenue from products
sold in its retail stores is recognized at the point of sale, when transfer of title takes place
and the customer receives the product. In some instances, customers request the product be
delivered to specified locations, in which case revenue is recognized when the customer receives
the product. Products sold through the Company’s business-to-business division and Internet web
site are shipped “free on board” shipping point and the related revenues are recognized upon
shipment. Revenue excludes collected sales taxes.
Service revenue is recognized when the repair service is completed. Revenue from installation
labor is recognized as labor is provided.
The Company sells extended warranties provided by third-parties. The Company receives a
commission from the third-party provider, which is recorded as revenue at the time the related
product is shipped or delivered.
The Company records a sales returns reserve to reflect estimated sales returns after the
period.
3. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation
(“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement
109. FIN 48 prescribes a
5
comprehensive model for recognizing, measuring, presenting and disclosing
in the financial statements tax positions taken or expected to be taken on a tax return, including
a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for
fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of
application of FIN 48 these will be accounted for as an adjustment to retained earnings. The
Company is currently assessing the impact of FIN 48 on its consolidated financial position and
results of operations.
4. Stock Based Compensation
Stock-based compensation — In December 2004, the FASB issued Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“Statement 123(R)”), which requires
the recognition of the cost of employee services received in exchange for an award of equity
instruments in the financial statements and measurement based on the grant-date fair value of the
award. It also requires the cost to be recognized over the period during which an employee is
required to provide service in exchange for the award (presumptively the vesting period).
Statement 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”),
and its related interpretations. The Company adopted Statement 123(R) on October 1, 2005. The
Company chose the Modified Prospective Application (“MPA”) method for implementing Statement
123(R). Under the MPA method, new awards are valued and accounted for prospectively upon adoption.
Outstanding prior awards that are unvested as of October 1, 2005 will be recognized as
compensation cost over the remaining requisite service period. Prior periods will not be restated.
Adoption of Statement 123(R) did not affect the Company’s cash flow or financial position but
it did reduce its reported net income and earnings per share, since adopting Statement 123(R)
results in the Company recording compensation cost for employee stock options and employee share
purchase rights.
On September 30, 2005 the Board of Directors approved the full acceleration of the vesting of
each otherwise unvested outstanding stock option granted under the Company’s 1995 and 1998 Stock
Option and Incentive Plans and its 2004 Long Term Incentive Plan for those grants whose strike
price was higher than the closing market value of a share of the Company’s common stock on that
date. As a result, options to purchase approximately 867,000 shares, including approximately
374,000 options held by the Company’s executive officers and directors, became immediately
exercisable effective as of September 30, 2005.
The decision to accelerate vesting of these options was made primarily to minimize future
compensation expense that the Company would otherwise recognize in its consolidated statements of
operations upon the effectiveness of Statement 123(R). As a result of the acceleration, the
Company expects to reduce the stock option expense it otherwise would have been required to record
in connection with accelerated options by approximately $2.0 million in 2006, $653,000 in 2007 and
$63,000 in 2008 under the MPA method.
Prior to its adoption of Statement 123(R) the Company accounted for stock-based compensation
in compliance with APB 25, which addressed the financial accounting and reporting standards for
stock or other equity-based compensation arrangements. The Company accounted for stock based
compensation to employees using the intrinsic method and provided disclosures under the fair
value-based method, as permitted by SFAS No. 123. Stock or other equity-based compensation for
non-employees was accounted for under the fair value-based method as required by SFAS No. 123 and
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 was valued at either the fair value of the
consideration received or the equity instrument issued on the date of grant. The resulting
compensation cost was recognized and charged to operations over the service period, which was
usually the vesting period.
The Company included $177,451 and $547,882 in total stock-based compensation expense to
employees in its condensed consolidated statement of operations for the three and nine months ended
June 30, 2006, respectively, as a result of the adoption of Statement 123(R). Prior to the
adoption of Statement No. 123(R), the Company reported all tax benefits resulting from the exercise
of non-qualified stock options as operating cash flows in its consolidated statements of cash
flows. In accordance with Statement No. 123(R), the Company now reports its current year excess
tax benefits from the exercise of non-qualified stock options as financing cash flows. There were
no excess tax benefits recorded from the exercise of non-qualified stock options for the nine
months ended June 30, 2006.
6
For purposes of recording stock option-based compensation expense as required by Statement No.
123(R), the fair values of each stock option granted under the Company’s stock option plan for the
three and nine months ended June 30, 2006 were estimated as of the date of grant using the
Black-Scholes option-pricing model. The weighted average fair value of all stock option grants
issued for the three and nine months ended June 30, 2006 was $4.64 and $2.18, respectively.
For purposes of recording Employee Stock Purchase Plan (“ESPP”) compensation expense as
required by Statement No. 123(R), the fair values of each share subject to purchase under the ESPP
for the three and nine months ended June 30, 2006 were estimated as of the beginning of the ESPP
period using the Black-Scholes option-pricing model. The weighted average fair value of all ESPP
shares issued for the three and nine months ended June 30, 2006 was $2.11 and $1.84, respectively.
The fair values of all stock option grants and ESPP shares issued were determined using the
following assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
June 30, 2006 |
|
|
June 30, 2006 |
|
| |
|
Stock |
|
|
|
|
|
|
Stock |
|
|
|
|
| |
|
Option |
|
|
|
|
|
|
Option |
|
|
|
|
| |
|
Plan |
|
|
ESPP |
|
|
Plan |
|
|
ESPP |
|
Risk-free interest rate |
|
|
4.9 |
% |
|
|
4.5 |
% |
|
|
4.3 |
% |
|
|
3.9 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected life of option grants and ESPP shares (years) |
|
|
5.17 |
|
|
|
0.25 |
|
|
|
5.17 |
|
|
|
0.25 |
|
Expected volatility of underlying stock |
|
|
73.9 |
% |
|
|
114.8 |
% |
|
|
77.7 |
% |
|
|
100.5 |
% |
Expected forfeitures as percentage of total option
grants and ESPP shares |
|
|
5.7 |
% |
|
|
0.0 |
% |
|
|
5.7 |
% |
|
|
0.0 |
% |
The risk-free rates for the stock option plan and ESPP are the weighted average of the yield
rates on 5-year U.S. Treasury notes on the dates of the stock option grants and the yield rates on
3-month U.S. Treasury bills at the inception of each quarterly ESPP period, respectively. The
dividend yield of zero is based on the fact that the Company has never paid cash dividends and has
no present intention to pay cash dividends. The expected life of the option grants is based on the
Company’s analysis of its experience with its option grants. The expected life of the ESPP shares
is 0.25 years, since shares are purchased through the plan on a quarterly basis. Expected
volatility is based on the historical volatility of the Company’s common stock over the period
commensurate with the expected life of the options and the ESPP shares, respectively. The expected
forfeitures as a percentage of total grants are based on the Company’s analysis of its experience
with its option grants and ESPP shares, respectively. Under the true-up provisions of Statement
123(R) additional expense will be recorded if the actual forfeiture rate is lower than estimated
and a recovery of prior expense will be recorded if the actual forfeiture rate is higher than
estimated.
SFAS No. 123 requires the presentation of pro forma information for the comparative period
prior to the adoption as if all of the Company’s employee stock options and ESPP shares had been
accounted for under the fair value method of the original SFAS No. 123. The following table
illustrates the effect on net loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation in the prior-year
periods.
7
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Net loss as reported |
|
$ |
(31,943,964 |
) |
|
$ |
(54,362,917 |
) |
Add: |
|
|
|
|
|
|
|
|
Total stock-based employee
compensation expense
recorded, net of related
tax effects |
|
|
1,410 |
|
|
|
75,727 |
|
Deduct: |
|
|
|
|
|
|
|
|
Total stock-based employee
compensation expense
determined under fair value
based method for all
awards, net of related tax
effects |
|
|
(1,158,208 |
) |
|
|
(3,488,013 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(33,100,762 |
) |
|
$ |
(57,775,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share |
|
|
|
|
|
|
|
|
Basic and diluted — as reported |
|
$ |
(1.30 |
) |
|
$ |
(2.22 |
) |
|
|
|
|
|
|
|
Basic and diluted — pro forma |
|
$ |
(1.35 |
) |
|
$ |
(2.35 |
) |
|
|
|
|
|
|
|
For purposes of determining the disclosures required by SFAS No. 123, the fair values of each
stock option granted in the three and nine months ended June 30, 2005 under the Company’s stock
option plan were estimated on the date of grant using the Black-Scholes option-pricing model. The
Company granted 5,278 options under our 2004 Long-Term Incentive Plan for the three and nine months
ended June 30, 2005. The weighted average grant date fair value of all stock option grants issued
for the nine months ended June 30, 2005 was $3.18, using the following assumptions:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Risk-free interest rate |
|
|
4.1 |
% |
|
|
3.4 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected life of option grants (years) |
|
|
10.0 |
|
|
|
10.0 |
|
Expected volatility of underlying stock |
|
|
83.0 |
% |
|
|
83.2 |
% |
Expected forfeitures as percentage of total grants |
|
|
7.0 |
% |
|
|
7.0 |
% |
During the three and nine months ended June 30, 2006 the Company recorded stock-based
compensation expense of $0 and $191,000, respectively, representing the value of common stock
issued to a vendor.
Stock Option Activity
A summary of award activity under the stock option plans as of June 30, 2006 and changes
during the 3-month period is presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
| |
|
Number of |
|
|
Exercise |
|
| |
|
Options |
|
|
Price |
|
Outstanding at March 31, 2006 |
|
|
3,484,184 |
|
|
$ |
6.93 |
|
Granted |
|
|
20,000 |
|
|
|
8.59 |
|
Exercised |
|
|
(262,845 |
) |
|
|
6.11 |
|
Forfeited or expired |
|
|
(202,873 |
) |
|
|
14.16 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
3,038,466 |
|
|
$ |
6.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
2,402,879 |
|
|
$ |
7.19 |
|
|
|
|
|
|
|
|
|
A summary of award activity under the stock option plan as of June 30, 2006 and changes during
the 9-month period is presented below:
8
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
| |
|
Number of |
|
|
Exercise |
|
| |
|
Options |
|
|
Price |
|
Outstanding at September 30, 2005 |
|
|
3,601,505 |
|
|
$ |
7.21 |
|
Granted |
|
|
748,159 |
|
|
|
3.94 |
|
Exercised |
|
|
(723,072 |
) |
|
|
5.55 |
|
Forfeited or expired |
|
|
(588,126 |
) |
|
|
8.60 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
3,038,466 |
|
|
$ |
6.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
2,402,879 |
|
|
$ |
7.19 |
|
|
|
|
|
|
|
|
|
The options outstanding and exercisable at June 30, 2006 were in the following exercise price
ranges:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
|
Options Exercisable |
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
| Range of Exercise Prices |
|
Shares |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
|
Shares |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
$2.70 - $4.38 |
|
|
596,184 |
|
|
$ |
3.60 |
|
|
|
9.2 |
|
|
$ |
2,089,528 |
|
|
|
34,236 |
|
|
$ |
3.54 |
|
|
|
9.0 |
|
|
$ |
121,766 |
|
$4.70 - $5.64 |
|
|
901,685 |
|
|
|
5.48 |
|
|
|
6.4 |
|
|
|
1,460,502 |
|
|
|
892,140 |
|
|
|
5.48 |
|
|
|
6.4 |
|
|
|
1,442,175 |
|
$5.90 - $7.18 |
|
|
547,114 |
|
|
|
6.06 |
|
|
|
6.5 |
|
|
|
572,934 |
|
|
|
505,114 |
|
|
|
6.00 |
|
|
|
6.2 |
|
|
|
556,034 |
|
$7.27 - $8.59 |
|
|
705,313 |
|
|
|
7.85 |
|
|
|
4.8 |
|
|
|
— |
|
|
|
683,219 |
|
|
|
7.82 |
|
|
|
4.6 |
|
|
|
— |
|
$12.00 - $32.00 |
|
|
288,170 |
|
|
|
13.50 |
|
|
|
1.2 |
|
|
|
— |
|
|
|
288,170 |
|
|
|
13.50 |
|
|
|
1.2 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,038,466 |
|
|
$ |
6.52 |
|
|
|
6.1 |
|
|
$ |
4,122,964 |
|
|
|
2,402,879 |
|
|
$ |
7.19 |
|
|
|
5.3 |
|
|
$ |
2,119,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options exercisable at June 30, 2006 was 5.3
years.
The aggregate intrinsic value in the table above represents the total intrinsic value, based
on the Company’s closing stock price of $7.10 as of June 30, 2006, which would have been received
by the option holders had all option holders exercised their options as of that date. The total of
in-the-money options exercisable as of June 30, 2006 was 1,431,490.
The aggregate intrinsic value of all stock options exercised during the three and nine months
ended June 30, 2006 was approximately $650,000 and $1,733,000, respectively.
The Company settles employee stock option exercises with newly issued common shares.
There were no grants of restricted stock during the three and nine months ended June 30, 2006.
As of June 30, 2006, there was $1,104,305 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the plans. That cost is expected to
be recognized over a weighted-average period of 2.3 years. The total fair value of shares vested
was $1,890 and $61,616 during the three and nine months ended June 30, 2006, respectively.
A summary of the activity for non-vested stock options as of June 30, 2006 and changes during
the 3-month period is presented below:
9
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
| |
|
Number of |
|
|
Exercise |
|
| |
|
Options |
|
|
Price |
|
Non-vested at March 31, 2006 |
|
|
662,225 |
|
|
$ |
3.83 |
|
Granted |
|
|
20,000 |
|
|
|
8.59 |
|
Vested |
|
|
(700 |
) |
|
|
2.70 |
|
Forfeited |
|
|
(45,938 |
) |
|
|
3.60 |
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2006 |
|
|
635,587 |
|
|
$ |
4.00 |
|
|
|
|
|
|
|
|
|
A
summary of the activity for non-vested stock options as of June 30, 2006 and changes during
the 9-month period is presented below:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
| |
|
Number of |
|
|
Exercise |
|
| |
|
Options |
|
|
Price |
|
Non-vested at September 30, 2005 |
|
|
1,750 |
|
|
$ |
2.70 |
|
Granted |
|
|
718,159 |
|
|
|
3.96 |
|
Vested |
|
|
(700 |
) |
|
|
2.70 |
|
Forfeited |
|
|
(83,622 |
) |
|
|
3.60 |
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2006 |
|
|
635,587 |
|
|
$ |
4.00 |
|
|
|
|
|
|
|
|
|
5. Restructuring Charges
During the third quarter of fiscal year 2005, the Company initiated a restructuring plan
designed to close 19 underperforming stores and re-align its resources and cost structure.
Thirteen of the closed stores were in markets where the Company continues to have a presence
and accordingly, the results of their operations are included in continuing operations. The
closing of these thirteen stores resulted in restructuring charges of $16.9 million, including $5.9
million of non-cash charges in the three and nine months ended June 30, 2005. At June 30, 2005 the
Company had accrued expenses associated with these store closings totaling $10.5 million. The
Company completed 12 of these store closings as of June 30, 2005 and the remaining store closed on
October 30, 2005.
During the nine months ended June 30, 2006, the Company recorded additional incremental costs
totaling $483,530, consisting of lease termination and other related charges. At June 30, 2006 the
Company had accrued expenses associated with these store closings totaling $4,900,702 which the
Company believes is adequate to cover the charges associated with these store closings.
In accounting for restructuring charges, the Company complied with SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities, which requires that a liability for costs
associated with an exit or disposal activity be recognized and measured initially at fair value
only when the liability is incurred.
The following is a summary of restructuring charge activity for the nine months ended June 30,
2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Lease |
|
|
|
|
|
|
|
|
|
|
| |
|
Termination |
|
|
|
|
|
|
|
|
|
|
| |
|
and Other |
|
|
|
|
|
|
|
|
|
|
| |
|
Related |
|
|
Professional |
|
|
|
|
|
|
|
| |
|
Charges |
|
|
Fees |
|
|
Severance |
|
|
Total |
|
Balance as of September 30, 2005 |
|
$ |
6,394,552 |
|
|
$ |
928,564 |
|
|
$ |
8,992 |
|
|
$ |
7,332,108 |
|
Change in estimate — revised assumptions |
|
|
483,530 |
|
|
|
— |
|
|
|
— |
|
|
|
483,530 |
|
Payments |
|
|
(2,678,397 |
) |
|
|
(227,547 |
) |
|
|
(8,992 |
) |
|
|
(2,914,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
4,199,685 |
|
|
$ |
701,017 |
|
|
$ |
— |
|
|
$ |
4,900,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Lease termination and other related charges represent lease termination costs and accrued rent
on certain closed stores. Professional fees include amounts paid to third parties in connection
with the negotiation of lease terminations and with the liquidation of inventory for the closed
stores.
6. Discontinued Operations
In the third quarter of fiscal year 2005, as part of the restructuring plan described in Note
5, the Company closed or committed to close six stores in markets where the Company does not
continue to have a presence. The Company completed these store closings by July 31, 2005. In
fiscal year 2005 the Company recorded exit costs associated with these six store closings within
discontinued operations totaling $6,291,420, including $2,012,280 of non-cash charges, principally
related to impairment of fixed assets. Previously, in the fourth quarter of fiscal year 2004 the
Company closed, sold or committed to close eight stores, all of which were closed by December 31,
2004.
The Company recorded a loss on discontinued operations associated with all these store
closings totaling $154,347 and $9,323,039 for the nine months ended June 30, 2006 and June 30,
2005, respectively. At June 30, 2006 the Company had accrued expenses associated with these store
closings totaling $1,579,209, which the Company believes is adequate to cover charges associated
with the remaining lease terminations and professional fees for the stores included in discontinued
operations.
In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company classified the operating results of these stores
as discontinued operations in the accompanying consolidated statements of operations. Revenue from
the closed stores amounted to $4,067,061 and $10,966,432 for the three and nine months ended June
30, 2005, respectively. There was no revenue from the closed stores for the three or nine months
ended June 30, 2006.
The following is a summary of discontinued operations activity for the nine months ended June
30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Lease |
|
|
|
|
|
|
|
|
|
|
| |
|
Termination |
|
|
|
|
|
|
|
|
|
|
| |
|
and Other |
|
|
|
|
|
|
|
|
|
|
| |
|
Related |
|
|
Professional |
|
|
|
|
|
|
|
| |
|
Charges |
|
|
Fees |
|
|
Severance |
|
|
Total |
|
Balance as of September 30, 2005 |
|
$ |
1,565,310 |
|
|
$ |
530,885 |
|
|
$ |
6,653 |
|
|
$ |
2,102,848 |
|
Change in estimate — revised assumptions |
|
|
154,347 |
|
|
|
— |
|
|
|
— |
|
|
|
154,347 |
|
Payments |
|
|
(508,588 |
) |
|
|
(162,745 |
) |
|
|
(6,653 |
) |
|
|
(677,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
1,211,069 |
|
|
$ |
368,140 |
|
|
$ |
— |
|
|
$ |
1,579,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease termination and other related charges represent lease termination costs and accrued rent
on certain closed stores. Professional fees include amounts paid to third parties in connection
with the negotiation of lease terminations and with the liquidation of inventory for the closed
stores.
7. Income Taxes
SFAS No. 109, Accounting for Income Taxes, requires the Company to provide a valuation
allowance when it is “more likely than not that some portion or all of the deferred tax assets will
not be realized.” In March 2005 the Company recorded a full valuation allowance and has continued
to record such an allowance through June 30, 2006 based upon its determination that it was more
likely than not that it would not realize the deferred tax benefits related to those assets. The
Company based that determination, in part, on its prior three years of losses and consideration of
store closings. As of June 30, 2006 the Company provided a full valuation related to federal and
state net deferred tax assets. In future periods the Company will re-evaluate the likelihood of
realizing benefits from the deferred tax assets and adjust the valuation allowance as deemed
necessary. Further, based on the availability of net operating losses being carried forward, the
Company did not record any regular federal tax provision on fiscal year 2006 income. During the
third quarter of fiscal 2006 the Company reversed the $110,000 federal alternative minimum tax
provision recorded during the first six months of fiscal 2006.
11
8. Net Income per Share
Basic earnings (loss) per share are calculated based on the weighted average number of common
shares outstanding. Diluted earnings (loss) per share are based on the weighted average number of
common shares outstanding plus dilutive potential common shares (common stock options and
warrants). Common stock options and warrants are not included in the earnings (loss) per share
calculation when their exercise price is greater than the average market price for the period.
The following is a reconciliation of the weighted average shares outstanding for basic and
diluted earnings (loss) per share from continuing operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic Earnings (Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
(14,341,957 |
) |
|
$ |
(24,521,418 |
) |
|
$ |
432,164 |
|
|
$ |
(45,039,878 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
25,369,473 |
|
|
|
24,600,731 |
|
|
|
25,044,992 |
|
|
|
24,538,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.57 |
) |
|
$ |
(1.00 |
) |
|
$ |
0.02 |
|
|
$ |
(1.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
(14,341,957 |
) |
|
$ |
(24,521,418 |
) |
|
$ |
432,164 |
|
|
$ |
(45,039,878 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
25,369,473 |
|
|
|
24,600,731 |
|
|
|
25,472,935 |
|
|
|
24,538,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.57 |
) |
|
$ |
(1.00 |
) |
|
$ |
0.02 |
|
|
$ |
(1.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options and warrants not included in
earnings per share calculation |
|
|
3,995,046 |
|
|
|
4,342,352 |
|
|
|
1,981,063 |
|
|
|
4,429,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price range of anti-dilutive options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low |
|
$ |
2.70 |
|
|
$ |
0.31 |
|
|
$ |
6.70 |
|
|
$ |
0.31 |
|
High |
|
$ |
32.00 |
|
|
$ |
32.13 |
|
|
$ |
32.00 |
|
|
$ |
32.13 |
|
9. Related-Party Transactions
Tweeter held an 18.75% ownership interest in Tivoli Audio, LLC (“Tivoli”), a manufacturer of
consumer electronic products, as of June 30, 2006 and 2005. The Company accounts for this
investment in Tivoli under the equity method of accounting, recognizing the Company’s share of
Tivoli’s income or loss in the Company’s statement of operations. Distributions received from
Tivoli amounted to $583,000 and $1,404,000 for the nine months ended June 30, 2006 and 2005,
respectively. The Company purchased inventory from Tivoli costing approximately $1,108,000 and
$1,288,000 during the nine months ended June 30, 2006 and 2005, respectively. Amounts receivable
from Tivoli were $11,000 at June 30, 2006, reflecting prepayments on purchases of inventory.
Amounts payable to Tivoli were $61,900 at June 30, 2005.
On December 31, 2004, Tweeter made an initial investment of $300,000 in Sapphire Audio, LLC
(“Sapphire”), a manufacturer of consumer electronic products, to obtain a 25% ownership interest.
This investment was being accounted for under the equity method of accounting. Sapphire was
liquidated during the three months ended June 30, 2006 and the Company recorded a gain of $90,000
in income from equity investments in connection with the liquidation. Distributions received from
Sapphire amounted to $292,000 for the nine months ended June 30, 2006. Distributions received from
Sapphire amounted to $31,900 for the nine months ended June 30, 2005. The Company purchased
inventory from Sapphire costing $6,497,000 and $2,707,000 during the nine months ended June 30,
2006 and 2005, respectively. Amounts payable to Sapphire were $0 and $161,300 at June 30, 2006 and
2005, respectively.
On April 20, 2005, the Company entered into an agreement with DJM Asset Management, LLC,
(“DJM”) a Gordon Brothers Group company, to negotiate possible lease terminations, sublease,
assignment or other disposition of certain leases. Since 2001, Mr. Jeffrey Bloomberg, a member of
Tweeter’s Board of Directors, has been with
12
Gordon Brothers Group LLC in the Office of the
Chairman. Mr. Jeffrey Bloomberg and Samuel Bloomberg, Chairman of Tweeter’s Board of Directors,
are brothers. Tweeter paid $391,000 to DJM associated with this agreement during the nine months
ended June 30, 2006. Effective May 26, 2006 the Company terminated the agreement with DJM. As of
June 30, 2006 the Company did not have any accruals outstanding related to DJM.
Mr. Jeffrey Bloomberg is a member of the Board of Directors of Nortek, Inc. (“Nortek”), which
is a supplier for Tweeter. The Company purchased inventory from Nortek and its subsidiaries
costing approximately $6,323,000 and $3,429,000 during the nine months ended June 30, 2006 and
2005, respectively and had amounts payable to Nortek and its subsidiaries of approximately $258,000
and $905,000 at June 30, 2006 and 2005, respectively.
10. Sale-Leaseback Transaction
During the quarter ended March 31, 2006, the Company entered into a sale-leaseback arrangement
with Tweet Canton LLC, an unrelated party. The Company sold its Canton, Massachusetts distribution
and corporate properties, including land and related leasehold improvements, located at 10 and 40
Pequot Way, Canton, Massachusetts, to Tweet Canton LLC for the sum of $13,750,000 and the Company
entered into a 16-year lease agreement (with two additional successive option periods for ten and
nine years, respectively) with Tweet Canton LLC. Under the new lease agreement the Company will
make rental payments of $1,200,000 in year one of the lease, $1,220,000 in year two of the lease,
$1,230,000 in year three of the lease, $1,240,000 in each of lease years four through ten, and
$1,325,000 in each of the remaining six years of the lease term. The Company received
approximately $13.5 million associated with this transaction, net of related fees, which was used
to pay down existing debt. The Company recorded a deferred gain of approximately $4.6 million on
the sale for the nine months ended June 30, 2006, which is being amortized over the life of the
lease.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
We are a specialty retailer of mid- to high-end audio and video consumer electronics products.
As of June 30, 2006, we operated 153 stores under the Tweeter, hifi Buys, Sound Advice and
Showcase Home Entertainment names. Our stores are located in the following markets: New England,
the Mid-Atlantic, the Southeast (including Florida), Texas, Chicago, Southern California, Phoenix
and Las Vegas.
During the third quarter of fiscal year 2005 we initiated a restructuring plan designed to
close 19 underperforming stores and re-align our resources and cost structure. As of July 20, 2006
we had executed 13 lease termination agreements or sublet agreements, were in the process of
completing negotiations on one location and had five locations remaining to be negotiated.
Six of the 19 stores we closed were in stand-alone markets and, in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we classified the operating results of these stores as discontinued operations
in the accompanying consolidated statements of operations. Revenue from the stores included in
discontinued operations amounted to $4,067,000 and $10,966,000 for the three and nine months ended
June 30, 2005. There was no revenue from these stores for the three and nine months ended June 30,
2006. Discontinued stores are excluded from the comparable store sales calculation.
The remaining 13 stores were deemed part of continuing operations and the costs associated
with their closings were treated as a restructuring charge. In fiscal year 2005 we recorded
restructuring charges associated with these 13 store closings totaling $16,480,000, including
$6,331,000 of non-cash charges, principally related to impairment of fixed assets. During fiscal
year 2006, we recorded additional incremental costs for these 13 store closings totaling $0 and
$484,000 for the three and nine months ended June 30, 2006. At June 30, 2006 we had accrued
expenses associated with these 13 store closings totaling $4,901,000, which we believe is adequate
to cover costs associated with the remaining lease terminations and professional fees. Revenue
from these 13 stores amounted to $8,914,000 and $23,445,000 for the three and nine months ended
June 30, 2005. We had $0 and $175,000 of revenue from these stores for the three and nine months
ended June 30, 2006, respectively. We have excluded the sales of these 13 stores from the
comparable store calculation for the three and nine months ended June 30, 2006 as compared to the
three and nine months ended June 30, 2005.
13
Our operations, as is common with other retailers, follow a seasonal pattern. Historically,
we realize more of our revenue and net income in our first fiscal quarter, which includes the
holiday season, than in any other fiscal quarter. Our selling expenses and administrative expenses
remain relatively fixed during the year, while our revenues fluctuate in accordance with the
seasonal patterns. As a result of the seasonal patterns, our net income in any interim quarter
will fluctuate dramatically, and one should not rely on our interim results as indicative of our
results for the entire fiscal year.
We use the term “comparable store sales” to compare the year-over-year sales performance of
our stores. We include a store in comparable store sales after it has been in operation for 12
full months, while we include an acquired store after 12 full months from the acquisition date. In
addition, comparable store sales include Internet-originated sales. We exclude remodeled or
relocated stores from comparable store sales until they have been operating for 12 full months from
the date we completed the remodeling or the date the store re-opened after relocation. Stores that
are part of discontinued operations are also excluded from comparable store sales.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
Total Revenue — Our total revenue includes delivered merchandise, home installation labor,
commissions on service contracts sold, completed service center work orders, direct
business-to-business sales, delivery charges and Internet-originated sales and excludes collected
sales taxes. Our total revenue from continuing operations decreased $7.3 million, or 4.4%, to
$159.3 million for the three months ended June 30, 2006 from $166.6 million for the three months
ended June 30, 2005. Our comparable store sales increased $3.5 million, or 2.4%. Sales increased
$921,000 from new stores opened for less than 12 months. We recorded a decrease in sales of $12.2
million related to stores that closed and are included in continuing operations.
For the three months ended June 30, 2006 flat panel televisions and home installation
continued to drive our business. Flat panel televisions grew to 32.5% of our total retail revenue
for the period, compared to 25.8% for the three months ended June 30, 2005. This increase was
partially offset by declining revenue from projection TVs, TV monitors, satellite TV equipment, DVD
equipment and camcorders, a category we no longer offer for sale. Collectively, these categories
declined to 15.4% of our total retail revenue for the period compared to 21.5% for the three months
ended June 30, 2005. Revenue from our audio and mobile categories also declined compared to the
same quarter last year. Together they were down to 26.0% of our total retail revenue for the
period compared to 28.2% for the three months ended June 30, 2005. Home installation labor revenue
grew to 7.6% of our total retail revenue for the period, compared to 6.3% in the same quarter last
year.
Cost of Sales and Gross Profit — Our cost of sales includes merchandise costs, delivery costs,
distribution costs, home installation labor costs, purchase discounts and vendor allowances. Our
cost of sales related to continuing operations decreased $8.6 million, or 8.3%, to $94.7 million
for the three months ended June 30, 2006 from $103.3 million for the three months ended June 30,
2005. Our gross profit increased $1.3 million, or 2.1%, to $64.6 million for the three months
ended June 30, 2006 from $63.3 million for the three months ended June 30, 2005. Our gross margin
percentage increased to 40.6% for the three months ended June 30, 2006 from 38.0% for the three
months ended June 30, 2005. The increase in our gross margin was led by improvement in our video
and audio categories, primarily due to the effect that closed stores had on our results for the
three months ended June 30, 2005, when sales from closed stores were liquidated at a loss.
Selling, General and Administrative Expenses — Our selling, general and administrative
expenses (“SG&A”) include the compensation of store personnel and store specific support functions,
occupancy costs, store level depreciation, advertising, pre-opening expenses, credit card fees and
the costs of the finance, information systems, merchandising, marketing, human resources and
training departments, related support functions and executive officers. Our SG&A expenses declined
$2.0 million, or 2.5%, to $78.1 million for the three months ended June 30, 2006 from $80.1 million
for the three months ended June 30, 2005. As a percentage of total revenue, our SG&A expenses
increased to 49.1% for the three months ended June 30, 2006 from 48.1% for the three months ended
June 30, 2005. The decrease in expense dollars is related to our having closed 13 stores in June
2005 as well as other stores since then upon the expiration of their leases. The increase in our
expenses as a percentage of revenue is due to increases of 0.7% for insurance, where we experienced
increases in the cost of claims and increases in reserves
14
based on our claims experience, 0.6% for
depreciation, 0.3% for vehicles and 0.2% for store maintenance. These increases were partially
offset by a reduction of 0.3% in marketing and smaller reductions in other categories.
Amortization of Intangibles — We incurred amortization of intangibles expense of $170,000 for
both the three months ended June 30, 2006 and 2005.
Interest Expense — Our interest expense increased to $1,001,000 for the three months ended
June 30, 2006 compared to $780,000 for the three months ended June 30, 2005. Our interest expense
increased due to an increase in our average borrowings and higher interest rates. In addition, our
term loans of $13 million as of June 30, 2006 bear higher interest rates than our revolving credit
facility. There were no term loans outstanding during the three months ended June 30, 2005.
Income from Equity Investments — Our income from equity investments increased to $275,000 for
the three months ended June 30, 2006 from $249,000 for the three months ended June 30, 2005. We
owned 18.75% of Tivoli for the three months ended June 30, 2006 and 2005. We owned a 25% interest
in Sapphire up until its liquidation during the three months ended June 30, 2006. We recorded a
gain of $90,000 in connection with the liquidation for the three months ended June 30, 2006.
Income Taxes — SFAS No. 109, Accounting for Income Taxes, requires that we record a valuation
allowance when it is “more likely than not that some portion or all of the deferred tax assets will
not be realized.” At June 30, 2006, we provided a full valuation allowance related to federal and
state net deferred tax assets. The third quarter loss resulted in the reversal of the $110,000
federal alternative minimum tax provision recorded during the first six months of fiscal year 2006.
The effective tax rate for the three months ended June 30, 2006 and 2005 was (0.7%) and 0.0%,
respectively.
Discontinued Operations — In the third quarter of fiscal year 2005, we closed or committed to
close six stores classified as discontinued operations. In the fourth quarter of fiscal year 2004
we closed or committed to close eight stores classified as discontinued operations. The decision
to exit these stores was primarily related to their poor operating results. The loss from
discontinued operations associated with these store closings amounted to $26,000 and $7,423,000 for
the three months ended June 30, 2006 and 2005, respectively. Revenue from the closed stores,
included in pre-tax loss from discontinued operations, amounted to $4,067,000 for the three months
ended June 30, 2005. There was no revenue from closed stores included in pre-tax loss from
discontinued operations for the three months ended June 30, 2006.
NINE MONTHS ENDED JUNE 30, 2006 AS COMPARED TO NINE MONTHS ENDED JUNE 30, 2005
Total Revenue —Our total revenue from continuing operations increased $6.2 million, or 1.0%,
to $613.0 million for the nine months ended June 30, 2006 from $606.8 million for the nine months
ended June 30, 2005. Our comparable store sales increased $26.6 million, or 4.9%. We generated an
increase in sales of $8.3 million from new stores opened for less than 12 months. We recorded a
decrease in sales of $30.4 million related to stores that closed and are included in continuing
operations.
For the nine months ended June 30, 2006 flat panel televisions and home installation continued
to drive our business. Flat panel televisions grew to 33.1% of our total retail revenue for the
period, compared to 24.8% for the nine months ended June 30, 2005. This increase was partially
offset by declining revenue from projection TVs, TV monitors, satellite TV equipment, DVD equipment
and camcorders, a category we no longer offer for sale. Collectively, these categories declined to
20.2% of our total retail revenue for the period compared to 26.4% for the nine months ended June
30, 2005. Revenue from our audio and mobile categories also declined compared to the same period
last year. Together they were down to 23.7% of our total retail revenue for the period compared to
26.6% for the nine months ended June 30, 2005. Our home installation labor revenue grew to 6.3% of
our total retail revenue for the period, compared to 5.1% in the same period last year.
Cost of Sales and Gross Profit — Our cost of sales related to continuing operations decreased
$6.9 million, or 1.9%, to $358.6 million for the nine months ended June 30, 2006 from $365.5
million for the nine months ended June 30, 2005. Our gross profit increased $13.1 million, or
5.4%, to $254.4 million for the nine months ended June 30, 2006 from $241.3 million for the nine
months ended June 30, 2005. Our gross margin percentage increased to 41.5% for the nine months
ended June 30, 2006 from 39.8% for the nine months ended June 30, 2005. This increase
15
is primarily
the result of an increase in revenue and improvement in gross margin percentage from our flat panel
televisions, an increase in revenue from home installation labor, which carries a higher gross
margin percentage than sales of our merchandise, and the negative impact on gross margin from the
stores that we closed during the nine months ended June 30, 2005.
Selling, General and Administrative Expenses — Our SG&A expenses declined $4.5 million, or
1.8%, to $250.9 million for the nine months ended June 30, 2006 from $255.5 million for the nine
months ended June 30, 2005. As a percentage of total revenue, our SG&A expenses decreased to 40.9%
for the nine months ended June 30, 2006 from 42.1% for the nine months ended June 30, 2005. The
decrease in our SG&A expenses as a percentage of revenue was mainly the result of decreases of 1.0%
for marketing, largely attributable to reductions in newspaper advertising, and 0.4% for
compensation, due in part to our having closed stores last year that couldn’t leverage their fixed
payroll costs and reductions in mobile installation labor. These decreases were partially offset
by an increase of 0.3% for insurance, where we experienced increases in the cost of claims and
increases in reserves based on our claims experience.
Amortization of Intangibles — We incurred amortization of intangibles expense of $510,000 in
both the nine months ended June 30, 2006 and 2005.
Restructuring Charges — We incurred restructuring charges associated with the closing of 13
stores totaling $484,000 for the nine months ended June 30, 2006 and $16.9 million for the nine
months ended June 30, 2005. The restructuring charges are related to lease termination and other
related costs.
Interest Expense — Our interest expense increased to $3,500,000 for the nine months ended June
30, 2006 compared to $2,008,000 for the nine months ended June 30, 2005. Our interest expense
increased due to an increase in our average borrowings and higher interest rates. In addition, our
term loans of $13 million as of June 30, 2006 bear higher interest rates than our revolving credit
facility. There were no term loans outstanding during the nine months ended June 30, 2005.
Income from Equity Investments — Our income from equity investments increased to $1,461,000
for the nine months ended June 30, 2006 from $540,000 for the nine months ended June 30, 2005.
This is due to the increased profitability in Tivoli. We owned 18.75% of Tivoli for the nine
months ended June 30, 2006. For the nine months ended June 30, 2005 we owned 25% of Tivoli up
until May 4, 2005 when we sold 68,750 shares of our investment and we owned 18.75% after this
transaction occurred. Our income from equity investments for the nine months ended June 30, 2006
also reflects our 25% ownership of Sapphire up until their liquidation during the period, which was
acquired on December 31, 2004.
Income Taxes — SFAS No. 109, Accounting for Income Taxes, requires that we record a valuation
allowance when it is “more likely than not that some portion or all of the deferred tax assets will
not be realized.” At June 30, 2006, we provided a full valuation allowance related to federal and
state net deferred tax assets. The effective tax rate for the nine months ended June 30, 2006 and
2005 was 0% and (93)%, respectively. Our effective tax rate for the nine months ended June 30,
2005 was adversely affected by a deferred tax asset write-off of $22.3 million.
Discontinued Operations — In the third quarter of fiscal year 2005, we closed or committed to
close six stores classified as discontinued operations. In the fourth quarter of fiscal year 2004
we closed or committed to close eight stores classified as discontinued operations. The decision
to exit these stores was primarily related to their poor operating results. The loss on
discontinued operations associated with these store closings amounted to $154,000 and $9,323,000
for the nine months ended June 30, 2006 and June 30, 2005, respectively. Revenue from the closed
stores, included in pre-tax loss from discontinued operations, amounted to $10,966,000 for the nine
months ended June 30, 2005. There was no revenue from closed stores included in pre-tax loss from
discontinued operations for the nine months ended June 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Our cash needs are primarily to support our inventory requirements and capital expenditures,
pre-opening expenses and beginning inventory for new stores, remodeling or relocating older stores
and, in recent years, to fund operating losses.
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For the nine months ended June 30, 2006, we generated approximately $22.7 million of cash from
operating activities. This includes net income of $0.3 million and distributions from equity
investment of $0.6 million. Non-cash expenses, net recorded for the period totaled $19.0 million.
These non-cash expenses consisted primarily of $19.6 million for depreciation, amortization and
accretion and $0.7 million of stock based compensation, offset in part by $1.5 million for income
from equity investments. Other sources of cash totaled $15.9 million, which primarily consisted of
decreases in accounts receivable, inventory and prepaid and other assets due to seasonal variations
and the timing of expenditures for the nine month period. These sources were partially offset by
other uses of cash that totaled $13.1 million, consisting primarily of decreases in accounts
payable, associated with our lower level of inventory, accrued expenses, due to the timing of
payments made for operating costs, and customer deposits, related to the seasonality of our
revenue.
For the nine months ended June 30, 2006, we generated $0.6 million of cash from investing
activities. Sources of cash totaled $13.8 million and consisted primarily of net proceeds of $13.5
million from the sale-leaseback transaction on our corporate office and New England distribution
facilities and proceeds of $250,000 from the liquidation of our investment in Sapphire. Offsetting
these sources of cash were capital expenditures of $13.2 million.
Our net cash used in financing activities during the nine months ended June 30, 2006 was $23.7
million. The decrease in the short-term portion of long-term debt was $2.6 million and repayments
of long-term debt were $25.3 million. In addition, we received proceeds from stock options
exercised and employee stock purchases of $4.2 million.
Our senior secured revolving credit facility (“credit facility”), as amended July 25, 2005,
provides for up to $90 million in revolving credit loans and $13 million in term loans. The credit
facility is secured by substantially all of our assets and contains various covenants and
restrictions, including that: (i) we cannot create, incur, assume or permit additional
indebtedness, (ii) we cannot create, incur, assume or permit any lien on any property or asset,
(iii) we cannot merge or consolidate with any other person or permit any other person to merge or
consolidate with us, (iv) we cannot purchase, hold or acquire any investment in any other person
except those specifically permitted, (v) we cannot sell, transfer, lease, or otherwise dispose of
any asset except permitted exceptions, and (vi) we cannot declare or make any restricted payments,
which includes any dividend or certain other distributions. Borrowings are restricted to
applicable advance rates based principally on eligible inventory and receivables, reduced by a $5
million reserve, a portion of customer deposits and outstanding letters of credit. At June 30,
2006, $22.4 million was available for future borrowings. The credit facility expires on April 1,
2008.
The interest rate on our revolving credit loan ranges from 1.5% to 2% over LIBOR or 0% over
the prime rate, depending on our commitment at various dates during the course of the agreement.
In addition, there is a commitment fee of 0.25% for the unused portion of the line. Our term loans
are in two tranches — Tranche A-1 and Tranche B. The Tranche A-1 term loan is for $5 million at an
interest rate of either 0.75% over the prime rate or 3.00% over LIBOR, whichever rate we choose.
The Tranche B term loan is for $8 million at an interest rate of 4.00% over the prime rate or
10.00%, whichever is greater. Neither term loan will require any scheduled principal payments
until maturity.
Our weighted average interest rates on all outstanding borrowings for the nine months ended
June 30, 2006 and 2005 were approximately 7.4% and 5.2%, respectively.
On January 17, 2006, we entered into a sale-leaseback arrangement with Tweet Canton LLC, an
unrelated party, with respect to our distribution and corporate properties, including land and
related leasehold improvements, located at 10 and 40 Pequot Way, Canton, Massachusetts. We
received approximately $13.5 million, net of related fees, for the sale of these properties, which
we used to pay down existing debt. Future lease commitments amount to $1.2 million in each of
years one to ten of the lease and $1.3 million in each of the remaining six years of the lease
term.
We believe that our existing cash, together with cash generated by operations and available
borrowings under our credit facility, will be sufficient to finance our working capital and capital
expenditure requirements for at least the next twelve months. Furthermore, due to the seasonality
of our business, our working capital needs are significantly higher in the first and second fiscal
quarters and there is the possibility that this could cause unforeseen capital constraints in the
future. Our credit facility provides us with the option of having more availability on our credit
line during our peak holiday season buying periods.
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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 our growth and acquisitions, dependence on key personnel, the
need for additional financing, competition and seasonal fluctuations, and those referred to in our
Annual Report on Form 10-K filed on December 29, 2005, 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.
The principle market risk inherent in our financial instruments and in our financial position
is the potential for loss arising from adverse changes in interest rates. We do not enter into
financial instruments for trading purposes.
At June 30, 2006 we had $44.0 million of variable rate borrowings outstanding under our
revolving credit facility and term loans. A hypothetical 10% change in interest rates for this
variable rate debt would have an approximate $364,000 annual impact on our income and cash flows
based on our June 30, 2006 borrowing levels.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company’s management, under the
supervision of and with the participation of the Company’s Chief Executive Officer, who also is
presently serving as acting Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June
30, 2006. Based on such evaluation, the Company’s Chief Executive Officer has concluded that,
because of the material weaknesses in internal control over financial reporting described in the
Company’s Annual Report on Form 10-K filed on December 29, 2005, the Company’s disclosure controls
and procedures were not effective as of June 30, 2006.
Changes in Internal Control over Financial Reporting. In an effort to remediate the
identified material weaknesses and other deficiencies in internal controls over financial reporting
that were described in the Company’s Annual Report on form 10-K filed on December 29, 2005, the
Company has taken the following actions regarding internal control over financial reporting:
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The Company has added resources to its accounting and finance staff, including appointing a
Director of Internal Audit to spearhead its internal control compliance efforts. The Company is
actively recruiting to further add staff with financial reporting and internal control expertise
and the Company expects to add an adequate number of experienced finance and accounting personnel
to eliminate the delays in the financial statement preparation and other issues that have occurred
in the past. In addition, training of the finance and accounting staff will be formalized and
enhanced. The Company has also engaged outside consultants to augment its staff and to add
internal control expertise. |
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The Company has re-emphasized to store, distribution center, and corporate personnel the
importance of controls surrounding the accurate and timely approval and reporting of information to
the corporate office, and has begun a program of education and audit to ensure that these controls
are understood and uniformly applied. This re-emphasis is expected to eliminate certain of the
weaknesses cited above. |
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The Company has taken steps to correct weaknesses relating to system access, segregation of
duties, supervisory controls, and control over spreadsheets. |
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
There were no material changes in the Company’s risk factors in the first nine months of
fiscal 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
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Ex. 10.1
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Employment Agreement between the Company and Gregory Hunt |
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Ex. 10.2
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Amendment to Employment Agreement between the Company and Gregory Hunt |
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Ex. 31.1
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Certification of Chief Executive Officer and acting Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act |
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Ex. 32.1
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Certification of Chief Executive Officer and acting Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 |
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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.
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TWEETER HOME ENTERTAINMENT GROUP, INC.
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By: |
/s/ Joseph G. McGuire
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Joseph G. McGuire |
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President and Chief Executive
Officer and
acting Chief Financial Officer |
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Date:
August 9, 2006