e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended September 30, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 0-24091
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
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(State or other jurisdiction
of incorporation)
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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)
(781) 830-3000
(Registrants telephone
number including area code)
Securities registered pursuant to section 12(b) of the
Act:
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Common Stock, $.01 par
value
(Title of
Class)
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The NASDAQ Stock Market LLC
(Name of Exchange on
Which Registered)
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes þ No
o
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definitions of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer þ Non-accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant, based upon the last
sales price for such stock on March 31, 2006, as reported
by NASDAQ, was $170,144,048.
On December 15, 2006, the company had outstanding
25,492,178 shares of common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders to be held on January 25, 2007 are
incorporated by reference into Part III.
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
ANNUAL
REPORT ON
FORM 10-K
TABLE OF
CONTENTS
1
PART I
In this Annual Report on
Form 10-K,
the Company, Tweeter, we,
us and our mean Tweeter Home
Entertainment Group, Inc. and its subsidiaries.
This Annual Report on
Form 10-K
contains forward-looking statements regarding Tweeters
performance, strategy, plans, objectives, expectations, beliefs
and intentions. The actual outcome of the events described in
these forward-looking statements could differ materially from
our expectations. This Report, and especially the sections
entitled Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of
Operations contains a discussion of some of the factors
and risks that could contribute to those differences.
General
Tweeter is a national specialty consumer electronics retailer
providing audio and video solutions for the home and mobile
environment. We believe that we can apply our expertise to help
our customers live in hi-def.
As of September 30, 2006, we operated 153 stores in
22 states under the Tweeter, Sound Advice, hifi buys and
Showcase Home Entertainment names. Our stores are located in the
following markets: New England, the Mid-Atlantic, the Southeast
(including Florida), Chicago, Texas, Southern California,
Phoenix, and Las Vegas. We operate in a single business segment
of retailing audio, video and mobile consumer electronics
products. Our stores feature a selection of quality home and
mobile audio and video products including cutting edge HDTV
plasma, LCD and rear-projection television sets, home theater
video and audio solutions, home theater furniture,
DVD players and recorders, surround sound systems, audio
components, digital video satellite systems, satellite radios,
personal video recorders and digital entertainment centers. We
differentiate ourselves by focusing on consumers who seek audio
and video products with advanced features, functionality and
performance and by offering expert in-home installation
services. We have created an inviting retail environment in each
store with specially designed notional spaces, allowing our
customers to visualize the technology in a more natural home
setting. Our stores average approximately 11,100 square
feet and are staffed with highly trained sales and installation
professionals. Our goal is to ensure that each customer receives
the best possible experience through their entire purchase and
installation process. We believe this commitment to customer
service, along with our competitive prices, will build customer
loyalty and brand awareness.
Trade names. We currently operate under
several trade names, with 116 of our stores being Tweeter
stores. We also operate 24 stores in Florida as Sound Advice
stores, 9 stores in the Southeast as hifi buys stores and
4 stores in Arizona as Showcase Home Entertainment stores.
We have registered the Tweeter and Tweeter
etc. service marks with the United States Patent and
Trademark Office. We have also registered the
Prosolutions trademark and the AVi.d.
Member, Slamfest, Wise Buys and
Picture Perfect service marks with the United States
Patent and Trademark Office. We have not registered hifi
buys, Sound Advice and some of our other
service marks. We are aware that other consumer electronics
retailers use the name hifi buys and Sound Advice. We have
submitted applications for registration of some of our other
service marks, which applications are currently pending. We may
be unable to successfully register such service marks. In
addition our service marks, whether registered or unregistered,
and our patents may not be effective to protect our intellectual
property rights, and infringement or invalidity claims may be
asserted by third parties in the future.
Competition. We are a relatively small player
in the U.S. consumer electronics market. According to the
Consumer Electronics Association, consumer electronics sales are
expected to reach $140 billion in 2006. With annual revenue
of nearly $800 million, we account for less than 1% of the
total. Several large players, including Best Buy, Circuit City,
Sears and Wal-Mart, dominate the industry and have significantly
greater resources than we have. We do not compete with these
larger players in all categories, but there is some overlap
between our products. Typically, the overlap includes the
higher-end (more sophisticated, with more features and options)
of the larger players products and the lower end (more
entry level, with fewer features and options) of our products.
One advantage we believe we have over the larger players is our
ability to provide our customers with superior service by
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our professionally trained sales and installation experts. We
also compete with many small, independent retailers that carry
similar products and offer similar service levels.
Seasonality. Our business is subject to
seasonal variations. The table below lists the percentage of
annual revenue generated in each of our fiscal quarters for the
last two fiscal years.
Percentage
of Annual Revenue
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Three Months Ended
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December 31
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March 31
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June 30
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September 30
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Fiscal 2006
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34.4
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%
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24.2
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%
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20.5
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%
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20.9
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%
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Fiscal 2005
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32.4
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%
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22.9
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%
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21.0
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%
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23.7
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%
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Due to the importance of the Christmas holiday shopping season,
our revenues generally are highest during the fiscal quarter
ending December 31. Any factor tending to adversely affect
this season could have a significant impact on our revenue and
profitability. Our quarterly results of operations may also
fluctuate significantly due to a number of factors, including
the timing of new store openings and acquisitions, and
unexpected changes in volume-related rebates or changes in
cooperative advertising policies from suppliers. In addition,
operating results may be negatively affected by increases in
merchandise costs, price reductions we institute in response to
competitive factors and unfavorable local, regional or national
economic developments that result in reduced consumer spending.
Purchases and Returns. We generally allow our
customers to return products within a specified amount of time
from the initial retail sale or 60 days if the product is
defective. This can vary for some product categories such as
speakers, where we have a trade up policy available. We also
offer extended payment terms and other promotional offers as an
inducement to purchase. We partner with GE Money Bank to run our
private label credit card program. GE Money Bank bears all
credit risk under the terms of this agreement.
Business
Strategy
The key elements of our business strategy are as follows:
Extensive Selection of Mid- to High-End Home and Mobile
Products. We concentrate on delivering our
customers a complete range of home and mobile consumer
electronics products. This focus differentiates us from larger
format superstores and mass merchandisers, who offer a broad
array of consumer electronics and non-electronics products with
an emphasis on products priced at introductory price levels. Our
emphasis on mid- to higher-end products positions us
attractively to those seeking to buy more advanced or limited
distribution products. Our salespeople are extensively trained
to educate our customers about new technologies. As a result of
our mid- to higher-end product focus, a historical early adopter
customer base and our extensively trained sales force, we are
often among the earliest retailers to offer new product
innovations. Tweeter has a long tradition of catering to the
audio and/or
video enthusiast, and for over three decades we have introduced
many new technologies to the marketplace. We were among the
first retailers to offer flat panel plasma and LCD televisions,
DVD players and CD players. We will often hold a market
share in new technology that is disproportionately large
compared to our share of audio and video consumer electronics
overall. Similarly, we are among the first retailers to see a
decline in sales from products after they become well
established in the marketplace and our customers move on to
newer technology. By staying in the forefront of the technology
curve we believe that our focused product offering allows for
higher gross margin opportunities, appeals to a more
service-conscious consumer and results in enhanced brand
awareness of our regional names among members of our targeted
customer group.
In-Home Services Business. As consumer
electronics products have become more sophisticated and complex,
our in-home installation services have become a more significant
part of our business. We not only offer customers a broad home
entertainment package, we also have a large team of highly
trained in-home installation experts who can efficiently install
the chosen solution in the customers home.
Exceptional Customer Service. We believe that
the quality and knowledge of our sales and installation
professionals is critical to our success and represents a
significant competitive advantage. Our relationship-selling
model encourages sales associates to promote a comfortable,
trusting, low-pressure environment. We provide new
3
sales and installation associates with intensive classroom
training and all sales and installation associates receive
ongoing training, both at the store and at our regional training
centers. Our sales and installation associates receive technical
product training prior to our introduction of significant new
products. We believe that our superior customer service has
enabled us to engender long-term customer loyalty.
Dynamic, Inviting Stores. Our stores display
products in a dynamic and inviting setting intended to encourage
the customer to view and hear products in sound rooms and other
notional spaces architecturally and acoustically designed to
simulate the customers home or mobile environment. Our
stores blend a colorful, comfortable lifestyle environment, with
innovative and interactive product displays that enable
customers to audition and compare a sample of products. Each
store contains a flat panel technology showcase, which displays
an extensive selection of plasma, LCD and related products, and
every store contains a home theater vignette, which showcases
our home theater products.
Everyday Competitive Pricing. We utilize an
everyday competitive pricing strategy with fixed
prices clearly marked on our products. Store managers regularly
visit local competitors to ensure that our pricing remains
competitive within the stores local market.
Store
Real Estate and Operational Strategy
Store Format and Operations. As of
September 30, 2006, we operated 153 stores, consisting of
116 Tweeter stores in New England, the Mid-Atlantic, the
Southeast, Chicago, Texas, Southern California and Las Vegas;
24 Sound Advice stores in Florida; 9 hifi buys stores in
the Southeast and 4 Showcase Home Entertainment stores in
Phoenix.
Our store concept combines the comfort of the home environment
with practical displays, enabling consumers to sample and
compare the features and functions of products in various
combinations. Unlike many other consumer electronics stores,
which contain large, open spaces where many different audio and
video products are displayed, our stores feature individual
sound rooms. The sound rooms architecturally and acoustically
resemble a home environment to enable our customers to see and
hear how products will perform at home and they allow them to
listen to and compare various combinations of audio and video
equipment. In addition, each store contains a flat panel
technology showcase, which displays an extensive selection of
plasma and LCD televisions and related video products, and every
store contains home theater vignettes, which showcase our home
theater products. The majority of our stores have areas that
feature
state-of-the-art
audio and video mobile systems. Most stores provide mobile
systems installation through on-premises installation bays.
In 2005 we introduced a new prototype store, a consumer
electronics playground concept. This prototype has a unique
selling space to make it easier and more enjoyable for
customers. It showcases whole-home control and automation
through notional spaces specifically designed to replicate the
rooms throughout a customers home. The customer experience
begins at the concierge service desk. As customers enter the
store they are greeted by a concierge, to enhance service and
optimize their shopping experience. Initial results from our new
prototype store were favorable and in 2006 we extended the test
by renovating one existing store and relocating one other store
using the same format. Based on the performance of these
prototype stores we have adopted this format as our new
prototype and we will look to introduce it in additional
existing and new locations going forward.
Stores are typically staffed with a general sales manager, an
assistant sales manager, an operations manager, approximately 12
sales associates and mobile electronics installers. Some sales
associates specialize in either in-home or mobile systems. We
provide new sales associates with intensive classroom training
and all sales associates receive ongoing training, both at the
store and at the regional training centers. The sales force
receives technical product and sales training prior to the
introduction of significant new products.
Most of our store managers are compensated through base pay,
commissions and monthly bonuses based on store performance.
Store managers can earn a substantial portion of their annual
compensation through such bonuses. Sales associates are
compensated through a commission program that is based on the
revenue and gross margins of products they have sold.
Our strategy is to capitalize on our highly trained sales force
and installation specialists to drive sales of new consumer
electronics technologies from existing stores. We were one of
the first retailers to sell products such as
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CD players, DVD players, plasma televisions, digital
televisions, mobile video and satellite radio. We expect that we
will continue to be among the first retailers to offer new
consumer electronics products as they are developed. We continue
to put considerable effort into having a knowledgeable sales
team that has expertise in selling new technologies to our
customers. They are
backed-up by
an equally expert team of installation specialists so that our
customers can enjoy their purchases quickly and easily. We
believe that as a result we will continue to attract buyers who
wish to be early adopters of new products.
Additionally, our other operations include a corporate sales
division, which sells to businesses, institutions and other
organizations, and an Internet-based business, whose website is
located at www.tweeter.com.
Site Selection. Our stores average
approximately 11,100 square feet and we typically lease
space located in freestanding buildings or strip shopping
centers within high traffic shopping areas. New store sites are
selected on the basis of several factors, including physical
location, demographic characteristics of the local market,
proximity to other retailers, access to highways or other major
roadways and available lease terms. We look for co-tenants that
are likely to draw customers whom we would otherwise target and
we believe that the proximity to other consumer electronics
retailers is, on balance, a positive factor due to increased
customer traffic.
Renovating and Relocating Stores. As store
leases come up for renewal we conduct a disciplined review and
evaluation of each location. Based upon this evaluation we may
choose to exercise our renewal option, relocate the store to a
better location in the same market or close the store. We have
approximately 44% of our store leases coming up for renewal over
the next five years. We also intend to renovate certain stores
as we continue to build on our consumer electronics playground
concept model. During fiscal 2006, we renovated 1 existing store
and relocated 1 store, converting them into the consumer
electronics playground concept, and we closed 6 stores, in the
following markets:
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Number of Stores
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Market
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Renovated
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Relocated
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Closed
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New England
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1
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Mid Atlantic
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1
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Southeast
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2
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Chicago
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1
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Texas
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2
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Southern California
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1
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Total
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1
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1
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6
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By taking a disciplined approach toward real estate our goal is
to stabilize our store count, convert existing stores to our new
prototype through either renovation or relocation and begin to
open new stores within our current markets. We have tentatively
planned to complete 4 renovations, relocate 4 stores and close 4
stores in fiscal 2007. We also plan to open 4 new stores in
fiscal 2007. These plans may vary based upon our operating
performance.
Store closing program. In fiscal 2005 we
performed a major study of our real estate portfolio and took a
number of actions. Between April 2005 and October 2005 we closed
19 underperforming stores, six of which were classified as
discontinued operations since we vacated the markets in which
those six stores operated. 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
statement of operations. As of September 30, 2006, of the
19 store closings, we had executed 13 lease termination
agreements or sublease agreements, leaving six locations
remaining to be negotiated. These six locations have taken
longer to resolve than originally expected. Accordingly, we
increased our reserves for restructuring and discontinued
operations in fiscal 2006. We believe that these reserves are
adequate to cover costs associated with the remaining lease
obligations.
Additionally, in the fourth quarter of fiscal 2004 we closed or
committed to close eight stores, five of which were closed as of
September 30, 2004 and three of which were closed during
the first quarter of fiscal 2005. These eight stores are
classified as discontinued operations along with the six stores
mentioned above.
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Merchandise
Our stores feature home audio systems and components, mobile
audio and video systems, video products such as flat-panel
plasma and LCD televisions, digital projection televisions,
digital satellite systems, digital video recorders, DVD
players and other consumer electronics products such as wireless
remote control devices, digital media players, home audio
speakers, stereo and surround sound receivers and portable audio
equipment. We offer home and mobile stereo installation services
and provide warranty and non-warranty repair services through
all of our stores. Our in-home installation business provides
design, installation and educational services in connection with
new construction and home renovations, as well as for existing
homes. Products provided by our in-home installation group
include home theater systems, satellite TV, Internet access
systems, touch screen controls and whole-house control systems,
which may include music, security, lighting and utility control
systems. Our emphasis on mid- to high-end products enables us to
offer limited distribution products and to be among the earliest
retailers to offer new product innovations.
We stock products from many suppliers, including, Alpine, Apple
Computer, Bose, Clarion, Denon, Focal, Krell, Mirage, Martin
Logan, Mitsubishi, Panasonic, Pioneer, Polk, Samsung, Sony,
Tivoli, Velodyne and Yamaha. We seek to manage our product mix
to maximize gross margin performance and inventory turns.
Historically, video products have yielded lower gross margin
than audio products. Total sales of video products have
increased at rates faster than the increases in audio product
sales during the last several years as a result of the increased
customer interest in big screen televisions. Accordingly, we
have enhanced our in-home installation business to increase
sales of higher margin audio products and in-home services. The
strategy involves training and incentive programs for sales
associates to work with customers to demonstrate audio products
that enhance the performance of the video products they are
purchasing, so that a customer purchasing a video product is
more likely to purchase an audio product as well.
The table below lists the approximate percentage of revenue for
each of our primary product categories for our fiscal years
ended September 30, 2006, 2005 and 2004, respectively. The
percentage of revenue represented by each product category may
be affected by, among other factors, competition, economic
conditions, consumer trends, the introduction of new products
into the market, changes in our product mix, and the timing of
marketing events. The historical percentages listed below may
not be indicative of revenue percentages for future periods:
Percentage
of Revenue by Product
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Years Ended September 30,
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Product Category
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2006
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2005
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2004
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Video(1)
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57
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%
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55
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%
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57
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%
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Audio(2)
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18
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%
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18
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%
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19
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%
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Mobile(3)
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9
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%
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10
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%
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11
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%
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Home installation labor
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7
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%
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5
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%
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4
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%
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All other 4
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9
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%
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12
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%
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9
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%
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(1)
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Includes flat-panel televisions,
projection televisions, furniture, DVD recorders and players and
other video categories.
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(2)
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Includes speakers, receivers, home
theater and other audio categories.
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(3)
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Includes mobile multimedia devices,
installation labor, car speakers, car decks and other mobile
categories.
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(4)
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Includes power accessories and
cables, extended warranties, labor and parts, home installation
parts and other miscellaneous categories.
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Purchasing
and Inventory
Our purchasing and inventory control functions are based out of
our corporate offices in Canton, Massachusetts. The purchasing
decisions are made by our purchasing group, which has primary
responsibility for product selection, stocking levels and
pricing. Purchasing decisions are facilitated by our information
systems, which analyze stocking levels and product sell-through.
The purchasing group continuously reviews new and existing
products with a view towards maintaining a wide range of high
quality, brand-name consumer electronics products within the
product mix. In order to remain current with new and developing
products, we regularly host
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presentations by our major suppliers. In recent years, we have
traveled to the Far East to assist in product development for
our class of products.
In addition to making direct purchases, we are a member of the
Progressive Retailers Organization (PRO) group, a
volume-buying group of specialty electronics retailers across
the country. This affiliation often provides us with the
opportunities to obtain additional supplier rebates, product
discounts and promotional products. We are not obligated to make
purchases through PRO. Our Chairman also serves on the Board of
Directors of PRO.
We source products from many suppliers. Our largest supplier and
our ten largest suppliers, ranked by purchasing volume,
represented 22% and 77%, respectively, of our total purchases in
fiscal 2006. We do not maintain long-term commitments or
exclusive contracts with any particular supplier, but instead
consider numerous factors, including price, credit terms,
distribution, quality and compatibility within the existing
product mix in making our purchasing decisions. We utilize an
automatic replenishment system for store inventory, maintaining
stock levels and minimizing total dollars invested in inventory.
We believe that our relationships with our large suppliers are
excellent and that our focused merchandising and high degree of
customer service make us an important distribution channel,
particularly for the introduction of new products.
We distribute products to our stores through our regional
distribution centers. The following table lists each
distribution center, the region it serves and the square footage
of the facility.
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Distribution Center Locations
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Market Served
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Sq. Ft.
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Canton, MA
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New England
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90,500
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King of Prussia, PA
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Mid-Atlantic
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67,100
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Atlanta, GA(1)
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Southeast
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84,000
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Pembroke Park, FL(2)
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Florida
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124,500
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Chicago, IL
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Chicago
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122,100
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Houston, TX(3)
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Texas
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72,300
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Phoenix, AZ
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Phoenix
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17,200
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San Diego, CA
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Southern California and Las Vegas
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106,300
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Total
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684,000
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(1)
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Sq. ft. includes small facility in
Durham, NC.
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(2)
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Sq. ft. includes small facility in
St. Petersburg, FL.
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(3)
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Sq. ft. includes small facility in
Dallas, TX.
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We believe that these distribution facilities are sufficient to
accommodate any expansion in these markets through at least the
year 2008.
Advertising
and Marketing
We target consumers seeking informed advice, products and
services that result in the creation, integration and
installation of home and mobile entertainment solutions. We
continue to utilize newspaper ads and free-standing inserts at
certain times of the year. However, with newspaper readership
declining as consumers are relying more upon the Internet and
the variety offered by cable television for their information
and entertainment, we began a shift in media strategy in fiscal
2004 to increase our use of electronic media and direct
marketing to reach qualified customers and prospects. In fiscal
2004 we allocated less than one-third of our overall advertising
budget to broadcast media. In fiscal 2005 we increased this
amount to over 50% and in fiscal 2006 to approximately 60%. We
now run radio advertisements in markets representing
approximately 80% of retail store sales. The direct marketing
program consists of catalogs and direct mail to promote new
technologies and to convey timely offers. We also use email to
send targeted messages to our customers and we use banner ads to
advertise on the Internet. All of these efforts are supplemented
by local marketing efforts conducted by our store associates,
who are supported by our corporate marketing staff. The specific
allocation of advertising dollars among the various types of
advertising media is reviewed from time to time by management
and, if necessary, adjusted to reflect our assessment of
advertising results and market conditions.
7
Providing competitive product pricing is a critical component of
our marketing and advertising strategy. Store managers regularly
visit the local competition to ensure that their stores
pricing remains competitive. This is supported by a
30-day price
protection guarantee. We also offer financing to our customers
through GE Money Bank and provide to our customers an annual
calendar of available Tweeter and manufacturer finance offers.
Customer
Support Center
During fiscal 2006, we established a customer support center,
located in our corporate headquarters in Canton, Massachusetts
that uses
state-of-the-art
telephone and data networks. Our call center responds to more
than 1,000 phone calls and emails daily. The responses
include scheduling service calls, in-home installations and home
deliveries, and answering customers unique requests for
hard to find parts and accessories.
Information
Systems
We utilize a sophisticated, fully integrated mainframe based
management information system for recording
point-of-sale
transactions, managing inventory and determining
commission-based wages. Our system updates after every
transaction and is accessible on a real time basis to
management, sales associates and product buyers. Extensive sales
reporting and sales tracking are provided real time on screen to
store managers and individual sales associates. They use the
system to track category sales and benchmark key sales data.
This system enables management and store managers to review
sales volume, gross margin and product mix on a per store or per
sales associate basis, allows for the viewing of open orders,
inventory value and mix and tracks sales by product category, by
sales associate and by store. We provide ongoing training and
support in the use of this system.
In May 2005, we implemented a new general ledger and accounts
payable system. This system interfaces with and draws data from
our
point-of-sale
system.
Employees
As of September 30, 2006, we had approximately 3,200
employees. None of our employees are covered by collective
bargaining agreements, and we believe our relations with our
employees are good.
Tweeter.com
Website
Our commercial website address is www.tweeter.com. Our investor
relations website is www.twtr.com. We make our Annual Report on
Form 10-K,
our Quarterly Reports on
Form 10-Q,
our Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 available on our www.tweeter.com website as
soon as reasonably practicable after we electronically file such
documents with, or furnish them to, the Securities and Exchange
Commission.
The value of an investment in our company will be subject to
the significant risks inherent in our business. Investors should
consider carefully the risks and uncertainties described
below.
This Annual Report contains forward-looking statements
regarding our performance, strategy, plans, objectives,
expectations, beliefs and intentions. The actual outcome of the
events described in these forward-looking statements could
differ materially from our expectations. The following is a
discussion of some of the factors and risks that could
contribute to those differences.
We face
intense competition that could reduce our market
share.
We compete against a diverse group of retailers, including
several national and regional large format merchandisers and
superstores, such as Best Buy, Circuit City and Wal-Mart, which
sell, among other products, audio and video consumer electronics
products similar and often identical to those we sell. We also
compete with many small, independent retailers that carry
similar products and offer similar service levels. We also
compete in particular markets with a substantial number of
retailers that specialize in one or more types of consumer
electronics products that we sell. Certain of these competitors
have substantially greater financial resources than we have,
8
which may increase their ability to purchase inventory at lower
costs or to initiate and sustain predatory price competition. In
addition, the large format stores are continuing to expand their
geographic markets, and this expansion may increase price
competition within those markets.
We have
incurred losses from continuing operations for the last five
years and those losses could continue in the future.
We have experienced losses from continuing operations for the
last five years. Our net loss in 2006 amounted to
$16.5 million. Despite efforts to improve our operations,
we could incur substantial losses in the future. In four of the
last five years we have not provided sufficient cash from
operating activities to fund our purchases of property and
equipment. Our losses and the related use of cash over the last
several years were funded, in part, by increased borrowings
under our senior secured revolving credit facility and term
loans. There can be no assurance that additional indebtedness
will be available to us at all or on acceptable terms.
We may
need additional capital and we may not be able to obtain it on
acceptable terms, if at all.
Financing for the opening and acquisition of new stores, as well
as for the improvement of existing stores, may be in the form of
debt or equity or both and may not be available on terms
acceptable to us, if at all. We estimate that the average cash
investment for capital expenditures required to open a store is
in the range of $0.8 million to $1.5 million,
depending upon the level of construction required. The actual
cost of opening a store may be significantly greater than such
estimates, however, and we may need to seek additional debt
and/or
equity financing in order to fund our continued expansion
through 2007 and beyond. In some cases, we lease stores in an
existing building and incur costs for leasehold improvements to
convert the space to our retail format. Additional factors vary
depending on the region in which a new store is being opened,
and can therefore cause a corresponding
region-to-region
variation in the cost of opening a new store, including the
following:
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|
|
Labor cost, regional cost of living, and the use of union or
non-union labor;
|
|
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|
Material cost (which can vary by state and region); and
|
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|
|
General contractors fees and volume benefits (e.g., a
contractor building more than one store).
|
In addition, our ability to incur additional indebtedness or
issue equity or debt securities could be limited by covenants in
present and future loan agreements and debt instruments.
Our
success depends on our ability to increase sales in our existing
stores. We may not be able to do so.
Our continued growth depends on our ability to increase sales in
our existing stores. Our ability to increase sales in existing
stores may also be affected by our:
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Success in attracting customers into our stores;
|
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|
Ability to maintain fully staffed and trained employees;
|
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|
|
Ability to keep stores stocked with the correct
merchandise; and
|
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|
|
Ability to choose the correct mix of products to sell.
|
Our
comparable sales results may fluctuate significantly, which
could adversely affect our reportable revenue and
profitability.
Comparable store sales is a term we use to compare
the year over year sales performance of our stores. A store is
included in the comparable store sales base after it is in
operation for 12 full months. An acquired store is included
after 12 full months from the date of acquisition. In addition,
comparable store sales include Internet-originated sales.
Remodeled or relocated stores are excluded from the comparable
store base until they have completed 12 full months of operation
from the date the remodeling was completed or the store
re-opened after relocation. In 2005 we initiated a store closing
program. We removed those closing stores from the comparable
store sales base in May 2005, after we determined that they
would close. Stores that are part of discontinued operations are
also excluded from the comparable store sales base.
9
A number of factors have historically affected, and will
continue to affect, our comparable store sales results,
including, among other factors:
|
|
|
|
|
Competition: well-established competitors with an abundance of
resources may enter markets in which stores are located and
provide products at lower prices. This competition may cause
sales to decline from prior year sales;
|
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|
General regional and national economic conditions: severe
regional weather conditions such as floods, hurricanes or
tornados, economic dislocations such as the recent sharp rise in
gasoline and home-heating fuel prices, or regional business
crises causing large layoffs or work stoppages may cause
regional comparable store sales declines, while exceptional
regional business success may cause comparable store sales
increases. In addition, national economic conditions, such as a
recession, may cause comparable store sales declines while
favorable economic events, such as a stock market surge, may
cause comparable store sales increases;
|
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|
|
Consumer trends: if consumer trends shift to a new product
technology, we will likely see an increase in comparable store
sales;
|
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|
|
Changes in our product mix: if we change our product mix to add
products, eliminate products or change our emphasis on certain
products, comparable store sales will be affected by such
changes;
|
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|
|
Timing of promotional events: if a promotional event held one
year is not held the following year, then comparable store sales
may be lower in the following year; and
|
|
|
|
New product introductions: new product introductions may
increase comparable store sales by providing customers with an
incentive to replace their existing systems. New product
introductions may cause comparable store sales to decrease,
however, if the product is a lower-priced item that replaces a
higher priced product.
|
Recent economic conditions make forecasting comparable store
sales particularly difficult. Comparable store sales may
decrease in the future. Changes in our comparable store sales
results could cause the price of our common stock and
profitability to fluctuate substantially.
We may
not be able to open new stores and, even if we do open new
stores, we may not be able to operate those stores
profitably.
While the opening of new stores has slowed considerably, we
expect to continue to open new stores from time to time. The
opening of additional stores in new geographical markets could
present competitive and merchandising challenges different from
those we currently or previously faced within our existing
geographic markets. In addition, we may incur higher costs
related to advertising, administration and distribution as we
enter new markets.
There are a number of factors that could affect our ability to
open or acquire new stores. These factors also affect the
ability of any newly opened or acquired stores to achieve sales
and profitability levels comparable with our existing stores, or
to become profitable at all. These factors include:
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The identification and acquisition of suitable sites and the
negotiation of acceptable leases for such sites;
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|
The obtaining of governmental and other third-party consents,
permits and licenses needed to operate such additional sites;
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|
The hiring, training and retention of skilled personnel;
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|
The availability of adequate management and financial resources;
|
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|
The adaptation of our distribution and other operational and
management systems to an expanded network of stores;
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|
|
The ability and willingness of suppliers to supply products on a
timely basis at competitive prices; and
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|
Continued consumer demand for our products at levels that can
support acceptable profit margins.
|
10
We depend
on key personnel and our business may be severely disrupted if
we lose the services of our key executives.
The Companys success and ability to properly manage its
growth depends to a significant extent on both the performance
of its current executive and senior management team and its
ability to attract, hire, motivate, and retain additional
qualified and talented management personnel in the future. The
Companys inability to recruit and retain such personnel,
or the loss of services of any of its current key employees,
could have a material adverse impact on the Companys
operations.
Our
business is subject to quarterly fluctuations and
seasonality.
Seasonal shopping patterns affect our business. The fourth
calendar quarter, which is our first fiscal quarter and which
includes the Christmas holiday shopping season, has historically
contributed, and is expected to continue to contribute, a
significant portion of our total revenue. As a result, any
factors negatively affecting us during this time of year,
including adverse weather or unfavorable economic conditions,
would have a materially adverse impact on our revenue and
profitability for the entire year.
More generally, our quarterly results of operations may
fluctuate based upon such factors as:
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|
The amount of net sales contributed by our stores;
|
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|
The mix of consumer electronics products sold in our stores;
|
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|
Profitability of sales of particular products;
|
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|
Changes in volume-rebates from manufacturers;
|
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|
|
Local, regional, and national economic factors, such as the
price of gasoline and the price of home-heating fuels; and
|
|
|
|
Local weather conditions, such as hurricanes and snow storms,
which result in the closure of many stores on certain days.
|
We may
not be able to anticipate and respond to changes in consumer
demand, preference and patterns.
Our success depends on our ability to anticipate and respond in
a timely manner to consumer demand and preferences regarding
audio and video consumer electronics products and changes in
consumer demand and preferences. Consumer spending patterns,
particularly discretionary spending for products such as those
we sell, are affected by, among other things, prevailing
economic conditions. In addition, the periodic introduction and
availability of new products and technologies at price levels
that generate wide consumer interest stimulate the demand for
audio and video consumer electronics products. Also, many
products that incorporate the newest technologies are subject to
significant technological and pricing limitations and to the
actions and cooperation of third parties such as television
broadcasters. It is possible that these products or other new
products will never achieve widespread consumer acceptance.
Furthermore, the introduction or expected introduction of new
products or technologies may depress sales of existing products
and technologies. Significant deviations from the projected
demand for products we sell would result in lost sales or lower
margins due to the need to mark down excess inventory.
If any of
our relationships with our key suppliers are terminated, we may
not be able to find suitable replacements.
The success of our business and growth strategy depends to a
significant degree upon our suppliers, particularly our
brand-name suppliers of audio and video equipment. We do not
have any supply agreements or exclusive arrangements with any
suppliers. We typically order our inventory through the issuance
of individual purchase orders to suppliers. In addition, we rely
heavily on a relatively small number of suppliers. Our largest
supplier and our ten largest suppliers, ranked by purchasing
volume, represented 22% and 77%, respectively, of our total
purchases in fiscal 2006. The loss of any of these key suppliers
could affect our business, as we may not be able to find
suitable replacements.
11
Suppliers
may not be willing to supply products at acceptable
prices.
It is possible that we will be unable to acquire sufficient
quantities or an appropriate mix of products at acceptable
prices. Specifically, our ability to establish additional stores
in existing markets and to penetrate new markets depends, to a
significant extent, on the willingness and ability of suppliers
to supply inventory at acceptable prices, and suppliers may not
be willing or able to do so.
Our
service marks and patents may not be effective to protect our
intellectual property rights.
Our Tweeter, Tweeter etc., AVi.d.
Member, Slamfest, Wise Buys and
Picture Perfect service marks have been registered
with the United States Patent and Trademark Office. We have not
registered hifi buys, Sound Advice and
some of our other service marks. We are aware that other
consumer electronics retailers use the name hifi
buys and Sound Advice. We have submitted
applications for registration of some of our other service
marks, which applications are currently pending. We may be
unable to successfully register such service marks. In addition
our service marks, whether registered or unregistered, and our
patents may not be effective to protect our intellectual
property rights, and infringement or invalidity claims may be
asserted by third parties in the future.
Anti-takeover
provisions of the Delaware General Corporation Law, our
certificate of incorporation and our shareholders rights
plan could delay or deter a change in control.
Our corporate charter and by-laws, as well as certain provisions
of the Delaware General Corporation Law, contain provisions that
may deter, discourage or make more difficult a change in control
of the Company, even if such a change in control would be in the
interest of a significant number of our stockholders or if a
change in control would provide stockholders with a substantial
premium for their shares over then current market prices. For
example, our charter authorizes our Board of Directors to issue
one or more classes of preferred stock, having such
designations, rights and preferences as they determine.
Our stockholders have no right to take action by written consent
and may not call special meetings of stockholders. Any amendment
of the by-laws by the stockholders or certain provisions of the
charter requires the affirmative vote of at least 75% of the
shares of voting stock then outstanding. Our charter also
provides for the staggered election of directors to serve for
one, two and three-year terms, and for successive three-year
terms thereafter, subject to removal only for cause upon the
vote of not less than 75% of the shares of common stock
represented at a stockholders meeting.
In addition, under the terms of our shareholders rights
plan, in general, if a person or group acquires more than 20% of
the outstanding shares of our common stock, all other
stockholders of the Company would have the right to purchase
securities from us at a discount to such securities fair
market value, thus causing substantial dilution to the holdings
of the acquiring person or group.
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|
Item 1B.
|
Unresolved
Staff Comments
|
None.
12
The following table lists the number and location of stores we
operated at the end of each of the last three fiscal years, by
state:
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|
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|
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|
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|
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|
|
|
|
|
|
|
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At September 30,
|
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|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
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|
End
|
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|
|
|
|
End
|
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|
|
|
|
End
|
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|
|
|
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|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
State
|
|
Openings
|
|
Acquisitions
|
|
Closings
|
|
Period
|
|
Openings
|
|
Closings
|
|
Period
|
|
Openings
|
|
Closings
|
|
Period
|
|
Alabama
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Arizona
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
1
|
|
|
|
3
|
|
|
|
13
|
|
|
|
|
|
|
|
1
|
|
|
|
12
|
|
Connecticut
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Delaware
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Florida
|
|
|
1
|
|
|
|
|
|
|
|
4
|
|
|
|
30
|
|
|
|
|
|
|
|
6
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
24
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|
Georgia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
4
|
|
|
|
10
|
|
|
|
|
|
|
|
1
|
|
|
|
9
|
|
Illinois
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
2
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Maine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Maryland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
1
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Massachusetts
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Nevada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
New Hampshire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
New Jersey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
New York
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
North Carolina
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
1
|
|
|
|
8
|
|
Pennsylvania
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
13
|
|
|
|
|
|
|
|
2
|
|
|
|
11
|
|
|
|
|
|
|
|
1
|
|
|
|
10
|
|
Rhode Island
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Tennessee
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
1
|
|
|
|
1
|
|
|
|
17
|
|
|
|
|
|
|
|
2
|
|
|
|
15
|
|
Virginia
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
|
|
176
|
|
|
|
5
|
|
|
|
22
|
|
|
|
159
|
|
|
|
|
|
|
|
6
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2006 we occupied approximately
1,697,000 square feet of retail store space. Our stores
range in size from 3,500 square feet to 24,000 square
feet and average approximately 11,100 square feet. They
include sales space, inventory storage, management offices and
employee areas. The majority of the leases provide for a fixed
minimum rent with scheduled escalation dates and amounts. Leases
for 24 of our stores have percentage rent provisions, which
range from 1.5% to 5% of gross sales in excess of certain
specified sales amounts. The initial terms of our leases range
from 5 to 25 years and generally allow us to renew for up
to three additional five-year terms. The terms of our leases,
including exercised renewal options, expire between December
2006 and January 2025. We currently are leasing a few locations
on a
month-to-month
basis. The average lease term for our stores is 14.2 years
and the average remaining lease term is 6.7 years,
excluding renewal options.
Our corporate offices and the New England distribution and
service centers are located in two leased facilities totaling
151,400 square feet in Canton, MA. In addition, we lease
approximately 603,000 square feet of regional operating
facilities, including major distribution, service centers and
offices in King of Prussia, PA, Atlanta, GA, Pembroke Park,
FL, Chicago, IL, Houston, TX, San Diego, CA and Phoenix, AZ.
|
|
Item 3.
|
Legal
Proceedings
|
We are involved in various claims and legal actions arising in
the ordinary course of business. While management currently
believes that resolving claims against us, individually or in
the aggregate, will not have a
13
material adverse impact on our financial position, our results
of operations, or our cash flows, these matters are subject to
inherent uncertainties and managements view of these
matters may change in the future.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is traded on the NASDAQ National Market under
the symbol TWTR. The following table lists the high,
low and last sale prices for our common stock for the last eight
quarters in which our common stock was publicly traded.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
Last
|
|
|
September 30, 2006
|
|
$
|
7.12
|
|
|
$
|
3.31
|
|
|
$
|
4.56
|
|
June 30, 2006
|
|
|
9.10
|
|
|
|
6.24
|
|
|
|
7.10
|
|
March 31, 2006
|
|
|
9.22
|
|
|
|
4.80
|
|
|
|
7.84
|
|
December 31, 2005
|
|
|
6.40
|
|
|
|
3.24
|
|
|
|
5.72
|
|
September 30, 2005
|
|
|
4.75
|
|
|
|
2.26
|
|
|
|
3.29
|
|
June 30, 2005
|
|
|
5.68
|
|
|
|
2.27
|
|
|
|
2.50
|
|
March 31, 2005
|
|
|
7.48
|
|
|
|
4.77
|
|
|
|
5.57
|
|
December 31, 2004
|
|
|
7.09
|
|
|
|
5.26
|
|
|
|
6.88
|
|
The last sale price of the common stock on December 7,
2006, as reported by NASDAQ, was $2.40 per share. As of
December 7, 2006, there were approximately 2,700 holders of
record of our common stock.
We do not anticipate paying any cash dividends for the
foreseeable future. Please see Liquidity and Capital
Resources below.
The following table summarizes our stock option plans as of
September 30, 2006. Further details of our stock option
plans are discussed in the notes to the consolidated financial
statements. The adoption of each of our stock option plans was
approved by our shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities to
|
|
|
|
|
|
|
|
|
|
be issued
|
|
|
|
|
|
|
|
|
|
upon the exercise
|
|
|
Weighted-average
|
|
|
Number of securities
|
|
|
|
of outstanding
|
|
|
exercise price of
|
|
|
remaining available
|
|
|
|
options
|
|
|
outstanding options
|
|
|
for future issuance
|
|
|
1998 Stock Option and Incentive
Plan
|
|
|
1,767,986
|
|
|
$
|
7.05
|
|
|
|
|
|
2004 Long-Term Incentive Plan
|
|
|
1,105,003
|
|
|
|
4.60
|
|
|
|
1,516,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,872,989
|
|
|
$
|
6.10
|
|
|
|
1,516,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Sales of Unregistered Securities
None.
14
|
|
Item 6.
|
Selected
Financial Data (amounts in thousands, except per share and
number of stores data)
|
The following table presents our selected financial data. The
table should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations, and Item 8, Financial Statements
and Supplementary Data, of this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004(4)
|
|
|
2003
|
|
|
2002(3)
|
|
|
Statement of
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
775,287
|
|
|
$
|
795,090
|
|
|
$
|
765,280
|
|
|
$
|
758,162
|
|
|
$
|
763,905
|
|
Cost of sales
|
|
|
455,852
|
|
|
|
481,436
|
|
|
|
467,721
|
|
|
|
498,355
|
|
|
|
489,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
319,435
|
|
|
|
313,654
|
|
|
|
297,559
|
|
|
|
259,807
|
|
|
|
274,898
|
|
Selling, general and administrative
expenses
|
|
|
331,346
|
|
|
|
343,593
|
|
|
|
317,810
|
|
|
|
275,064
|
|
|
|
244,005
|
|
Amortization of intangibles
|
|
|
567
|
|
|
|
680
|
|
|
|
680
|
|
|
|
680
|
|
|
|
1,573
|
|
Impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,176
|
|
Restructuring charges
|
|
|
1,195
|
|
|
|
16,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(13,673
|
)
|
|
|
(47,099
|
)
|
|
|
(20,931
|
)
|
|
|
(15,937
|
)
|
|
|
(151,856
|
)
|
Interest expense
|
|
|
(4,570
|
)
|
|
|
(2,743
|
)
|
|
|
(3,350
|
)
|
|
|
(2,834
|
)
|
|
|
(2,282
|
)
|
Interest income
|
|
|
|
|
|
|
26
|
|
|
|
328
|
|
|
|
113
|
|
|
|
27
|
|
Gain on sale of investments
|
|
|
225
|
|
|
|
9,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(18,018
|
)
|
|
|
(39,959
|
)
|
|
|
(23,953
|
)
|
|
|
(18,658
|
)
|
|
|
(154,111
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
25,036
|
|
|
|
(9,102
|
)
|
|
|
(7,090
|
)
|
|
|
(1,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income from equity investments related
parties
|
|
|
(18,018
|
)
|
|
|
(64,995
|
)
|
|
|
(14,851
|
)
|
|
|
(11,568
|
)
|
|
|
(152,338
|
)
|
Income (loss) from equity
investments related parties
|
|
|
2,021
|
|
|
|
1,442
|
|
|
|
534
|
|
|
|
403
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(15,997
|
)
|
|
|
(63,553
|
)
|
|
|
(14,317
|
)
|
|
|
(11,165
|
)
|
|
|
(152,364
|
)
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from discontinued
operations
|
|
|
(486
|
)
|
|
|
(10,800
|
)
|
|
|
(6,212
|
)
|
|
|
(802
|
)
|
|
|
(12,904
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(2,360
|
)
|
|
|
(305
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations
|
|
|
(486
|
)
|
|
|
(10,800
|
)
|
|
|
(3,852
|
)
|
|
|
(497
|
)
|
|
|
(12,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,483
|
)
|
|
$
|
(74,353
|
)
|
|
$
|
(18,169
|
)
|
|
$
|
(11,662
|
)
|
|
$
|
(165,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.64
|
)
|
|
$
|
(2.59
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(6.53
|
)
|
Loss from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.44
|
)
|
|
|
(0.16
|
)
|
|
|
(0.02
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.66
|
)
|
|
$
|
(3.03
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(7.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted(1)
|
|
|
25,154
|
|
|
|
24,565
|
|
|
|
24,165
|
|
|
|
23,690
|
|
|
|
23,342
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at beginning of period
|
|
|
159
|
|
|
|
176
|
|
|
|
174
|
|
|
|
167
|
|
|
|
147
|
|
New stores opened
|
|
|
|
|
|
|
5
|
|
|
|
2
|
|
|
|
12
|
|
|
|
22
|
|
Stores acquired
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
2
|
|
Stores closed
|
|
|
6
|
|
|
|
22
|
|
|
|
6
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at end of period
|
|
|
153
|
|
|
|
159
|
|
|
|
176
|
|
|
|
174
|
|
|
|
167
|
|
Remodeled/relocated stores
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
|
|
4
|
|
|
|
8
|
|
Comparable store sales(2)
|
|
|
0.6
|
%
|
|
|
1.0
|
%
|
|
|
(0.8
|
)%
|
|
|
(9.9
|
)%
|
|
|
(3.3
|
)%
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
39,355
|
|
|
$
|
39,154
|
|
|
$
|
56,290
|
|
|
$
|
86,575
|
|
|
$
|
89,291
|
|
Total assets
|
|
|
258,573
|
|
|
|
284,017
|
|
|
|
301,213
|
|
|
|
308,436
|
|
|
|
335,878
|
|
Long-term debt, excluding current
portion
|
|
|
50,362
|
|
|
|
62,617
|
|
|
|
35,002
|
|
|
|
48,267
|
|
|
|
50,074
|
|
Stockholders equity
|
|
|
68,156
|
|
|
|
82,867
|
|
|
|
156,419
|
|
|
|
165,037
|
|
|
|
174,611
|
|
|
|
|
(1) |
|
Diluted weighted average shares outstanding excludes shares
issuable upon exercise of stock options and warrants outstanding
for all periods presented, as inclusion would be anti-dilutive. |
15
|
|
|
(2) |
|
Stores are included in the comparable store base after they are
in operation for 12 full months. Acquired stores are included
after 12 months from the date of acquisition. Remodeled or
relocated stores are excluded from the comparable store base
until they have completed 12 full months of operation from the
date the remodeling was completed or the store re-opened after
relocation. In 2005, when we decided to close 19 stores due to
poor operating performance, we removed those stores from the
comparable store sales calculation. In addition, comparable
store sales include Internet-originated sales. |
|
(3) |
|
The fiscal year 2002 data includes the results of the Hillcrest
acquisition from March 1, 2002. |
|
(4) |
|
The fiscal year 2004 data includes the results of the NOW! Audio
Video acquisition from July 1, 2004. |
16
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Annual Report contains forward-looking statements regarding
our performance, strategy, plans, objectives, expectations,
beliefs and intentions. The actual outcome of the events
described in these forward-looking statements could differ
materially. This report, and especially this section and the
section entitled Risk Factors contains a discussion
of some of the factors and risks that could contribute to those
differences.
General
We are a national specialty consumer electronics retailer
providing audio and video solutions for the home and mobile
environment. We believe that we can apply our expertise to help
our customers live in hi-def.
We opened our first Tweeter store in New England in 1972. As of
September 30, 2006, we operated 153 stores in
22 states under the Tweeter, Sound Advice, hifi buys and
Showcase Home Entertainment names. Our stores are located in the
following markets: New England, the Mid-Atlantic, the Southeast
(including Florida), Chicago, Texas, Southern California,
Phoenix, and Las Vegas. We operate in a single business segment
of retailing audio, video and mobile consumer electronics
products. Our stores feature a selection of quality home and
mobile audio and video products including cutting edge HDTV
plasma, LCD and rear-projection television sets, home theater
video and audio solutions, home theater furniture, DVD players
and recorders, surround sound systems, audio components, digital
video satellite systems, satellite radios, personal video
recorders and digital entertainment centers. We differentiate
ourselves by focusing on consumers who seek audio and video
products with advanced features, functionality and performance
and by offering expert in-home installation services. We have
created an inviting retail environment in each store with
specially designed notional spaces, allowing our customers to
visualize the technology in a more natural home setting. Our
stores average approximately 11,100 square feet and are
staffed with highly trained sales and installation
professionals. Our goal is to ensure that each customer receives
the best possible experience through their entire purchase and
installation process. We believe this commitment to customer
service, along with our competitive prices, will build customer
loyalty and brand awareness.
In 2005 we introduced a new prototype store, a consumer
electronics playground concept. This prototype has a unique
selling space to make it easier and more enjoyable for
customers. It showcases whole-home control and automation
through notional spaces specifically designed to replicate the
rooms throughout a customers home. The customer experience
begins at the concierge service desk. As customers enter the
store they are greeted by a concierge, to enhance service and
optimize their shopping experience. Initial results from our new
prototype store were favorable and in 2006 we extended the test
by renovating one existing store and relocating one other store
using the same format. Those stores also performed well so we
have adopted this format as our new prototype and we will look
to introduce it in additional existing and new locations going
forward.
Results
of Operations
The following table sets forth the percentage relationship to
net sales of certain items in our consolidated statements of
earnings for the fiscal periods shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
58.8
|
%
|
|
|
60.6
|
%
|
|
|
61.1
|
%
|
Gross profit
|
|
|
41.2
|
%
|
|
|
39.4
|
%
|
|
|
38.9
|
%
|
Selling, general and
administrative expenses
|
|
|
42.7
|
%
|
|
|
43.2
|
%
|
|
|
40.8
|
%
|
Restructuring charges
|
|
|
0.2
|
%
|
|
|
2.1
|
%
|
|
|
0.0
|
%
|
Interest expense
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
Gain on sale of investments
|
|
|
0.0
|
%
|
|
|
1.2
|
%
|
|
|
0.0
|
%
|
Income from equity investments,
net of tax
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Net loss from continuing operations
|
|
|
(2.1
|
)%
|
|
|
(8.0
|
)%
|
|
|
(1.9
|
)%
|
17
Fiscal
2006 as Compared to Fiscal 2005
Total Revenue. Our total revenue includes
delivered merchandise, home installation labor, commissions on
extended warranties sold, completed service center work orders,
direct
business-to-business
sales, delivery charges and Internet-originated sales and
excludes collected sales taxes. Generally, revenue from products
sold in our 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 that we deliver
the product to specified locations, in which case revenue would
be recognized when the customer receives the product. Revenue
from installation labor is recognized as labor is provided.
Service revenue is recognized when the repair service is
completed. Product sold through our
business-to-business
division and our Internet web site is shipped free on
board shipping point and the related revenue is recognized
upon shipment.
We use the term comparable store sales to compare
year-over-year
sales performance of our stores. We include a store in our
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 our 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. In
2005 we implemented a store closing program. We removed those
closing stores from the comparable store sales base in May 2005
after we determined that they would close. Stores that are part
of discontinued operations are also excluded from the comparable
store sales base.
Our total revenue from continuing operations decreased
$19.8 million, or 2%, to $775.3 million in the year
ended September 30, 2006 from $795.1 million for the
year ended September 30, 2005. The decrease was primarily
the result of a $34.6 million reduction in sales related to
closed stores. This decrease in revenue was partially offset by
an increase of $8.3 million related to revenues from new
stores, a comparable store sales increase of $4.5 million,
or 1%, and an increase of $2.0 million associated with
direct
business-to-business
sales.
In both the years ended September 30, 2006 and 2005 we
generated 95% of our total revenue from our retail store sales,
3% from repair service, 2% from direct
business-to-business
sales and less than 1% from all other revenue. For the year
ended September 30, 2006, retail store sales declined
$21.8 million, or 3%, repair service revenue declined
$0.6 million, or 3%, and direct
business-to-business
sales increased $2.0 million, or 15%.
Video is our largest category of retail store sales,
contributing 57% and 55% of total retail store sales in the
years ended September 30, 2006 and 2005, respectively. For
the year ended September 30, 2006 we experienced a decline
of $7.0 million, or 2%, in video sales. Excluding closed
stores, video sales increased $11.2 million. This increase
of $11.2 million included an increase of
$58.3 million, or 31%, for sales of plasma and LCD
televisions, which was partially offset by decreases of
$22.7 million, or 16%, for sales of projection televisions,
$8.4 million, or 77%, for sales of TV monitors,
$5.0 million, or 99%, for sales of camcorders, a category
that we discontinued selling in 2005, $4.1 million, or 63%,
for sales of satellite TV systems, $3.7 million, or 21%,
for sales of DVD players and recorders and
$2.7 million, or 15%, for sales of furniture.
Audio, our next largest category of retail store sales,
contributed 18% of total retail store sales in the years ended
September 30, 2006 and 2005. For the year ended
September 30, 2006 we experienced a decline of
$11.5 million, or 8%, in audio sales. Excluding closed
stores, audio sales decreased $5.1 million, or 4%. This
decrease of $5.1 million included decreases of
$4.2 million, or 73%, for sales of music systems and
$3.5 million, or 5%, for sales of speakers, which were
partially offset by an increase of $1.9 million, or 107%
for sales of audio/video networking products.
Mobile contributed 9% and 10% of total retail store sales in the
years ended September 30, 2006 and 2005, respectively. For
the year ended September 30, 2006 we experienced a decline
of $11.4 million, or 15%, in mobile sales. Excluding closed
stores, mobile sales decreased $6.4 million, or 9%. This
decrease of $6.4 million included decreases of
$2.4 million, or 24%, for sales of car decks,
$1.4 million, or 12%, for sales of car speakers,
$1.1 million, or 6%, for sales of mobile multimedia
products, $0.9 million, or 6%, for car installation labor
revenue and $0.9 million, or 13%, for sales of car
amplifier equipment.
Home installation labor revenue increased $7.4 million, or
18%, for the year ended September 30, 2006, reaching 7% of
total retail store revenue, compared to 5% of total retail store
revenue in the previous year. Excluding closed stores, home
installation labor revenue increased $8.6 million, or 22%.
18
Cost of Sales and Gross Profit. Our cost of
sales includes merchandise costs, distribution costs, home
installation labor costs, purchase discounts and vendor
allowances. Our cost of sales decreased $25.5 million, or
5%, to $455.9 million in the year ended September 30,
2006 from $481.4 million in the year ended
September 30, 2005. Our gross profit increased
$5.7 million, or 1.8%, to $319.4 million in the year
ended September 30, 2006 from $313.7 million for the
year ended September 30, 2005. Our gross profit percentages
were 41.2% and 39.4%
for the years ended September 30, 2006 and 2005,
respectively.
Our gross profit percentage from the video category in our
retail stores increased 1.3%. This was largely due to an
increase of 1.2% in the gross profit percentage for plasma and
LCD televisions.
Our gross profit percentage from the audio category in our
retail stores increased 0.5%. This was largely due to an
increase of 0.6% in the gross profit percentage for speakers.
Our gross profit percentage from the mobile category in our
retail stores decreased by 0.4%. The gross profit percentage for
mobile multimedia products declined 1.1%, which was partially
offset by flat gross profit percentages for car decks and car
labor.
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, depreciation, advertising, 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
decreased $12.3 million, or 4%, to $331.3 million for
the year ended September 30, 2006 from $343.6 million
for the year ended September 30, 2005.
As a percentage of total revenue, SG&A expenses decreased
0.5%, to 42.7%, for the year ended September 30, 2006, from
43.2% in the prior year. Advertising expenses decreased
$5.5 million, or 0.6% as a percentage of total revenue,
largely because we reduced our spending on newspaper
advertisements due to declining newspaper readership.
Amortization of Intangibles. Amortization of
intangibles was $0.6 million for the year ended
September 30, 2006 compared to $0.7 million for the
year ended September 30, 2005. This decrease was due to the
related intangible asset becoming fully amortized during the
year ended September 30, 2006.
Restructuring charges. In 2006 we recorded an
additional $1.2 million associated with a change in
estimate of the restructuring reserve related to our closed
store program. In 2005 we incurred restructuring charges
totaling $16.5 million associated with the closing of 13
stores that are in continuing markets. Our 2005 restructuring
charges included $8.1 million for lease termination fees
and other related charges, $1.8 million for professional
fees related to lease termination negotiations and inventory
liquidation, $0.3 million for severance costs and a
non-cash charge of $6.3 million related to the write-down
of leasehold improvements and lease adjustments. Revenue from
these closed stores amounted to $0.2 million and
$23.7 million for the years ended September 30, 2006
and 2005, respectively.
Interest expense. Our interest expense was
$4.6 million for the year ended September 30, 2006
compared to $2.7 million for the year ended
September 30, 2005. Our interest expense increased due to
an increase in our average borrowings and higher interest rates.
Gain on Sale of Investments. In 2006 we
realized a gain on sale of investments of $0.2 million
related to the sales of our available for sale securities in
September 2006. We realized a gain on sale of equity investment
of $9.9 million for the year ended September 30, 2005.
On May 4, 2005, we sold 68,750 shares, representing
25% of our total investment, in Tivoli Audio, LLC
(Tivoli) for $10.3 million. The transaction
decreased our total ownership in Tivoli from 25% to 18.75% after
completion of the sale.
Income Tax Expense (Benefit). We are required
to 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 September 30, 2006, we have
provided a full valuation allowance of approximately
$52.0 million related to net federal and state deferred tax
assets. The effective tax rate (benefit) for the years ended
September 30, 2006 and 2005 was 0.0% and 50.8%,
respectively. In 2006 we did not record a tax benefit from our
pre-tax loss. We provided a valuation allowance on the tax
benefit related to the 2006 and 2005 operating losses because of
the uncertainty of realization of such benefit.
19
Income from Equity Investment. Our income from
equity investment increased to $2.0 million for the year
ended September 30, 2006 from $1.4 million for the
year ended September 30, 2005, reflecting the increased
profitability of Tivoli.
Discontinued Operations. In 2006, we recorded
an additional $0.5 million associated with a change in
estimate of our discontinued operations reserve. In 2005 we
closed or committed to close six stores classified as
discontinued operations. The decision to exit these stores was
primarily related to poor operating results. There was no
revenue from closed stores included in pre-tax loss from
discontinued operations for the year ended September 30,
2006. Revenue from the closed stores, included in pre-tax loss
from discontinued operations amounted to $11.1 million for
the year ended September 30, 2005.
Fiscal
2005 as Compared to Fiscal 2004
Total Revenue. Our total revenue from
continuing operations increased $29.8 million, or 4%, to
$795.1 million in the year ended September 30, 2005
from $765.3 million for the year ended September 30,
2004. The increase was primarily the result of revenues from new
and acquired stores of $30.9 million, of which
$13.3 million related to the NOW! Audio Video acquisition
that occurred on July 1, 2004. In addition, comparable
store sales increased $7.8 million, or 1%. The increase in
revenue was partially offset by a $5.2 million reduction in
sales associated with direct
business-to-business
sales and a $4.8 million reduction in sales related to
closed stores.
Video was our largest category of retail store sales,
contributing 55% and 57% of total retail store sales in the
years ended September 30, 2005 and 2004, respectively. For
the year ended September 30, 2005 we experienced a decline
of $0.1 million, or 0%, in video sales. Excluding closed
stores, video sales increased $4.2 million. This increase
of $4.2 million included an increase of $44.3 million,
or 31%, for sales of plasma and LCD televisions, which was
partially offset by decreases of $17.5 million, or 61%, for
sales of TV monitors, $9.9 million, or 6%, for sales of
projection televisions, $7.1 million, or 59%, for sales of
camcorders, a category that we discontinued selling in 2005, and
$5.5 million, or 24%, for sales of DVD players and
recorders.
Audio, our next largest category of retail store sales,
contributed 18% and 19% of total retail store sales in the years
ended September 30, 2005 and 2004, respectively. For the
year ended September 30, 2005 we experienced a decline of
$2.0 million, or 1%, in audio sales. Excluding closed
stores, audio sales decreased $0.5 million, or 0%. This
decrease of $0.5 million included decreases of
$2.7 million, or 59% sales of audio/video networking
equipment, $2.5 million, or 8%, for sales of receivers,
$2.0 million, or 12%, for sales of home
theater-in-a-box
systems and $1.1 million, or 2%, for sales of speakers,
which were partially offset by increases of $2.8 million
for sales of audio source equipment, which was a new category we
introduced in 2005, $2.5 million, or 88%, for sales of
personal electronics, $2.0 million, or 72%, for sales of
audio accessories and $0.7 million.
Mobile contributed 10% and 11% of total retail store sales in
the years ended September 30, 2005 and 2004, respectively.
For the year ended September 30, 2005 we experienced a
decline of $4.7 million, or 6%, in mobile sales. Excluding
closed stores, mobile sales decreased $2.6 million, or 4%.
This decrease of $2.6 million included decreases of
$3.2 million, or 24%, for sales of car decks and
$1.6 million, or 12%, for sales of car speakers, which were
partially offset by increases of $1.5 million, or 11%, for
car installation labor revenue and $1.2 million, or 7%, for
sales of mobile multimedia products.
Home installation labor revenue increased $15.5 million, or
62%, for the year ended September 30, 2005, reaching 5% of
total retail store revenue, compared to 4% of total retail store
revenue in the previous year. Excluding closed stores, home
installation labor revenue increased $15.5 million, or 65%.
Cost of Sales and Gross Profit. Our cost of
sales related to continuing operations increased
$13.7 million, or 3%, to $481.4 million in the year
ended September 30, 2005 from $467.7 million in the
year ended September 30, 2004. Our gross profit increased
$16.1 million, or 5.4%, to $313.7 million in the year
ended September 30, 2005 from $297.6 million for the
year ended September 30, 2004. Our gross profit percentages
for the years ended September 30, 2005 and 2004 were 39.4%
and 38.9%, respectively. This increase was primarily related to
higher contribution from home installation labor and parts,
plasma and LCD TVs, cables, remote control devices and
furniture. We were also able to reduce the adverse impact of
discount coupons on our gross profit. These increases
20
were partially offset by lower contribution from projection TVs,
TV monitors, DVD equipment and audio speakers and receivers.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased $25.8 million, or 8%, to
$343.6 million for the year ended September 30, 2005
from $317.8 million for the year ended September 30,
2004. As a percentage of total revenue, selling general and
administrative expenses increased to 43.2% for the year ended
September 30, 2005 from 41.5% in the prior year period. The
percentage increase was attributable to several factors. Payroll
and fringe benefits expenses rose $9.0 million, driven by
increased sales and a larger support staff associated with our
growing in-home installation business. Advertising costs
increased $5.0 million due to an increase in the number of
advertising initiatives. Insurance expense increased
$3.0 million due to an increase in our workers compensation
self-insurance expenses. Bank and credit cards fees increased
$2.7 million, reflecting our increase in sales and the
increase in interest rates. Occupancy expense increased
$2.1 million, primarily due to increases in rent and real
estate taxes. Our depreciation expense increased
$2.2 million as we began adding more displays in our
stores. Vehicle expenses rose by $1.3 million, largely
associated with increases in fuel prices and additional vehicles
required to support our growing in-home installation business.
Utility costs increased by $1.1 million, primarily due to
increases in telephone costs. Professional fees increased
$1.7 million largely due to increased spending on
Sarbanes-Oxley compliance efforts. Partially offsetting these
increases was a decrease in non-cash compensation charges of
$5.2 million.
Amortization of Intangibles. Amortization of
intangibles was $0.7 million for the years ended
September 30, 2005 and 2004.
Restructuring charges. In 2005 we incurred
restructuring charges totaling $16.5 million associated
with the closing of 13 stores described above that are in
continuing markets. Our restructuring charges included
$8.1 million for lease termination fees and other related
charges, $1.8 million for professional fees related to
lease termination negotiations and inventory liquidation,
$0.3 million for severance costs and a non-cash charge of
$6.3 million related to the write-down of leasehold
improvements and lease adjustments.
Interest expense. Our interest expense was
$2.7 million for the year ended September 30, 2005
compared to interest expense of $3.4 million for the year
ended September 30, 2004. The decrease was primarily due to
a reduction in amortization expense associated with loan
financing costs.
Gain on Sale of Investments. We realized a
gain on sale of equity investment of $9.9 million for the
year ended September 30, 2005. On May 4, 2005, we sold
68,750 shares, representing 25% of our total investment, in
Tivoli for $10.3 million. The transaction decreased our
total ownership in Tivoli from 25% to 18.75% after completion of
the sale.
Income Tax Expense (Benefit). We are required
to 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 September 30, 2005, we had
provided a full valuation allowance of approximately
$45.9 million related to net federal and state deferred tax
assets. The effective tax rate (benefit) for the years ended
September 30, 2005 and 2004 was 50.8% and (38.0%),
respectively. In 2005 we recorded tax expense of
$25.0 million, $22.3 million of which related to the
establishment of a full valuation allowance on net federal and
state deferred tax assets established prior to 2005 and the
balance of which related to further adjustments of our tax asset
and liability accounts. We provided a valuation allowance on the
tax benefit related to the 2005 operating loss because of the
uncertainty of realization of such benefit.
Income from Equity Investment. Our income from
equity investment increased to $1.4 million for the year
ended September 30, 2005 from $0.5 million for the
year ended September 30, 2004, reflecting the increased
profitability of Tivoli.
Discontinued Operations. In the third quarter
of fiscal 2005 we closed or committed to close six stores
classified as discontinued operations. In the fourth quarter of
fiscal 2004 we closed or committed to close eight stores
classified as discontinued operations. The decision to exit
these stores was primarily related to poor operating results.
Prior year information has been reclassified to conform to
current year presentation. Revenue from the closed stores,
included in pre-tax loss from discontinued operations, amounted
to $11.1 million and $26.6 million for the years ended
September 30, 2005 and 2004, respectively. The revenue in
2005 from discontinued operations
21
was lower than in 2004 because eight of the 14 stores classified
as discontinued operations were closed by early 2005 whereas all
14 were open for nearly all of 2004.
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.
For the fiscal year ended September 30, 2006, we generated
$15.6 million of cash from operating activities. This
includes a net loss of $16.5 million. Net non-cash expenses
recorded for the year totaled $29.5 million. These non-cash
expenses consisted primarily of $26.8 million for
depreciation, amortization and accretion, a $3.1 million
increase in our allowance for doubtful accounts and
$1.0 million of stock-based compensation, offset in part by
$2.0 million for income from equity investments. The
increase in our allowance for doubtful accounts was largely due
to increased reserves for monies due from our former extended
warranty provider. The increase in stock-based compensation is
due to the issuance of new stock options during the year
accounted for under Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)). Other sources of
cash totaled $8.9 million, which primarily consisted of
decreases in accounts receivable of $4.9 million due to
better collection efforts of vendor receivables and
$2.6 million for inventory due to fewer stores. Our prepaid
expenses and other assets decreased by $1.1 million
primarily due to changing providers for medical insurance
effective the beginning of fiscal 2006, whereby in September
2005 we were required to prepay over $1.0 million to cover
the expected run out of claims. Uses of cash totaled
$7.1 million consisting primarily of decreases in customer
deposits of $3.6 million due to fewer stores and a slowdown
in the business experienced in the fourth quarter of fiscal 2006
and decreases in accounts payable and accrued expenses of
$2.5 million due to the paydown of accrued restructuring
charges.
For the year ended September 30, 2006, we used
$3.4 million of cash for investing activities. Capital
expenditures were $17.4 million, primarily for investments
in information technology, relocated and remodeled stores,
merchandising displays and vehicles. We have tentative plans to
spend approximately $6.0 million in capital expenditures in
2007. These plans may vary based upon operating performance.
Sources of cash totaled $14.0 million and consisted
primarily of net proceeds of $13.5 million from the
sale-leaseback transaction on our corporate office and our New
England distribution facility, $0.3 million as our share of
the proceeds from the liquidation of Sapphire Audio, LLC
(Sapphire), a manufacturer of consumer electronic
products and $0.2 million from the sale of equity
investments in marketable securities.
Our net cash used in financing activities during the year ended
September 30, 2006 was $12.2 million. We paid down
$13.7 million of long-term debt and $2.8 million of
the current portion of long-term debt. We received
$4.0 million in proceeds from stock options exercised and
$0.3 million from employee purchases of stock through our
employee stock purchase plan.
Our senior secured revolving credit facility (credit
facility), as amended July 25, 2005, provides for up
to $90 million in revolving credit loans, which may include
up to $15 million in letters of credit, 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 receivables and
inventory, reduced by a $5 million reserve, a portion of
customer deposits and outstanding letters of credit. At
September 30, 2006, $16.5 million was available for
future borrowings and $6.9 million was held as letters of
credit. The facility expires on April 1, 2008.
The interest rate on our revolving credit loans ranges from 1.5%
to 2% over LIBOR or at 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
22
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 years ended September 30, 2006 and 2005
were approximately 7.6% and 5.1%, respectively.
The following table lists our contractual obligations at
September 30, 2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Within
|
|
|
Within
|
|
|
Within
|
|
|
After
|
|
|
|
|
|
|
1
|
|
|
2-3
|
|
|
4-5
|
|
|
5
|
|
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Long-term debt, including
interest(1)
|
|
$
|
54,953
|
|
|
$
|
4,040
|
|
|
$
|
50,913
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases real
estate(2)
|
|
|
280,780
|
|
|
|
35,392
|
|
|
|
65,617
|
|
|
|
57,178
|
|
|
|
122,593
|
|
Operating leases
vehicles(2)
|
|
|
1,767
|
|
|
|
616
|
|
|
|
698
|
|
|
|
367
|
|
|
|
86
|
|
Capital lease real
estate(3)
|
|
|
1,485
|
|
|
|
31
|
|
|
|
71
|
|
|
|
83
|
|
|
|
1,300
|
|
Name in title sponsorships(2)
|
|
|
7,138
|
|
|
|
1,875
|
|
|
|
3,250
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(4)
|
|
$
|
346,123
|
|
|
$
|
41,954
|
|
|
$
|
120,549
|
|
|
$
|
59,641
|
|
|
$
|
123,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest was estimated through
April 1, 2008, the maturity date of the debt, assuming
borrowing levels and interest rates as of September 30,
2006.
|
|
(2)
|
|
See Note 10 to the
consolidated financial statements.
|
|
(3)
|
|
See Note 8 to the consolidated
financial statements.
|
|
(4)
|
|
At September 30, 2006 we had
outstanding purchase orders totaling approximately
$115.3 million for the acquisition of inventory that was
scheduled for delivery after September 30, 2006. We are
obligated to pay for the inventory only upon receipt of goods
and in certain instances may change items to be purchased, date
the inventory will be received or cancel orders based on
inventory needs. We are also obligated to certain officers under
employment and severance agreements in the event such officers
were to be terminated without cause.
|
On January 17, 2006 we entered into a sale-leaseback
arrangement with Tweet Canton LLC, an unrelated party, with
respect to our corporate office and our New England distribution
facility, 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, which are included in
the table above, 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 have experienced losses from continuing operations for the
last five years. In four of the last five years we have not
provided sufficient cash from operating activities to fund our
purchases of property and equipment. However, by using other
sources to raise cash including selling owned properties and
investments we have been able to limit the amount of borrowings.
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. Due to the seasonality of our business, our working
capital needs are significantly higher in the fiscal first and
second quarters and there is the possibility that this could
cause unforeseen capital constraints in the future. Within our
credit facility, there is an option during our peak holiday
season buying periods to have more availability on our credit
line to meet these needs. We will continue to monitor our
results of operations and spending on capital expenditures,
inventory and other initiatives to insure availability on our
credit facility is sufficient to meet our needs.
Impact of
Inflation
We do not believe that inflation has had a material adverse
effect on our results of operations. However, we cannot predict
accurately the effect of inflation on future operating results.
23
Seasonality
Our business is subject to seasonal variations. Historically, we
have realized a significant portion of our total revenue and net
income for the year during the first and second fiscal quarters,
with a majority of net income for such quarters realized in the
first fiscal quarter. Due to the importance of the holiday
shopping season, any factors negatively impacting the holiday
selling season could have an adverse effect on our revenue and
our ability to generate a profit. Our quarterly results of
operations may also fluctuate significantly due to a number of
factors, including the timing of new store openings and
acquisitions and unexpected changes in volume-related rebates or
changes in cooperative advertising policies from manufacturers.
In addition, operating results may be negatively affected by
increases in merchandise costs, price changes in response to
competitive factors and unfavorable local, regional or national
economic developments that result in reduced consumer spending.
Critical
Accounting Policies
Presented below is a discussion about our application of
critical accounting policies that require us to make assumptions
about matters that are uncertain at the time the accounting
estimate is made, and where different estimates that we
reasonably could have used in the current period, or changes in
the accounting estimate that are reasonably likely to occur from
period to period, would have a material impact on the
presentation of our financial condition, changes in financial
condition or results of operations. Management has identified
the following accounting estimates as critical for Tweeter, and
will discuss them separately below: allowance for doubtful
accounts, inventory obsolescence reserve, goodwill impairment,
accounting for stock-based compensation, asset retirement
obligations, income taxes, self-insurance accruals, and deferred
cash discounts, volume rebates and coop advertising.
Management has discussed the development and selection of these
critical accounting estimates with the audit committee of our
Board of Directors and the audit committee has reviewed our
disclosure relating to it in this Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Allowance
for Doubtful Accounts
Description
|
|
|
|
|
Most of our accounts receivable are due from our suppliers,
including warranty receivables due from a third party provider,
and a small percentage are due from retail customers. Our net
accounts receivable balance at September 30, 2006 of
$20.2 million constitutes 7.9% of our total assets and our
allowance for doubtful accounts reserve of $3.8 million is
15.7% of gross accounts receivable.
|
|
|
|
We categorize our accounts receivable by business type and
estimate our allowance for doubtful accounts reserve using four
aging classifications: current,
31-60 days,
61-90 days
and over 90 days. For each business type, based on the
amounts in each aging category, we apply a percentage to
determine the amount of the reserve to be applied to each
category. If a further review of a business type shows that this
methodology needs to be adjusted, the percentage of reserve is
adjusted accordingly.
|
Judgments
and Uncertainties
|
|
|
|
|
Our allowance for doubtful accounts contains uncertainties
because the calculation requires management to make assumptions
and to apply judgment regarding a number of factors, including
historical results, reserve percentage and current doubtful
accounts write-off trends.
|
Effect
if Actual Results Differ From Assumptions
|
|
|
|
|
In 2006 we changed extended warranty providers. In conjunction
with this change the incumbent provider instituted a review of
the extended warranty program they were administrating and at
such time began to withhold payments for current work being
performed by us. Due to the uncertainty of timing and amount of
monies to be received from the previous extended warranty
company, we have recorded an amount we believe properly reserves
for any non-payment from the previous extended warranty company.
The reserves were recorded in the periods the associated revenue
was recognized. The allowance for doubtful accounts
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24
|
|
|
|
|
increased $2.4 million, to $3.8 million at
September 30, 2006, from $1.4 million at
September 30, 2005. Of this $2.4 million increase,
$1.7 million was for the warranty reserve.
|
|
|
|
|
|
We have not made any material changes in our methodology during
the past three fiscal years.
|
|
|
|
We do not believe there is a reasonable likelihood that there
will be a material change in the future estimates or assumptions
we use to calculate our allowance for doubtful accounts.
However, if our estimates regarding doubtful accounts allowance
are inaccurate we may be exposed to losses or gains that could
be material. A 10% difference in our allowance for doubtful
accounts at September 30, 2006, would have affected net
loss by approximately $0.4 million for the fiscal year
ended September 30, 2006.
|
Inventory
Obsolescence Reserve
Description
|
|
|
|
|
Inventory represents $109.0 million, or 42.4% of our total
assets at September 30, 2006. Our profitability and
viability are highly dependent on the demand for our products.
An imbalance between purchasing levels and sales could cause
rapid and material obsolescence, and loss of competitive price
advantage and market share. We believe that our product mix has
provided sufficient diversification to mitigate this risk. At
the end of each reporting period, we reduce the value of our
inventory by our estimate of what we believe to be obsolete, and
we recognize an expense of the same amount, which is included in
cost of sales in our consolidated statement of operations.
|
|
|
|
Our inventory obsolescence reserve represents the excess of the
carrying value over the amount we expect to realize from the
ultimate sale or other disposal of the inventory. This reserve
is particularly relevant to discontinued merchandise, special
order merchandise and display and floor models in our stores.
|
|
|
|
In estimating our obsolescence reserve, we analyze the sales of
discontinued merchandise by department and determine what profit
or loss was recorded in the prior twelve-month period. If
product of the discontinued department was sold for below cost
during this prior period, then we apply that negative percentage
to the value of the inventory on hand as of the balance sheet
date. In addition to this reserve we also identify the selling
costs to be incurred in the sale of such discontinued inventory
and add that to this obsolescence reserve. We also evaluate the
obsolescence of our service parts inventory based on the aging
of this inventory. We apply a percentage to each aging category
in order to determine the reserve amount. The calculation of our
reserve for merchandise decreased $0.9 million due to fewer
departments generating a negative discontinued gross margin
percentage over last year.
|
|
|
|
In certain instances, we order special order merchandise at
specific customer requests. If the customer does not pick up the
merchandise, we try to resell it to other customers. We take a
reserve for all special order merchandise that has not been
delivered for over six months. We recorded a reserve for special
order merchandise of $1.0 million during the year ended
September 30, 2006.
|
|
|
|
In addition, we determined that certain merchandise used as
display, floor models and associated back stock in our stores
would no longer be sold and should be written off at year-end.
The total costs of these items were approximately
$0.6 million. We reserved this amount in the obsolescence
reserve at September 30, 2006.
|
|
|
|
Our inventory obsolescence reserve at September 30, 2006
was $3.4 million, compared to $2.7 million at
September 30, 2005.
|
Judgments
and Uncertainties
|
|
|
|
|
Our inventory obsolescence reserve contains uncertainties
because the calculation requires management to make assumptions
and to apply judgment regarding a number of factors, including
profit margin of discontinued merchandise and likelihood of
reselling special order merchandise.
|
25
Effect
if Actual Results Differ From Assumptions
|
|
|
|
|
We have not made any material changes in our methodology during
the past three fiscal years.
|
|
|
|
We do not believe there is a reasonable likelihood that there
will be a material change in the future estimates or assumptions
we use to calculate our inventory obsolescence reserve. However,
if estimates regarding consumer demand are inaccurate or changes
in technology affect demand for certain products in an
unforeseen manner, we may be exposed to losses or gains that
could be material. A 10% difference in our actual inventory
obsolescence reserve at September 30, 2006, would have
affected net loss by approximately $0.3 million for the
fiscal year ended September 30, 2006.
|
Goodwill
Impairment
Description
|
|
|
|
|
We evaluate goodwill for impairment on an annual basis, or more
frequently if an event or circumstance indicates the asset may
be impaired. We use a cash flow approach at the reporting unit
level (store level). A reporting unit is the business unit one
level below that operating segment, for which discrete financial
information is prepared regularly and reviewed by management.
|
|
|
|
In the fourth quarter of fiscal 2006, we completed our annual
impairment testing of goodwill using the methodology described
herein, and determined there was no impairment.
|
|
|
|
The carrying value of goodwill as of September 30, 2006,
was $5.3 million.
|
Judgments
and Uncertainties
|
|
|
|
|
We determine fair value using the widely accepted valuation
technique of discounted cash flow. This type of analysis
contains uncertainties because it requires management to make
assumptions and to apply judgment to estimate the profitability
of future business strategies. It is our policy to conduct
impairment testing based on our current business strategy in
light of present industry and economic conditions, as well as
future expectations.
|
Effect
if Actual Results Differ From Assumptions
|
|
|
|
|
We have not made any material changes in our impairment loss
assessment methodology during the past three fiscal years.
|
|
|
|
We do not believe there is a reasonable likelihood that there
will be a material change in the future estimates or assumptions
we use to test for goodwill impairment losses. However, if
actual results are not consistent with our estimates and
assumptions, we may be exposed to an impairment charge that
could be material.
|
Accounting
for Stock-Based Compensation
Description
|
|
|
|
|
We have a stock-based compensation plan, which includes
incentive stock options, non-qualified stock options and an
employee stock purchase plan.
|
|
|
|
We determine the fair value of our stock option awards at the
date of grant using the Black-Scholes option-pricing model.
|
|
|
|
Management reviews its assumptions and the information utilized
by and received from independent third-party valuation advisors
to determine the fair value of stock-based compensation awards.
|
Judgments
and Uncertainties
|
|
|
|
|
Option-pricing models and generally accepted valuation
techniques require management to make assumptions and to apply
judgment to determine the fair value of our awards. These
assumptions and judgments include estimating the future
volatility of our stock price, expected dividend yield,
risk-free interest rate,
|
26
|
|
|
|
|
future employee turnover rates and future employee stock options
exercise behaviors. The expected life of the option grants is
based on our analysis of our experience with our 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 our
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 our
analysis of our experience with our option grants. The expected
forfeitures as a percentage of total ESPP shares are zero due to
the short-term nature of the plan. Changes in these assumptions
can materially affect the fair value estimate.
|
Effect
if Actual Results Differ From Assumptions
|
|
|
|
|
If actual results are not consistent with our estimates or
assumptions, we may be exposed to changes in stock-based
compensation expense.
|
|
|
|
If actual results are not consistent with the assumptions used,
the stock-based compensation expense reported in our financial
statement may not be representative of the actual economic cost
of the stock-based compensation.
|
Income
Taxes
Description
|
|
|
|
|
Our estimate of the expense or benefit and the sufficiency of
the income tax accrual are somewhat dependent on our assessment
of certain tax filing exposures. Our income tax returns, like
those of most companies, are periodically audited by domestic
tax authorities. These audits include questions regarding our
tax filing positions, including the timing and amount of
deductions and the allocation of income among various tax
jurisdictions. At any one time, multiple tax years are subject
to audit by the various tax authorities. In evaluating the
exposures associated with our various tax filing positions, we
may record receivables or liabilities for probable refunds or
exposures. A number of years may elapse before a particular
matter is audited and fully resolved or clarified. We adjust our
tax contingencies receivable or liability and income tax
provision in the period in which actual results of a settlement
with tax authorities differs from our established receivable or
liability, the statute of limitations expires for the relevant
taxing authority to examine the tax position or when more
information becomes available.
|
|
|
|
Our refundable income taxes of $9.0 million as of
September 30, 2006 and 2005 reflect loss carry-back claims
filed with and under review by the Internal Revenue Service. We
expect to settle and collect these claims in fiscal 2007.
|
|
|
|
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
March 31, 2005, we evaluated our recorded deferred tax
assets and determined that it was more likely than not that we
would not realize the deferred tax benefits related to those
assets. Accordingly, we provided a full valuation allowance. We
based that determination, in part, on our trend of continuing
losses and possible store closings. We provided a valuation
allowance of approximately $52.0 million related to net
federal and state deferred tax assets as of September 30,
2006 based on our valuation at that time. In future periods we
will re-evaluate the likelihood of realizing benefits from the
deferred tax assets and adjust the valuation allowance as deemed
necessary. Further, based on our recent history of operating
losses, we provided a full valuation allowance against the 2006
tax benefit.
|
Judgments
and Uncertainties
|
|
|
|
|
Our tax assets and accruals contain uncertainties because
management is required to make assumptions and to apply judgment
to estimate the exposures associated with our various filing
positions.
|
|
|
|
Our effective income tax rate is also affected by changes in tax
law, the tax jurisdiction of new stores, the level of earnings,
valuation allowance balances and the results of tax audits.
|
27
Effect
if Actual Results Differ From Assumptions
|
|
|
|
|
Although management believes that the judgments and estimates
discussed herein are reasonable, actual results could differ,
and we may be exposed to losses or gains that could be material.
|
|
|
|
To the extent we prevail in matters for which reserves have been
established, or are required to pay amounts in excess of our
reserves, our effective income tax rate in a given financial
statement period could be materially affected. An unfavorable
tax settlement would require use of our cash and result in an
increase in our effective income tax rate in the period of
resolution. A favorable tax settlement would be recognized as a
reduction in our effective income tax rate in the period of
resolution.
|
Self-Insurance
Accruals
Description
|
|
|
|
|
We have a self-insured retention policy for workers
compensation, auto/garage, general liability insurance and
medical/dental benefits and we evaluate our liability estimate
on a quarterly basis based on actuarial information and
experience. However, we obtain third-party stop loss insurance
coverage to limit our exposure to these claims.
|
|
|
|
When estimating our self-insured accruals, we consider a number
of factors, including historical claims experience, demographic
factors, severity factors and valuations prepared with the
assistance of independent third-party actuaries.
|
|
|
|
Periodically, management reviews its assumptions and the
information utilized by and received from independent
third-party actuaries to determine the adequacy of our
self-insured accruals.
|
Judgments
and Uncertainties
|
|
|
|
|
Our self-insured accruals contain uncertainties because
management is required to make assumptions and to apply judgment
to estimate the ultimate cost to settle reported claims and
claims incurred but not reported as of the balance sheet date.
|
Effect
if Actual Results Differ From Assumptions
|
|
|
|
|
In fiscal year 2006 we refined our estimation of self-insured
accruals and determined that the future liability related to
claims that have already been incurred but have not been billed
was $6.3 million as of September 30, 2006 compared to
our estimate of $5.4 million as of September 30, 2005.
|
|
|
|
We do not believe there is a reasonable likelihood that there
will be a material change in the estimates or assumptions we use
to calculate our self-insured accruals. However, if actual
results are not consistent with our estimates or assumptions, we
may be exposed to losses or gains that could be material.
|
|
|
|
A 10% change in our self-insured accruals at September 30,
2006, would have affected net loss by approximately
$0.6 million for the fiscal year ended September 30,
2006.
|
Deferred
Cash Discounts, Volume Rebates and Cooperative
Advertising
Description
|
|
|
|
|
We receive cash discounts for timely payment of merchandise
invoices and recognize these amounts in our statement of
operations upon the sale of the inventory. The amount of the
deferral for discounts received but not yet recognized in income
was $1.6 million as of September 30, 2006, compared to
$2.5 million as of September 30, 2005. We recognized
this deferral as a reduction in gross inventory in the
consolidated balance sheet.
|
|
|
|
We also receive substantial funds from our suppliers for volume
rebates and cooperative advertising. These funds can be earned
in two ways; the first is based on levels of inventory purchases
and the second is based on performance of specific advertising
activities. Amounts earned based on levels of inventory
purchases are
|
28
|
|
|
|
|
recognized as a reduction of cost of goods sold in the statement
of operations based on when the inventory from each supplier is
sold. Amounts earned based on performance of specific
advertising activities are recognized in the statement of
operations as these activities are performed. The amount of the
deferral for amounts received related to levels of inventory
purchases was $14.5 million as of September 30, 2006,
compared to $14.7 million as of September 30, 2005. No
amounts were deferred as of September 30, 2006 and 2005 for
specific advertising activities as we did not have any
unfulfilled obligations in relation to cash received prior to
the year-end.
|
|
|
|
|
|
Many of our agreements include stretch goals where the level of
funds earned is dependent upon achieving certain purchase
levels. We recognize these program funds in the statement of
operations and as a reduction of inventory costs when we
determine that we are likely to achieve the goal.
|
Judgments
and Uncertainties
|
|
|
|
|
Our deferred cash discounts, volume rebates and coop advertising
contains uncertainties because management is required to make
assumptions and to apply judgment to estimate inventory levels,
supplier mix of inventory on hand and the timing of performance
of specific advertising activities in relation to when the cash
for these activities is received.
|
Effect
if Actual Results Differ From Assumptions
|
|
|
|
|
We have not made any material changes in the accounting
methodology used to establish our deferred cash discounts,
volume rebates and coop advertising during the past three fiscal
years.
|
|
|
|
We do not believe there is a reasonable likelihood that there
will be a material change in the estimates or assumptions we use
to calculate our deferred cash discounts, volume rebates and
coop advertising. However, if actual results are not consistent
with our estimates or assumptions, we may be exposed to losses
or gains that could be material.
|
Recent
Accounting Pronouncements
In July 2006 the FASB issued FASB Interpretation
(FIN) No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB
Statement 109. FIN 48 prescribes a 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. We are currently assessing the
impact of FIN 48 on our consolidated financial position and
results of operations.
In September 2006 the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value in generally accepted accounting principles
(GAAP) and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We are currently assessing the impact of
SFAS No. 157 on our consolidated financial position
and results of operations.
In September 2006 the SEC issued SAB No. 108, Topic
1N, Financial Statements, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements, which provides interpretive guidance
on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. SAB 108 is effective for the first fiscal
year ending after November 15, 2006. We retroactively as of
October 1, 2005, as permitted, recognized an adjustment of
$3.4 million to accumulated deficit and rent related
accruals in our consolidated balance sheet as of October 1,
2005 resulting in a reduction in net loss of $0.4 million
in our consolidated statement of operations for the fiscal year
ended September 30, 2006.
29
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk
The market risk inherent in our financial instruments and in our
financial position is the potential for loss arising from
adverse changes in interest rates, principally related to our
borrowings. We do not enter into financial instruments for
trading purposes.
At September 30, 2006, we had $55.4 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, based on the
September 30, 2006 balances outstanding, would have an
annual impact on our interest expense of approximately
$0.5 million.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The response to this item is included in a separate
section of this report. See Index to Consolidated
Financial Statements on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures. Our management, with the
participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure
controls and procedures, as such term is defined under
Rule 13a-15
(e) and 15d-15 (e) under the Securities Exchange Act
of 1934, as amended, as of September 30, 2006. Based on
such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that because of the material weaknesses
described below, our disclosure controls and procedures were
ineffective as of that date.
Managements Report on Internal Control over Financial
Reporting. Our management is responsible for
establishing and maintaining adequate internal control over
financial reporting, as that term is defined in Exchange Act
Rules 13a-15
(f) and 15d-15 (f). Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting
principles. Our management, including the Chief Executive
Officer and the Chief Financial Officer, assessed the
effectiveness of our internal control over financial reporting
as of September 30, 2006. In making this assessment,
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
its Internal Control-Integrated Framework.
Management has identified certain control deficiencies that
represent material weaknesses (as defined in the Public Company
Accounting Oversight Board Auditing Standard No. 2,
An Audit of Internal Control Over Financial Reporting
Performed in Conjunction with An Audit of Financial
Statements).
A material weakness is a control deficiency, or a combination of
control deficiencies, that result in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. As of
September 30, 2006, the Company did not maintain effective
internal control over financial reporting because of the
material weaknesses described below.
Controls
over the Financial Close and Reporting Process
(i) We incorrectly accounted for a new store lease as an
operating lease when it should have been recorded as owned
property under EITF Issue
no. 97-10,
The Effect of Lessee Involvement in Asset Construction,
resulting in a material weakness. This error was first noted
and brought to the attention of management by our independent
registered public accounting firm in connection with their audit
of our 2006 financial statements and has been corrected in those
financial statements. (ii) We also had deficiencies related
to the operating effectiveness over the recording of non-routine
transactions, reviews of period-end reconciliations and
analyses, and processing of reclassifications and adjustments.
These deficiencies aggregated to a material weakness. While
these deficiencies
30
did not result in a material misstatement of the financial
statements, due to the potential effect on financial statement
balances and disclosures and the importance of the financial
closing and reporting processes, management has concluded, that,
in the aggregate, these deficiencies in internal control
resulted in a more than remote likelihood that a material error
would not have been prevented or detected, and therefore,
constitute a material weakness.
Controls
for recording fixed asset additions and disposals
We had operating deficiencies in our internal control procedures
with respect to the assignment of useful lives to leasehold
improvements, the timely review of the fixed asset ledger, the
assignment of in-service dates and useful lives to fixed asset
additions and a design deficiency with respect to effective
policies and procedures to ensure that fixed asset disposals
were reported and recorded. These significant deficiencies
aggregated to a material weakness. While these deficiencies did
not result in a material misstatement of the financial
statements, management believes that these internal control
deficiencies in the aggregate resulted in more than a remote
likelihood that a material misstatement of our financial
statements might not have been prevented or detected, and
therefore constitute a material weakness.
Changes in Internal Control over Financial
Reporting. Our management, including the Chief
Executive Officer and Chief Financial Officer, discussed the
material weaknesses described above with the Audit Committee. We
have taken the following actions regarding internal controls
over financial reporting:
1. From April to September 2006, we added significant
experienced finance and accounting staff, including a Chief
Financial Officer in August and a corporate controller, SEC
reporting personnel and other key accounting positions. Because
of the timing of their hiring, the full benefit of their
knowledge and expertise has not yet been realized.
2. With respect to non-routine transactions and new
contracts we enter into, we have instituted new review and
certification processes designed to identify such items. Every
new contract is reviewed and discussed at our quarterly
disclosure committee meetings. Regular meetings with accounting
staff and executive-level officers involved and familiar with
accounting issues related to complex non-routine transactions
are being held to review documentation and appropriate
accounting.
3. We are in the process of implementing additional
monitoring procedures and training of our staff to mitigate the
potential risk of other reporting errors. Further, we are
designing additional procedures and controls to ensure that
fixed asset additions and disposals are accounted for
appropriately.
Deloitte & Touche LLP, an independent registered public
accounting firm that audited our financial statements included
in this Annual Report on
Form 10-K,
has issued an attestation report on managements assessment
of our internal control over financial reporting as of
September 30, 2006, which is included in this Item 9A
under the caption Report of Independent Registered Public
Accounting Firm.
31
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tweeter Home Entertainment Group, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Tweeter Home Entertainment Group, Inc.
and subsidiaries (the Company) did not maintain
effective internal control over financial reporting as of
September 30, 2006, because of the effect of material
weaknesses identified in managements assessment based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment:
Controls
over the Financial Close and Reporting Process
(i) The Company incorrectly accounted for a new store lease
as an operating lease when it should have been recorded as owned
property under EITF Issue
no. 97-10,
The Effect of Lessee Involvement in Asset Construction,
resulting in a material weakness. This error has been
corrected in the 2006 financial statements. (ii) The
Company also had deficiencies related to the operating
effectiveness over the recording of non-routine transactions,
reviews of period-end reconciliations and analyses, and
processing of reclassifications and adjustments. These
deficiencies aggregated to a material weakness. These
deficiencies resulted in misstatements that were not material to
the financial statements; however, in the aggregate, these
deficiencies in internal control result in a more than remote
32
likelihood that a material error would not have been prevented
or detected, and therefore, constitute a material weakness.
Controls
for Recording Fixed Asset Additions and Disposals
The Company had operating deficiencies in its internal control
procedures with respect to the assignment of useful lives to
leasehold improvements, the timely review of the fixed asset
ledger, the assignment of in-service dates and useful lives to
fixed asset additions and a design deficiency with respect to
effective policies and procedures to ensure that fixed asset
disposals were reported and recorded. These significant
deficiencies aggregated to a material weakness. These
deficiencies resulted in misstatements that were not material to
the financial statements; however, in the aggregate, these
deficiencies in internal control result in a more than remote
likelihood that a material error would not have been prevented
or detected, and therefore, constitute a material weakness.
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the consolidated financial statements and financial statement
schedule as of and for the year ended September 30, 2006,
of the Company and this report does not affect our report on
such financial statements and financial statement schedule.
In our opinion, managements assessment that the Company
did not maintain effective internal control over financial
reporting as of September 30, 2006, is fairly stated, in
all material respects, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, because of the effect of the
material weaknesses described above on the achievement of the
objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting
as of September 30, 2006, based on the criteria established
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended September 30, 2006,
of the Company and our report dated December 20, 2006
expressed an unqualified opinion on those financial statements
and financial statement schedule and includes an explanatory
paragraph relating to the adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment and Securities and Exchange Commission Staff
Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements in
fiscal 2006.
Deloitte & Touche LLP
Boston, Massachusetts
December 20, 2006
33
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this Item is included in the
definitive Proxy Statement for the Companys 2007 Annual
Meeting of Stockholders, to be filed with the Commission on or
about December 22, 2006 (the 2007 Proxy
Statement), under Election of Directors and is
incorporated herein by reference.
We have adopted a code of ethics applicable to our principal
executive officer, principal financial officer and principal
accounting officer or controller, as well as other senior
officers. The code of ethics is publicly available on our
website at www.tweeter.com. Amendments to this Code and any
grant of a waiver from a provision of the Code requiring
disclosure under applicable SEC rules will be disclosed on the
Companys website.
|
|
Item 11.
|
Executive
Compensation
|
Information with respect to this item is incorporated by
reference from our definitive proxy statement (or amendment to
this Annual Report on
Form 10-K)
to be filed with the Commission within 120 days of the end
of the fiscal year ended September 30, 2006.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
Information with respect to this item is incorporated by
reference from our definitive proxy statement (or amendment to
this Annual Report on
Form 10-K)
to be filed with the Commission within 120 days of the end
of the fiscal year ended September 30, 2006.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Information with respect to this item is incorporated by
reference from our definitive proxy statement (or amendment to
this Annual Report on
Form 10-K)
to be filed with the Commission within 120 days of the end
of the fiscal year ended September 30, 2006.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Information with respect to this item is incorporated by
reference from our definitive proxy statement (or amendment to
this Annual Report on
Form 10-K)
to be filed with the Commission within 120 days of the end
of the fiscal year ended September 30, 2006.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules and Reports on
Form 8-K
|
(a)(1) Financial Statements. The
financial statements required to be filed by Item 15 of
this Annual Report on
Form 10-K,
and filed herewith, are as follows:
Consolidated Balance Sheets as of September 30, 2006 and
2005
Consolidated Statements of Operations for the Years Ended
September 30, 2006, 2005 and 2004
Consolidated Statements of Stockholders Equity for the
Years Ended September 30, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
34
Schedule II attached
(a)(3) Exhibits.
See the Exhibit Index included immediately preceding the
Exhibits to this
Form 10-K.
(b) Reports on
Form 8-K.
The Company filed the following reports on
Form 8-K
during the fourth quarter of 2006:
On July 14, 2006, we filed with the Securities and Exchange
Commission a Current Report on
Form 8-K
to announce sales results for the quarter ended June 30,
2006.
On July 28, 2006 we filed with the Securities and Exchange
Commission a Current Report on
Form 8-K
to announce our earnings results for the quarter ended
June 30, 2006 and the appointment of John Esposito to our
audit committee.
On August 1, 2006 we filed with the Securities and Exchange
Commission a Current Report on
Form 8-K
to announce an amendment to Gregory Hunts Employment
Agreement.
On September 27, 2006 we filed with the Securities and
Exchange Commission a Current Report on
Form 8-K
to announce the appointment of Karen Kaplan to our compensation
committee.
35
SCHEDULE II
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
Allowance
for Doubtful Accounts (amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Deductions
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Net of
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Write-Offs
|
|
Period
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
$
|
1,400
|
|
|
$
|
3,105
|
|
|
$
|
739
|
|
|
$
|
3,766
|
|
September 30, 2005
|
|
|
475
|
|
|
|
1,202
|
|
|
|
277
|
|
|
|
1,400
|
|
September 30, 2004
|
|
|
1,110
|
|
|
|
226
|
|
|
|
861
|
|
|
|
475
|
|
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Tweeter Home
Entertainment Group, Inc.
Joseph McGuire
President and Chief Executive Officer
Date: December 21, 2006
Gregory Hunt
Senior Vice President and Chief Financial Officer
Date: December 21, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
By:
|
|
/s/ Samuel
Bloomberg
Samuel
Bloomberg
|
|
Chairman of the Board
|
|
December 21, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Joseph
McGuire
Joseph
McGuire
|
|
Director
|
|
December 21, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Jeffrey
Bloomberg
Jeffrey
Bloomberg
|
|
Director
|
|
December 21, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Michael
Cronin
Michael
Cronin
|
|
Director
|
|
December 21, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ John
Esposito
John
Esposito
|
|
Director
|
|
December 21, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Steven
Fischman
Steven
Fischman
|
|
Director
|
|
December 21, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Karen
Kaplan
Karen
Kaplan
|
|
Director
|
|
December 21, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ John
Mahoney
John
Mahoney
|
|
Director
|
|
December 21, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Jeffrey
Stone
Jeffrey
Stone
|
|
Director
|
|
December 21, 2006
|
37
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Tweeter Home Entertainment Group, Inc.
We have audited the accompanying consolidated balance sheets of
Tweeter Home Entertainment Group, Inc. and subsidiaries (the
Company) as of September 30, 2006 and 2005, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended September 30, 2006. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Tweeter Home Entertainment Group, Inc. and subsidiaries as of
September 30, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2006, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
During fiscal 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment (as discussed in Notes 2 and 3) and
Securities and Exchange Commission Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (as discussed in
Notes 2 and 15).
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of September 30, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
December 20, 2006 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
adverse opinion on the effectiveness of the Companys
internal control over financial reporting because of material
weaknesses.
Deloitte &
Touche LLP
Boston,
Massachusetts
December 20, 2006
F-2
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,295,546
|
|
|
$
|
1,309,871
|
|
Accounts receivable, net of
allowance for doubtful accounts of $3,766,312 and $1,400,172 at
September 30, 2006 and 2005, respectively
|
|
|
20,197,400
|
|
|
|
28,189,414
|
|
Inventory
|
|
|
109,038,782
|
|
|
|
111,506,056
|
|
Refundable income taxes
|
|
|
9,006,240
|
|
|
|
9,006,740
|
|
Prepaid expenses and other current
assets
|
|
|
6,895,247
|
|
|
|
8,189,625
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
146,433,215
|
|
|
|
158,201,706
|
|
Property and equipment, net
|
|
|
102,072,249
|
|
|
|
115,306,933
|
|
Long-term investments
|
|
|
2,639,365
|
|
|
|
2,220,353
|
|
Intangible assets, net
|
|
|
|
|
|
|
566,667
|
|
Goodwill
|
|
|
5,250,868
|
|
|
|
5,250,868
|
|
Other assets, net
|
|
|
2,177,656
|
|
|
|
2,470,599
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
258,573,353
|
|
|
$
|
284,017,126
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
6,479,835
|
|
|
$
|
9,278,849
|
|
Current portion of deferred
consideration
|
|
|
589,958
|
|
|
|
484,866
|
|
Accounts payable
|
|
|
37,843,266
|
|
|
|
34,885,458
|
|
Accrued expenses
|
|
|
40,189,548
|
|
|
|
48,775,158
|
|
Customer deposits
|
|
|
21,975,616
|
|
|
|
25,623,763
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
107,078,223
|
|
|
|
119,048,094
|
|
Long-term debt
|
|
|
50,362,090
|
|
|
|
62,617,263
|
|
Rent related accruals
|
|
|
25,411,330
|
|
|
|
16,939,556
|
|
Long-term restructuring and
discontinued stores reserve
|
|
|
5,414,727
|
|
|
|
|
|
Deferred consideration
|
|
|
2,150,915
|
|
|
|
2,545,547
|
|
Commitments and Contingencies
(Note 10)
|
|
|
|
|
|
|
|
|
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; 27,013,997 and
26,249,725 shares issued at September 30, 2006 and
2005, respectively
|
|
|
270,140
|
|
|
|
262,497
|
|
Additional paid in capital
|
|
|
309,937,003
|
|
|
|
304,663,875
|
|
Accumulated other comprehensive
income
|
|
|
|
|
|
|
112,329
|
|
Accumulated deficit
|
|
|
(240,406,847
|
)
|
|
|
(220,488,691
|
)
|
Treasury stock, 1,521,819 and
1,577,698 shares at September 30, 2006 and 2005, at
cost, respectively
|
|
|
(1,644,228
|
)
|
|
|
(1,683,344
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
68,156,068
|
|
|
|
82,866,666
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
258,573,353
|
|
|
$
|
284,017,126
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-3
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total revenue
|
|
$
|
775,287,123
|
|
|
$
|
795,089,981
|
|
|
$
|
765,280,337
|
|
Cost of sales
|
|
|
(455,852,524
|
)
|
|
|
(481,436,444
|
)
|
|
|
(467,721,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
319,434,599
|
|
|
|
313,653,537
|
|
|
|
297,559,321
|
|
Selling, general and
administrative expenses
|
|
|
331,345,450
|
|
|
|
343,592,482
|
|
|
|
317,809,939
|
|
Amortization of intangibles
|
|
|
566,667
|
|
|
|
680,000
|
|
|
|
680,000
|
|
Restructuring charges
|
|
|
1,195,128
|
|
|
|
16,480,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(13,672,646
|
)
|
|
|
(47,099,216
|
)
|
|
|
(20,930,618
|
)
|
Interest expense
|
|
|
(4,570,389
|
)
|
|
|
(2,742,668
|
)
|
|
|
(3,350,007
|
)
|
Interest income
|
|
|
246
|
|
|
|
26,478
|
|
|
|
327,781
|
|
Gain on sale of investments
|
|
|
224,664
|
|
|
|
9,856,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(18,018,125
|
)
|
|
|
(39,958,790
|
)
|
|
|
(23,952,844
|
)
|
Income tax provision (benefit)
|
|
|
|
|
|
|
25,036,282
|
|
|
|
(9,102,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income from equity investments related parties
|
|
|
(18,018,125
|
)
|
|
|
(64,995,072
|
)
|
|
|
(14,850,750
|
)
|
Income from equity
investments related parties
|
|
|
2,021,325
|
|
|
|
1,441,590
|
|
|
|
533,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(15,996,800
|
)
|
|
|
(63,553,482
|
)
|
|
|
(14,317,478
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from discontinued
operations
|
|
|
(485,909
|
)
|
|
|
(10,799,157
|
)
|
|
|
(6,211,547
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(2,360,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations
|
|
|
(485,909
|
)
|
|
|
(10,799,157
|
)
|
|
|
(3,851,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,482,709
|
)
|
|
$
|
(74,352,639
|
)
|
|
$
|
(18,168,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.64
|
)
|
|
$
|
(2.59
|
)
|
|
$
|
(0.59
|
)
|
Loss from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.44
|
)
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.66
|
)
|
|
$
|
(3.03
|
)
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.64
|
)
|
|
$
|
(2.59
|
)
|
|
$
|
(0.59
|
)
|
Loss from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.44
|
)
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.66
|
)
|
|
$
|
(3.03
|
)
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,153,533
|
|
|
|
24,565,287
|
|
|
|
24,164,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
25,153,533
|
|
|
|
24,565,287
|
|
|
|
24,164,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-4
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Equity
|
|
|
Balance, October 1,
2003
|
|
|
25,748,489
|
|
|
$
|
257,485
|
|
|
$
|
294,969,338
|
|
|
$
|
(408,142
|
)
|
|
$
|
(15,931
|
)
|
|
$
|
(127,967,415
|
)
|
|
|
1,742,616
|
|
|
$
|
(1,798,786
|
)
|
|
|
|
|
|
$
|
165,036,549
|
|
Issuance of shares under stock
option plan
|
|
|
293,652
|
|
|
|
2,937
|
|
|
|
1,555,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,558,580
|
|
Income tax benefit from issuance of
shares under stock option plan
|
|
|
|
|
|
|
|
|
|
|
1,377,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,377,852
|
|
Issuance of treasury stock under
employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
346,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,079
|
)
|
|
|
46,255
|
|
|
|
|
|
|
|
392,317
|
|
Amortization of unearned equity
compensation
|
|
|
|
|
|
|
|
|
|
|
5,009,362
|
|
|
|
332,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,341,777
|
|
Issuance of common stock, net
|
|
|
133,824
|
|
|
|
1,338
|
|
|
|
748,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
749,414
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,168,637
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,168,637
|
)
|
|
|
(18,168,637
|
)
|
Net unrealized gain on investments,
net of $26,426 for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,639
|
|
|
|
39,639
|
|
Fair value of interest rate forward
contract, net of $61,121 for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,683
|
|
|
|
91,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,037,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30,
2004
|
|
|
26,175,965
|
|
|
|
261,760
|
|
|
|
304,006,333
|
|
|
|
(75,727
|
)
|
|
|
115,391
|
|
|
|
(146,136,052
|
)
|
|
|
1,676,537
|
|
|
|
(1,752,531
|
)
|
|
|
|
|
|
|
156,419,174
|
|
Issuance of shares under stock
option plan including tax benefit
|
|
|
73,760
|
|
|
|
737
|
|
|
|
397,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398,281
|
|
Issuance of treasury stock under
employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
259,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,839
|
)
|
|
|
69,187
|
|
|
|
|
|
|
|
329,185
|
|
Amortization of unearned equity
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,727
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,352,639
|
)
|
|
|
|
|
|
|
|
|
|
|
(74,352,639
|
)
|
|
|
(74,352,639
|
)
|
Net unrealized gain on investments,
net of $8,305 for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,459
|
|
|
|
12,459
|
|
Fair value of interest rate forward
contract, net of $10,347 for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,521
|
)
|
|
|
(15,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,355,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30,
2005
|
|
|
26,249,725
|
|
|
|
262,497
|
|
|
|
304,663,875
|
|
|
|
|
|
|
|
112,329
|
|
|
|
(220,488,691
|
)
|
|
|
1,577,698
|
|
|
|
(1,683,344
|
)
|
|
|
|
|
|
|
82,866,666
|
|
Cumulative effect of adjustments
resulting from the adoption of SAB No. 108, net of $0
for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,435,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,435,447
|
)
|
Issuance of shares under stock
option plan
|
|
|
724,272
|
|
|
|
7,243
|
|
|
|
4,019,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,026,541
|
|
Issuance of treasury stock under
employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
248,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,879
|
)
|
|
|
39,116
|
|
|
|
|
|
|
|
288,026
|
|
Issuance of shares to vendor
|
|
|
40,000
|
|
|
|
400
|
|
|
|
190,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,000
|
|
Shared-based compensation
|
|
|
|
|
|
|
|
|
|
|
814,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
814,320
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,482,709
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,482,709
|
)
|
|
|
(16,482,709
|
)
|
Change in unrealized gain on
investments, net of $74,885 for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,329
|
)
|
|
|
(112,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(16,595,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30,
2006
|
|
|
27,013,997
|
|
|
$
|
270,140
|
|
|
$
|
309,937,003
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(240,406,847
|
)
|
|
|
1,521,819
|
|
|
$
|
(1,644,228
|
)
|
|
|
|
|
|
$
|
68,156,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-5
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,482,709
|
)
|
|
$
|
(74,352,639
|
)
|
|
$
|
(18,168,637
|
)
|
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
26,366,857
|
|
|
|
24,979,558
|
|
|
|
23,292,086
|
|
Asset retirement obligation
accretion expense
|
|
|
384,043
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation vendor
|
|
|
191,000
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation employee
|
|
|
814,320
|
|
|
|
75,727
|
|
|
|
5,341,777
|
|
Income from equity
investment related parties
|
|
|
(2,021,325
|
)
|
|
|
(1,441,590
|
)
|
|
|
(860,116
|
)
|
Distributions from equity
investment related parties
|
|
|
1,025,687
|
|
|
|
1,561,083
|
|
|
|
737,933
|
|
Gain on sale of investments
|
|
|
(224,664
|
)
|
|
|
(9,856,616
|
)
|
|
|
|
|
Loss on disposal of property and
equipment
|
|
|
551,992
|
|
|
|
170,073
|
|
|
|
362,000
|
|
Allowance for doubtful accounts
|
|
|
3,104,788
|
|
|
|
1,202,381
|
|
|
|
225,518
|
|
Tax benefit from options exercised
|
|
|
|
|
|
|
46,727
|
|
|
|
1,377,852
|
|
Deferred income tax provision
(benefit)
|
|
|
|
|
|
|
22,272,607
|
|
|
|
(11,213,982
|
)
|
Amortization of deferred gain on
sale leaseback
|
|
|
(264,927
|
)
|
|
|
(44,843
|
)
|
|
|
(44,843
|
)
|
Impairment charge
|
|
|
|
|
|
|
9,013,438
|
|
|
|
|
|
Amortization of deferred lease
incentives
|
|
|
381,302
|
|
|
|
350,558
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,887,226
|
|
|
|
(11,595,873
|
)
|
|
|
401,260
|
|
Inventory
|
|
|
2,606,846
|
|
|
|
(5,231,244
|
)
|
|
|
13,650,191
|
|
Prepaid expenses and other assets
|
|
|
1,055,192
|
|
|
|
(1,589,408
|
)
|
|
|
9,765,338
|
|
Accounts payable and accrued
expenses
|
|
|
(2,517,329
|
)
|
|
|
12,124,628
|
|
|
|
13,265,788
|
|
Customer deposits
|
|
|
(3,648,147
|
)
|
|
|
3,729,858
|
|
|
|
725,068
|
|
Deferred warranty
|
|
|
|
|
|
|
(93,625
|
)
|
|
|
(220,018
|
)
|
Rent related accruals
|
|
|
303,516
|
|
|
|
2,522,344
|
|
|
|
59,979
|
|
Deferred consideration
|
|
|
(942,843
|
)
|
|
|
(518,200
|
)
|
|
|
3,548,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
15,570,825
|
|
|
|
(26,675,056
|
)
|
|
|
42,245,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(17,374,900
|
)
|
|
|
(22,434,303
|
)
|
|
|
(19,485,478
|
)
|
Proceeds from sale-leaseback
transaction, net of fees
|
|
|
13,521,951
|
|
|
|
2,946,707
|
|
|
|
|
|
Proceeds from sale of property and
equipment
|
|
|
17,916
|
|
|
|
237,888
|
|
|
|
54,450
|
|
Proceeds from sale of investments
|
|
|
224,664
|
|
|
|
10,246,614
|
|
|
|
|
|
Purchase of equity investments
|
|
|
|
|
|
|
(300,000
|
)
|
|
|
|
|
Return of equity investment
|
|
|
249,839
|
|
|
|
33,572
|
|
|
|
|
|
Cash received (paid) for
acquisitions, net of cash acquired
|
|
|
|
|
|
|
62,796
|
|
|
|
(4,279,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(3,360,530
|
)
|
|
|
(9,206,726
|
)
|
|
|
(23,710,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in amount due
to bank
|
|
|
(2,797,457
|
)
|
|
|
6,106,575
|
|
|
|
(4,100,987
|
)
|
Net (repayments) proceeds of
long-term debt
|
|
|
(13,741,730
|
)
|
|
|
14,603,333
|
|
|
|
(13,406,294
|
)
|
Proceeds from term loans
|
|
|
|
|
|
|
13,000,000
|
|
|
|
|
|
Payment of debt assumed in
acquisition
|
|
|
|
|
|
|
|
|
|
|
(2,028,183
|
)
|
Proceeds from options exercised
|
|
|
4,026,541
|
|
|
|
351,555
|
|
|
|
1,558,580
|
|
Proceeds from employee stock
purchase plan
|
|
|
288,026
|
|
|
|
329,185
|
|
|
|
392,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(12,224,620
|
)
|
|
|
34,390,648
|
|
|
|
(17,584,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
(14,325
|
)
|
|
|
(1,491,134
|
)
|
|
|
950,556
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
|
|
|
1,309,871
|
|
|
|
2,801,005
|
|
|
|
1,850,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END
OF PERIOD
|
|
$
|
1,295,546
|
|
|
$
|
1,309,871
|
|
|
$
|
2,801,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the
period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,328,163
|
|
|
$
|
2,715,008
|
|
|
$
|
2,634,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
|
|
|
$
|
(1,492,558
|
)
|
|
$
|
(9,228,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment additions
included in accounts payable
|
|
$
|
3,526,820
|
|
|
$
|
1,222,566
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and
assumption of options for acquisitions
|
|
$
|
|
|
|
$
|
|
|
|
$
|
752,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,009,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-6
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Years Ended September 30, 2006, 2005 and 2004
|
|
1.
|
Business
of the Company
|
Tweeter Home Entertainment Group, Inc. and its subsidiaries
(the Company or Tweeter) sells audio,
video, entertainment and electronics products through a chain of
153 retail stores in the New England, Mid-Atlantic, Southeast
(including Florida), Texas, Chicago, Southern California,
Phoenix and Las Vegas markets. The Company operates under the
names Tweeter, Sound Advice, hifi
buys and Showcase Home Entertainment. The
Company operates in a single reportable segment of retailing
audio, video and mobile consumer electronics products.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis of Presentation The consolidated
financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany transactions have
been eliminated in consolidation.
Accounting for Estimates In the process of
preparing its consolidated financial statements, the Company
estimates the appropriate carrying value of certain assets and
liabilities that are not readily apparent from other sources.
The primary estimates underlying the Companys consolidated
financial statements include allowances for potential bad debts,
vendor allowances, obsolete inventory, impairment of tangible
and intangible assets, the useful lives of its long-lived
assets, the recoverability of deferred tax assets,
self-insurance accruals, stock-based compensation and other
matters. Management bases its estimates on certain assumptions,
which they believe are reasonable in the circumstances, and does
not believe that any change in those assumptions in the near
term would have a significant effect on the consolidated
financial position or results of operations. Actual results
could differ from these estimates.
Cash and Cash Equivalents The Company
considers all highly liquid instruments purchased with
maturities of three months or less to be cash equivalents. Cash
primarily consists of cash on hand and bank deposits. The
Company had no cash equivalents in 2006 or 2005.
Allowance for Doubtful Accounts Accounts
receivable are primarily due from the suppliers from which the
Company buys its products including warranty receivables due
from a third party provider and a small percentage are due from
retail customers. The Company provides allowances for its
estimates of potential bad debts.
Vendor Rebates and Allowances Cash discounts
earned for timely payments of merchandise invoices are recorded
as a reduction of inventory and recognized in the statement of
operations upon the sale of the related inventory.
Periodic payments from vendors in the form of volume rebates or
other purchase discounts that are evidenced by signed agreements
are reflected in the carrying value of the inventory when earned
or as the Company progresses towards earning the rebate or
discount and as a component of cost of sales as the merchandise
is sold. Other consideration received from vendors is generally
recorded as a reduction of merchandise costs upon completion of
contractual milestones or terms of the related agreement.
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. The inventory
carrying value is reduced by certain vendor allowances that are
not a reimbursement of specific, incremental and identifiable
costs to promote a vendors products and an estimate of
what the Company believes to be obsolete.
F-7
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and Equipment A listing of the
estimated useful life of the various categories of property and
equipment is as follows:
|
|
|
Asset Classification
|
|
Estimated Useful Life
|
|
Merchandise display fixtures
|
|
3 years
|
Computer hardware and software
|
|
3 years
|
Vehicles
|
|
3 years
|
Point-of-sale
and other equipment
|
|
5 years
|
Furniture and fixtures
|
|
7 years
|
Leasehold improvements
|
|
15 years or remaining term of
lease, if shorter
|
Leasehold interests
|
|
Remaining term of lease
|
Property and equipment are stated at cost. Depreciation and
amortization are computed by the straight-line method over the
estimated useful lives of the respective assets. Amortization of
improvements to leased properties is based upon the remaining
initial term of the leases or the estimated useful lives of such
improvements, whichever is shorter. Leasehold improvements made
significantly after the initial lease term are amortized over
the shorter of their estimated useful lives or the remaining
lease term, including renewal periods, if reasonably assured.
Fully depreciated property and equipment are written off in the
period they become fully depreciated.
Long-Term Investments Long-term investments
consisted of investments in one privately held company as of
September 30, 2006. As of September 30, 2005,
long-term investments consisted of investments in marketable
equity securities and two privately held companies. Marketable
equity securities are stated at fair value and classified as
available-for-sale
as of September 30, 2005. In September 2006, the Company
sold its
available-for-sale
securities recognizing a gain of $0.2 million in its
consolidated statement of operations. In 2005 unrealized holding
gains and losses, net of the related tax effect, on
available-for-sale
securities were 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 Companys proportionate
part of the intercompany profits and losses relating to
inventory purchased from its equity method investees is
eliminated until the inventory is sold as the Company does not
have a controlling interest in its equity method investees.
Inventory is purchased on an arms length basis.
The Company had invested $1.8 million in a privately held
company, Tivoli Audio LLC (Tivoli), which resulted
in an ownership percentage of 25%. The Company accounts for this
investment using the equity method of accounting. On May 4,
2005, Tweeter sold 25% of its equity investment in Tivoli for
$10.2 million and recorded a gain on the sale of investment
of $9.9 million. As of September 30, 2006 and 2005,
Tweeter held an 18.75% ownership interest in Tivoli. The
investment continues to be accounted for under the equity method
based upon the fact that Tivoli is an LLC.
On December 31, 2004, Tweeter made an initial investment of
$0.3 million in Sapphire Audio, LLC (Sapphire)
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 $0.1 million in income
from equity investments in connection with the liquidation in
its statement of operations.
Intangible Assets Intangible assets represent
a trade name, which was being amortized on a straight-line basis
over its five-year useful life. Amortization expense for fiscal
years ended September 30, 2006, 2005 and 2004 was
$0.6 million, $0.7 million and $0.7 million,
respectively. The tradename was fully amortized as of
September 30, 2006.
Goodwill On July 1, 2004 the Company
acquired Sumarc Electronics Incorporated d/b/a NOW! Audio Video
(NOW!), resulting in the recording of
$5.3 million of goodwill upon finalization of the fair
value of the
F-8
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets received and liabilities assumed. In accordance with
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets,
goodwill is tested for impairment annually or when indications
of potential impairment exist. The Company used a cash flow
approach at the reporting until level (store level). A reporting
unit is the business unit one level below that operating
segment, for which discrete financial information is prepared
regularly and reviewed by management.
Other Assets Other assets include deferred
financing costs and multiple venue naming rights. The deferred
financing costs are being amortized over the term of the banking
agreement, which expires on April 1, 2008. The venue naming
rights are amortized over the lives of the respective
agreements, which range from seven to eleven and one-half years.
Long-Lived Assets When conditions indicate a
need to evaluate recoverability, Statements of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of requires that the
Company (1) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable based
on its undiscounted future cash flows and (2) measure an
impairment loss as the difference between the carrying amount
and fair value of the asset. No impairment charges were
recognized against long-lived assets for the fiscal years ended
September 30, 2006 and 2004. An impairment charge of
$9.0 million was recognized for the fiscal year ended
September 30, 2005 related to fixed assets of closed stores.
Fair Market Value of Financial Instruments
The estimated fair market values of the Companys financial
instruments, which include accounts receivable, accounts payable
and other current liabilities, approximate their carrying values
due to the short-term nature of these instruments. The carrying
value of long-term debt approximates fair value due to its
variable interest rate.
Self-Insurance Accruals The Company is
self-insured for workers compensation, auto/garage,
general liability insurance and medical/dental benefits and
evaluates its liability estimate on a quarterly basis based on
actuarial information and experience. Historical claims are
reviewed as to when they are incurred versus when they are
actually paid and an average claims lag is determined. Once the
average historical lag is determined, it is applied to the
current level of claims being processed. Accounting standards
require that a related loss contingency be recognized in its
consolidated balance sheet. The Company had self-insurance
accruals of $6.3 million and $5.4 million at
September 30, 2006 and 2005, respectively.
Deferred Consideration During the fiscal year
ended September 30, 2004 the Company extended an agreement
associated with processing private label credit card
transactions and received approximately $3.7 million from a
finance company. This amount has been initially deferred and is
being amortized over eight years, the life of the contract, as a
reduction of selling expenses.
During the fiscal year ended September 30, 2006 the Company
entered into an agreement as an authorized seller of extended
service agreements (ESA) on computers, consumer
electronics, appliances and related equipment and is scheduled
to receive $0.5 million over the life of the contract from
the ESA provider company. In accordance with the contract terms,
as payments from the ESA provider company are received these
amounts are deferred and amortized over five years, the life of
the contract, as recognized revenue.
Leases The Company leases retail stores,
warehouse and office facilities. Initial terms of the leases
range from 5 to 25 years. Most leases provide for monthly
fixed minimum rentals or contingent rentals based upon sales in
excess of stated amounts and normally require the Company to pay
real estate taxes, insurance, common area maintenance costs and
other occupancy costs. The Company recognizes rent expense for
leases that include scheduled and specified escalations of the
minimum rent on a straight-line basis over the base term of the
lease. Any difference between the straight-line rent amount and
the amount payable under the lease is included in rent related
accruals on the consolidated balance sheets.
F-9
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net gains from sale-leaseback transactions are initially
deferred (recorded in rent related accruals) and then amortized
over the lease term. Losses from sale-leaseback transactions are
fully recognized in the period in which they occur.
Cash or lease incentives (tenant allowances) received upon
entering into certain store leases are recognized on a
straight-line basis as a reduction to rent from the date of
possession of the property through the end of the initial lease
term. The unamortized portion of tenant allowances is recorded
as a part of rent related accruals.
Asset Retirement Obligations In March 2005,
the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47), an
interpretation of SFAS No. 143, Accounting for
Asset Retirement Obligations (SFAS No. 143).
FIN 47 clarifies that conditional asset retirement
obligations meet the definition of liabilities and should be
recognized when incurred if their fair values can be reasonably
estimated. Uncertainty surrounding the timing and method of
settlement that may be conditional on events occurring in the
future are factored into the measurement of the liability rather
than the existence of the liability. SFAS No. 143
established accounting and reporting standards for obligations
associated with the retirement of tangible long-lived assets
legally required by law, regulatory rule or contractual
agreement and the associated asset retirement costs.
SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the
carrying amount of the related long-lived asset, which is then
depreciated over the useful life of the related asset. The
liability is increased over time through income such that the
liability will equate to the future cost to retire the
long-lived asset at the expected retirement date. Upon
settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The Companys obligations are primarily the
result of requirements under its store lease agreements which
generally have return to original condition clauses
which would require the Company to remove or restore items such
as walls, among others.
The Company adopted SFAS No. 143 on October 1, 2005
and determined that the cumulative effect was immaterial to the
financial statements. During fiscal 2006, the Company recognized
a liability of $0.7 million as an increase to long-term
liabilities and a charge of $0.6 million to earnings from
continuing operations. The significant assumptions used in
estimating aggregate asset retirement obligations are the timing
of removals, estimated cost and associated expected inflation
rates that are consistent with historical rates and
credit-adjusted risk-free rates that approximate the
Companys incremental borrowing rate.
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 Companys
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.
Income Statement Classifications Total
revenue includes delivered merchandise, home installation labor,
commissions on extended warranties sold, completed service
center work orders, direct
business-to-business
sales, delivery charges and Internet-originated sales and
excludes collected sales taxes. Cost of sales includes
F-10
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
merchandise costs, distribution costs, home installation labor
costs, purchase discounts and vendor allowances. Selling,
general and administrative expenses include the compensation of
store personnel and store specific support functions, occupancy
costs, depreciation, advertising, credit card fees and the costs
of the finance, information systems, merchandising, marketing,
human resources and training departments, related support
functions and executive officers.
Store Opening Costs Costs of a non-capital
nature incurred prior to store openings are expensed as incurred.
Advertising Gross advertising expense
includes costs for advertising in electronic media, newspapers,
buyers guides and direct mailings. Such costs are expensed
when the media is first released. Cooperative advertising
represents monies received from suppliers for the performance of
specific advertising activities and under the guidelines
expressed in EITF
02-16
reduces gross advertising expense. Such reductions were
$0.4 million, $1.4 million and $3.2 million for
the years ended September 30, 2006, 2005 and 2004,
respectively. The net advertising expenses for the years ended
September 30, 2006, 2005 and 2004 were $40.4 million,
$46.1 million and $41.0 million, respectively.
Income Taxes The Company provides for
deferred tax liabilities or assets resulting from temporary
differences between financial reporting and taxable income and
for loss carry-forwards based on enacted tax laws and rates.
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. At
March 31, 2005 the Company determined that it was more
likely than not that it would not realize the deferred tax
benefits related to those assets and recorded a valuation
allowance of $22.2 million. As of September 30, 2006
and 2005, the valuation allowance amounted to approximately
$52.0 million and $45.9 million, respectively, related
to net federal and state deferred tax assets. The Company based
this determination, in part, on the trend of continuing losses
and consideration of store closings. 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.
Restructuring Charges The Company classified
certain expenses related to a restructuring plan designed to
close underperforming stores and re-align its resources and cost
structure. The expenses related to the closing of stores that
were in markets where the Company continues to have a presence
and accordingly, the results of their operations are included in
continuing operations.
Discontinued Operations The Company
classifies closed stores in discontinued operations when the
operations and cash flows of the store have been eliminated from
ongoing operations and when the Company will not have any
significant continuing involvement in the operation of the store
after disposal. In making this determination, the Company
considers, among other factors, geographic proximity and
customer crossover to other area stores.
Stock-Based Compensation In December 2004,
the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS 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).
SFAS 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 SFAS 123(R) on
October 1, 2005. The Company chose the Modified Prospective
Application (MPA) method for implementing
SFAS 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 have not been restated.
Accordingly, the Company will continue to provide pro forma
financial information for periods prior to the date of adoption
to illustrate the effect on net income (loss) and earnings
(loss) per share of applying the fair value recognition
provisions of SFAS No. 123(R).
F-11
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive Loss For the years ended
September 30, 2005 and 2004 the Companys
comprehensive loss was comprised of net loss, net unrealized
gains or losses on investments and net change in the value of a
derivative instrument. For the year ended September 30,
2006 the Companys comprehensive loss was comprised of net
loss and the net change in the unrealized gain on investments.
The Company sold its
available-for-sale
securities in September 2006 which resulted in recording a
realized gain during the period.
Earnings (Loss) Per Share Basic earnings
(loss) per share is 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, and dilutive potential common shares (common stock
options and warrants).
The number of potentially dilutive shares excluded from the
earnings (loss) per share calculation for fiscal 2006, 2005 and
2004, because they are anti-dilutive, was 3,829,569, 4,558,085
and 5,031,998, respectively.
Segment Information The Company operates in a
single reportable segment. This segment is primarily engaged in
the business of selling, delivering and installing specialty
consumer electronic solutions from our stores in the United
States and via the Web. The store level operating segments are
aggregated to a single reportable segment as they sell identical
products to a similar class of customers across all geographies.
At September 30, 2006, the Company operated 153 stores in
22 states.
The table below sets forth the approximate percentage of retail
revenue for each of the Companys primary product
categories for its fiscal years ended September 30, 2006,
2005 and 2004. Retail revenue consists of all revenue earned at
the Companys retail stores. The percentage of retail
revenue represented by each product category may be affected by,
among other factors, competition, economic conditions, consumer
trends, the introduction into the market of new products,
changes in the Companys product mix, acquisitions of
stores with different product mixes, and the timing of marketing
events. The historical percentages set forth below may not be
indicative of revenue percentages for future periods:
Percentage
of Revenue by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
Product Category
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Video(1)
|
|
|
57
|
%
|
|
|
55
|
%
|
|
|
57
|
%
|
Audio(2)
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
19
|
%
|
Mobile(3)
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
11
|
%
|
Home installation labor
|
|
|
7
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
All other(4)
|
|
|
9
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
(1)
|
Includes flat-panel televisions, projection televisions,
furniture, DVD recorders and players and other video categories.
|
|
(2)
|
Includes speakers, receivers, home theater and other audio
categories.
|
|
(3)
|
Includes mobile multimedia devices, installation labor, car
speakers, car decks and other mobile categories.
|
|
(4)
|
Includes power accessories and cables, extended warranties,
labor and parts, home installation parts and other miscellaneous
categories.
|
Reclassifications Certain prior period
balances have been reclassified to conform to the current period
presentation. Selling expenses and non-cash compensation charges
are now included in selling, general and administrative expenses
in the Companys consolidated statements of operations. In
prior years, selling expenses and non-cash compensation charges
were listed as separate items in the consolidated statement of
operations. In addition the 2005 proceeds from term loans were
segregated from the proceeds from long-term debt within the
financing section of the statements of cash flows.
F-12
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In June 2006 the FASB issued FASB Interpretation
(FIN) No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB
Statement 109. FIN 48 prescribes a 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 also
provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure, and
transition and defines the criteria that must be met for the
benefits of a tax position to be recognized. 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 opening retained earnings. The Company is
currently assessing the impact of FIN 48 on its
consolidated financial position and results of operations.
In September 2006 the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value in generally accepted accounting principles
(GAAP) and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company is currently assessing the impact of
SFAS No. 157 on its consolidated financial position
and results of operations.
In September 2006 the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 108 Topic 1N, Financial
Statements, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements, which provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement.
SAB 108 is effective for the first fiscal year ending after
November 15, 2006. The Company adopted this statement
retroactively as of October 1, 2005, as permitted,
recognizing an adjustment of $3.4 million to accumulated
deficit and rent related accruals in its consolidated balance
sheet as of October 1, 2005 and $0.4 million to its
consolidated statement of operations for the fiscal year ended
September 30, 2006. See Note 15 for further discussion.
|
|
3.
|
Stock
Based Compensation
|
The Company adopted the Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R)) on
October 1, 2005 using the Modified Prospective Application
(MPA) method of implementation. The Company
recognizes the cost of employee services received in exchange
for awards of equity instruments in the financial statements and
measures this cost based on the grant-date fair value of the
award. The Company recognizes this cost either on an accelerated
or straight-line basis depending on the legal vesting schedule
of the award. 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.
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 Companys 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 Companys
common stock on that date. As a result, options to purchase
approximately 867,000 shares, including approximately
374,000 options held by the Companys executive officers
and directors, became immediately exercisable effective as of
September 30, 2005.
As a result of the acceleration, the Company reduced the stock
option expense that otherwise would have been required to be
recorded in connection with accelerated options by approximately
$2.0 million in 2006. The Company expects its stock option
expense in connection with these accelerated options will be
reduced by approximately $0.7 million in 2007 and
$0.1 million in 2008.
Prior to its adoption of SFAS 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
F-13
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Adoption of SFAS 123(R) did not affect the Companys
cash flow or financial position but it did increase its reported
net loss and loss per share, since adopting SFAS 123(R)
results in the Company recording compensation cost for employee
stock options and employee share purchase rights.
The effect of adopting FAS 123(R) resulted in an increase
in loss from continuing operations and net loss of
$0.8 million ($0.03 per share) in fiscal 2006. There
was no effect on cash flows. All of the stock-based compensation
expense was recorded in selling, general and administrative
expenses. None of the compensation expense related to
stock-based compensation arrangements was capitalized as part of
inventory or fixed assets. 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 fiscal year ended
September 30, 2006.
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 Companys
stock option plan for the fiscal year ended September 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 fiscal year
ended September 30, 2006 was $2.23.
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 fiscal year ended
September 30, 2006 were estimated as of the beginning of
the ESPP period using the Black-Scholes option-pricing model.
The fair values of all stock option grants and ESPP shares
issued were determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
Stock
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
Plan
|
|
|
ESPP
|
|
|
Risk-free interest rate
|
|
|
4.4%
|
|
|
|
4.2%
|
|
Expected dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
Expected life of option grants and
ESPP shares (years)
|
|
|
5.17
|
|
|
|
0.25
|
|
Expected volatility of underlying
stock
|
|
|
77.5%
|
|
|
|
82.1%
|
|
Expected forfeitures as percentage
of total option grants and ESPP shares
|
|
|
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 Companys 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
F-14
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based on the historical volatility of the Companys 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
Companys analysis of its experience with its option grants
and ESPP shares, respectively. Under the
true-up
provisions of SFAS 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.
Stock options are granted at not less than market price as of
grant date. Stock options granted to non-employee members of the
board of directors are fully vested as of the grant date. Other
stock option grants generally vest over three years.
During the year ended September 30, 2006 the Company also
recorded stock-based compensation expense of $0.2 million
representing the value of common stock issued to a vendor.
SFAS No. 123 requires the presentation of pro forma
information for the comparative periods prior to the adoption as
if all of the Companys 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:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss as reported
|
|
$
|
(74,352,639
|
)
|
|
$
|
(18,168,637
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Total stock-based employee
compensation expense recorded, net of related tax effects
|
|
|
75,727
|
|
|
|
199,000
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Total stock-based employee
compensation expense determined under fair value based method
for all awards, net of related tax effects
|
|
|
(7,011,579
|
)
|
|
|
(7,124,000
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(81,288,491
|
)
|
|
$
|
(25,093,637
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share Basic and
diluted as reported
|
|
$
|
(3.03
|
)
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro
forma
|
|
$
|
(3.31
|
)
|
|
$
|
(1.04
|
)
|
|
|
|
|
|
|
|
|
|
For purposes of determining the disclosures required by
SFAS No. 123, the fair values of each stock option
granted in the fiscal years ended September 30, 2005 and
2004 under the Companys stock option plan were estimated
on the date of grant using the Black-Scholes option-pricing
model. The Company granted 583,613 and 2,500 options under its
2004 Long-Term Incentive Plan for the years ended
September 30, 2005 and 2004, respectively. The weighted
average grant date fair value of all stock option grants issued
for the years ended September 30, 2005 and 2004 was $5.88
and $5.85, respectively, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
3.40%
|
|
|
|
3.41%
|
|
Expected dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
Expected life of option grants
(years)
|
|
|
4.33
|
|
|
|
7.43
|
|
Expected volatility of underlying
stock
|
|
|
83.1%
|
|
|
|
80.1%
|
|
Expected forfeitures as percentage
of total grants
|
|
|
7.0%
|
|
|
|
2.8%
|
|
F-15
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
The following summarizes stock option activity under the Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Per Share
|
|
|
Weighted-Average
|
|
|
|
Options
|
|
|
Option Price
|
|
|
Exercise Price
|
|
|
Outstanding at October 1, 2003
|
|
|
4,330,631
|
|
|
$
|
0.31 to $32.13
|
|
|
$
|
9.47
|
|
Granted
|
|
|
693,937
|
|
|
$
|
4.38 to $8.05
|
|
|
$
|
8.00
|
|
Exercised
|
|
|
(293,652
|
)
|
|
$
|
0.31 to $8.50
|
|
|
$
|
5.31
|
|
Forfeited or expired
|
|
|
(655,498
|
)
|
|
$
|
3.62 to $32.13
|
|
|
$
|
13.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2004
|
|
|
4,075,418
|
|
|
$
|
0.31 to $32.13
|
|
|
$
|
8.82
|
|
Granted
|
|
|
583,613
|
|
|
$
|
2.70 to $6.05
|
|
|
$
|
5.88
|
|
Exercised
|
|
|
(73,760
|
)
|
|
$
|
0.31 to $5.90
|
|
|
$
|
4.77
|
|
Forfeited or expired
|
|
|
(983,766
|
)
|
|
$
|
3.23 to $32.13
|
|
|
$
|
13.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2005
|
|
|
3,601,505
|
|
|
$
|
0.31 to $32.13
|
|
|
$
|
7.21
|
|
Granted
|
|
|
867,705
|
|
|
$
|
3.60 to $8.68
|
|
|
$
|
3.97
|
|
Exercised
|
|
|
(724,272
|
)
|
|
$
|
0.31 to $8.05
|
|
|
$
|
5.55
|
|
Forfeited or expired
|
|
|
(871,949
|
)
|
|
$
|
0.76 to $32.13
|
|
|
$
|
8.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
2,872,989
|
|
|
$
|
2.70 to $25.04
|
|
|
$
|
6.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30,
2004
|
|
|
3,047,603
|
|
|
|
|
|
|
$
|
9.48
|
|
Exercisable at September 30,
2005
|
|
|
3,599,755
|
|
|
|
|
|
|
$
|
7.22
|
|
Exercisable at September 30,
2006
|
|
|
2,164,950
|
|
|
|
|
|
|
$
|
6.81
|
|
The options outstanding and exercisable at September 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
|
|
|
704,636
|
|
|
$
|
3.62
|
|
|
|
9.1
|
|
|
$
|
660,567
|
|
|
|
59,236
|
|
|
$
|
3.63
|
|
|
|
9.2
|
|
|
$
|
54,806
|
|
$ 4.70 - $ 5.64
|
|
|
901,485
|
|
|
|
5.48
|
|
|
|
6.2
|
|
|
|
|
|
|
|
891,940
|
|
|
|
5.48
|
|
|
|
6.2
|
|
|
|
|
|
$ 5.90 - $ 7.18
|
|
|
485,567
|
|
|
|
6.07
|
|
|
|
6.5
|
|
|
|
|
|
|
|
454,567
|
|
|
|
6.01
|
|
|
|
6.4
|
|
|
|
|
|
$ 7.27 - $ 8.68
|
|
|
618,131
|
|
|
|
7.93
|
|
|
|
5.0
|
|
|
|
|
|
|
|
596,037
|
|
|
|
7.90
|
|
|
|
4.8
|
|
|
|
|
|
$12.00 - $25.04
|
|
|
163,170
|
|
|
|
13.46
|
|
|
|
0.9
|
|
|
|
|
|
|
|
163,170
|
|
|
|
13.46
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,872,989
|
|
|
$
|
6.10
|
|
|
|
6.4
|
|
|
$
|
660,567
|
|
|
|
2,164,950
|
|
|
$
|
6.81
|
|
|
|
5.5
|
|
|
$
|
54,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options
exercisable at September 30, 2006 was 5.5 years.
The aggregate intrinsic value in the table above represents the
total intrinsic value, based on the Companys closing stock
price of $4.56 as of September 29, 2006, which would have
been received by the option holders had all option holders
exercised their options as of that date. The total number of
in-the-money
options exercisable as of September 30, 2006 was 59,236.
The aggregate intrinsic value of all stock options exercised
during the year ended September 30, 2006 was approximately
$1.7 million.
The Company settles employee stock option exercises with newly
issued common shares.
F-16
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2006, there was $1.1 million 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 2.2 years. The total fair value of shares vested
was $0.2 million during the year ended September 30,
2006.
A summary of the activity for non-vested stock options as of
September 30, 2006 and changes during the year then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Non-vested at September 30,
2005
|
|
|
1,750
|
|
|
$
|
2.70
|
|
Granted
|
|
|
827,705
|
|
|
|
3.93
|
|
Vested
|
|
|
(25,700
|
)
|
|
|
3.73
|
|
Forfeited
|
|
|
(95,716
|
)
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30,
2006
|
|
|
708,039
|
|
|
$
|
3.94
|
|
|
|
|
|
|
|
|
|
|
A summary of the activity for vested stock options as of
September 30, 2006 and changes during the year then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Vested at September 30, 2005
|
|
|
3,599,755
|
|
|
$
|
7.21
|
|
Granted
|
|
|
40,000
|
|
|
|
4.87
|
|
Vested
|
|
|
25,700
|
|
|
|
3.73
|
|
Exercised
|
|
|
(724,272
|
)
|
|
|
5.55
|
|
Forfeited
|
|
|
(776,233
|
)
|
|
|
9.62
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2006
|
|
|
2,164,950
|
|
|
$
|
6.81
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Awards
The following information relates to restricted stock awards
that have been granted to employees under the Companys
stock incentive plans. The restricted stock awards are not
transferable until vested and the restrictions lapse upon set
conditions which may be based on continuing employment (or other
business relationship)
and/or
achievement of pre-established performance goals and objectives.
There were no grants of restricted stock during the years ended
September 30, 2006, 2005 and 2004.
As of September 30, 2006, there was no unrecognized
compensation cost arising from non-vested compensation related
to restricted stock awards under the Companys stock
incentive plans.
Employee
Stock Purchase Plan
During fiscal 1999, the Company adopted an Employee Stock
Purchase Plan (ESPP). The ESPP was effective upon
approval by the stockholders of the Company and will continue in
effect for a term of 20 years, unless terminated sooner.
The Company has the right to terminate the ESPP at any time. The
ESPP is intended to be an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code of 1986, as
amended. Subject to adjustment pursuant to the ESPP, the
aggregate number of shares of common stock that may be sold
under the ESPP is 1,000,000. Employees who elect to participate
in an offering may utilize up to 10% of their payroll for the
F-17
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purchase of common stock at 85% of the closing price of the
stock on the last business day of the offering. Due to the
discount of 15% offered to employees for purchase of shares
under the ESPP, the Company considers such plan as compensatory.
In the fiscal years ended September 30, 2006, 2005 and
2004, the Company issued 55,879, 98,839, and 66,079 shares
of common stock, respectively, under this plan. At
September 30, 2006, 2005 and 2004 there were 627,189,
683,068 and 781,907 shares available for future sales. The
weighted average per share fair value of all ESPP shares issued
for the fiscal year ended September 30, 2006 was $1.53.
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 13 stores resulted in
restructuring charges of $16.5 million, including
$6.3 million of non-cash charges, principally related to
impairment of fixed assets, an additional charge of
$1.2 million was recorded in 2006 in connection with these
store closings.
In accounting for restructuring charges, the Company followed
guidance of SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, for disposal
activities.
The following is a summary of restructuring charge activity for
the years ended September 30, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
Professional
|
|
|
|
|
|
Non-cash
|
|
|
|
|
|
|
Charges
|
|
|
Fees
|
|
|
Severance
|
|
|
Charges
|
|
|
Total
|
|
|
Total Restructuring Charge
|
|
$
|
8,063,010
|
|
|
$
|
1,783,644
|
|
|
$
|
302,215
|
|
|
$
|
6,331,402
|
|
|
$
|
16,480,271
|
|
Payments
|
|
|
(1,668,458
|
)
|
|
|
(855,080
|
)
|
|
|
(293,223
|
)
|
|
|
|
|
|
|
(2,816,761
|
)
|
Non-cash charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,331,402
|
)
|
|
|
(6,331,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2005
|
|
|
6,394,552
|
|
|
|
928,564
|
|
|
|
8,992
|
|
|
|
|
|
|
|
7,332,108
|
|
Change in estimate
revised assumptions
|
|
|
1,744,951
|
|
|
|
(549,823
|
)
|
|
|
|
|
|
|
|
|
|
|
1,195,128
|
|
Payments
|
|
|
(2,965,239
|
)
|
|
|
(227,547
|
)
|
|
|
(8,992
|
)
|
|
|
|
|
|
|
(3,201,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2006
|
|
$
|
5,174,264
|
|
|
$
|
151,194
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,325,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $5.3 million balance as of September 30, 2006 is
composed of a short-term portion of $1.1 million (included
in accrued expenses) and a long-term portion of
$4.2 million.
|
|
5.
|
Discontinued
Operations
|
In the fourth quarter of fiscal 2004 the Company closed, sold or
committed to close eight stores, all of which were closed by
December 31, 2004. In the third quarter of fiscal 2005 the
Company closed or committed to close six stores in markets where
the Company does not continue to have a presence. The Company
closed four locations by June 30, 2005 and the remaining
store closures were completed by July 31, 2005. The
incremental cost related to all 14 store closings amounted to
$6.5 million and $0.6 million for the years ended
September 30, 2005 and 2004, respectively. The decision to
exit these locations was primarily related to poor operating
results. The incremental cost related to the six store closings
in 2005 amounted to $6.3 million for the year ended
September 30, 2005, consisting of lease termination and
other related charges, professional fees, severance and non-cash
charges of
F-18
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2.0 million, principally related to impairment of fixed
assets. 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 $11.1 million
and $26.6 million for the years ended September 30,
2005 and 2004, respectively. There was no revenue from the
closed stores for the year ended September 30, 2006. At
September 30, 2006, the remaining balance of exit costs
amounted to $1.8 million and is composed of a short-term
portion of $0.6 million (included in accrued expenses) and
a long-term portion of $1.2 million. Of the balance
$1.7 million consists of lease-related costs.
The following is a summary of discontinued operations activity
for the years ended September 30, 2004, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
Professional
|
|
|
|
|
|
Non-cash
|
|
|
|
|
|
|
Charges
|
|
|
Fees
|
|
|
Severance
|
|
|
Charges
|
|
|
Total
|
|
|
Balance as of October 1, 2003
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Discontinued operations charges
|
|
|
560,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
560,000
|
|
Payments
|
|
|
(560,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(560,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimate
|
|
|
166,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,302
|
|
Discontinued operations charges
|
|
|
3,268,098
|
|
|
|
912,781
|
|
|
|
98,261
|
|
|
|
2,012,280
|
|
|
|
6,291,420
|
|
Payments
|
|
|
(1,869,090
|
)
|
|
|
(381,896
|
)
|
|
|
(91,608
|
)
|
|
|
|
|
|
|
(2,342,594
|
)
|
Non-cash charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,012,280
|
)
|
|
|
(2,012,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2005
|
|
|
1,565,310
|
|
|
|
530,885
|
|
|
|
6,653
|
|
|
|
|
|
|
|
2,102,848
|
|
Change in estimate
|
|
|
808,259
|
|
|
|
(322,350
|
)
|
|
|
|
|
|
|
|
|
|
|
485,909
|
|
Payments
|
|
|
(654,496
|
)
|
|
|
(162,745
|
)
|
|
|
(6,653
|
)
|
|
|
|
|
|
|
(823,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2006
|
|
$
|
1,719,073
|
|
|
$
|
45,790
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,764,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Property
and Equipment
|
Major classifications of property and equipment consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Leasehold improvements
|
|
$
|
109,705,670
|
|
|
$
|
104,745,454
|
|
Furniture and equipment
|
|
|
62,463,473
|
|
|
|
64,063,444
|
|
Buildings
|
|
|
2,872,723
|
|
|
|
15,201,864
|
|
Land
|
|
|
|
|
|
|
867,164
|
|
Vehicles
|
|
|
4,311,135
|
|
|
|
2,132,488
|
|
Capitalized leased assets
|
|
|
1,534,750
|
|
|
|
112,575
|
|
Construction in progress
|
|
|
3,931,031
|
|
|
|
1,347,249
|
|
Leasehold interests
|
|
|
140,955
|
|
|
|
140,955
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
184,959,737
|
|
|
|
188,611,193
|
|
Less accumulated depreciation and
amortization
|
|
|
82,887,488
|
|
|
|
73,304,260
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
102,072,249
|
|
|
$
|
115,306,933
|
|
|
|
|
|
|
|
|
|
|
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
$13.8 million and the Company entered into a
16-year
operating 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 $1.2 million in years one through ten of the
lease and $1.3 million 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 fiscal year ended
September 30, 2006, which is being amortized over the life
of the lease.
On March 31, 2005, the Company entered into a
sale-leaseback arrangement with Samuel Bloomberg, Chairman of
Tweeters Board of Directors. Tweeter sold its Warwick,
Rhode Island retail location at 1301 Bald Hill Road, Warwick,
Rhode Island to Mr. Bloomberg for the sum of
$3.0 million and entered into a
15-year
operating lease agreement (with two successive five year options
of extension) with Mr. Bloomberg. The $3.0 million
sales price was determined based upon three separate valuations
performed by independent third parties. Under the new lease
agreement the Company will make rental payments of
$0.3 million in each of lease years one through ten, and
$0.4 million in each of the remaining five years of the
lease term. The Company recorded a $0.2 million loss on the
sale in its statement of operations for the year ended
September 30, 2005.
Depreciation and amortization of property and equipment for the
fiscal years ended September 30, 2006, 2005, and 2004
totaled $25.3 million, $23.9 million and
$21.5 million, respectively. During fiscal 2006 and 2005,
fully depreciated assets with an original cost of
$9.9 million and $15.3 million, respectively, were
written off.
F-20
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Compensation and fringe benefits
|
|
$
|
10,500,949
|
|
|
$
|
11,168,079
|
|
Accrued restructuring charges
|
|
|
5,325,458
|
|
|
|
7,332,108
|
|
Insurance reserves
|
|
|
6,349,000
|
|
|
|
5,375,000
|
|
Other
|
|
|
23,428,868
|
|
|
|
24,899,971
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
45,604,275
|
|
|
$
|
48,775,158
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Revolving credit facility
|
|
$
|
35,877,090
|
|
|
$
|
49,617,077
|
|
Term loans
|
|
|
13,000,000
|
|
|
|
13,000,000
|
|
Amounts due bank
|
|
|
6,479,649
|
|
|
|
9,277,105
|
|
Capital leases
|
|
|
1,485,186
|
|
|
|
1,930
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
56,841,925
|
|
|
|
71,896,112
|
|
Less current portion
|
|
|
6,479,835
|
|
|
|
9,278,849
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
50,362,090
|
|
|
$
|
62,617,263
|
|
|
|
|
|
|
|
|
|
|
The Companys senior secured revolving credit facility
(credit facility), as amended July 25, 2005,
provides for up to $90 million in revolving credit loans,
which may include up to $15 million in letters of credit
and $13 million in term loans. The credit facility is
secured by substantially all of the Companys assets and
contains various covenants and restrictions, including that:
(i) Tweeter cannot create, incur, assume or permit
additional indebtedness, (ii) Tweeter cannot create, incur,
assume or permit any lien on any property or asset,
(iii) Tweeter cannot merge or consolidate with any other
person or permit any other person to merge or consolidate with
us, (iv) Tweeter cannot purchase, hold or acquire any
investment in any other person except those specifically
permitted, (v) Tweeter cannot sell, transfer, lease, or
otherwise dispose of any asset except permitted exceptions, and
(vi) Tweeter cannot declare or make any restricted
payments. Borrowings are restricted to applicable advance rates
based principally on eligible receivables and inventory, reduced
by a $5 million reserve, a portion of customer deposits and
outstanding letters of credit. At September 30, 2006,
$16.5 million was available for future borrowings and
$6.9 million was held as letters of credit. The facility
expires on April 1, 2008.
The interest rate on the revolving credit loans ranges from 1.5%
to 2% over LIBOR or at the prime rate, depending on the
Companys 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. The 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
the Company chooses. 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.
On March 23, 2006, the Company entered into a lease
agreement relating to one building for retail space in
Wilmington, Delaware. The rent obligation for this lease began
in October 2006 when the retail store opened. The Company was
responsible for a portion of the construction costs for this
building and was deemed to be the owner
F-21
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during the construction period under
EITF 97-10,
The Effect of Lessee Involvement in Asset
Construction. Accordingly, the Company recorded the lease
as a capital lease. Payments under this capital lease are
comprised of principal and interest. The obligation matures in
September 2026 and calls for annual payments of
$0.1 million, including interest.
On the accompanying consolidated balance sheets, included in the
Current portion of long-term debt are
$6.5 million and $9.3 million for 2006 and 2005,
respectively, which represent checks issued but not yet cleared.
The Company has an employee savings plan covering all eligible
employees who have completed 3 months of service. Under
this plan, which was adopted under Section 401(k) of the
Internal Revenue Code, the Company may provide matching
contributions up to a stipulated percentage of employee
contributions. The expenses of the plan are fully funded by the
Company; and the matching contribution, if any, is established
each year. Such matching contributions cannot exceed the
employers established annual percentage of compensation,
which was a maximum of 6%. The Company recorded contribution
expense of $0.1 million for the year ended
September 30, 2006. There was no contribution expense for
the years ended September 30, 2005 or 2004.
|
|
10.
|
Commitments
and Contingencies
|
Leases
The Company leases a majority of its stores, installation
centers, warehouses, vehicles and administrative facilities
under operating leases. The initial terms of these leases
generally range up to 25 years with varying renewal
options. The leases provide for base rentals, real estate taxes,
and common area maintenance charges and, in some instances, for
the payment of percentage rents based on sales volumes in excess
of defined amounts. Rent expense for the years ended
September 30, 2006, 2005, and 2004 was $37.8 million,
$50.4 million and $38.7 million respectively,
including percentage rent expense of $0.1 million,
$0.1 million and $0.03 million, respectively.
Name
in Title Sponsorships
In prior years, the Company entered into five agreements to
become the name in title sponsor for various
performing arts centers in certain key markets throughout the
United States. In March 2006, the Company terminated its Tweeter
Center, Chicago, IL venue, incurring a termination fee of
$0.1 million during fiscal 2006.
Future minimum rental commitments (excluding closed stores)
under non-cancelable operating leases and name in title
sponsorships as of September 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Operating leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, net
|
|
$
|
280,779,632
|
|
|
$
|
35,392,348
|
|
|
$
|
33,431,249
|
|
|
$
|
32,185,957
|
|
|
$
|
30,150,214
|
|
|
$
|
27,028,220
|
|
|
$
|
122,591,644
|
|
Vehicles and equipment
|
|
|
1,767,013
|
|
|
|
615,661
|
|
|
|
391,150
|
|
|
|
307,596
|
|
|
|
195,117
|
|
|
|
171,810
|
|
|
|
85,679
|
|
Name in title sponsorships
|
|
|
7,137,500
|
|
|
|
1,875,000
|
|
|
|
1,875,000
|
|
|
|
1,375,000
|
|
|
|
1,375,000
|
|
|
|
637,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
289,684,145
|
|
|
$
|
37,883,009
|
|
|
$
|
35,697,399
|
|
|
$
|
33,868,553
|
|
|
$
|
31,720,331
|
|
|
$
|
27,837,530
|
|
|
$
|
122,677,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Contingencies
The Company has entered into employment and severance agreements
with certain key employees. These agreements provide for
continued employment with termination of the agreement at the
option of either party. Under certain circumstances, the key
employees could receive an amount up to two times their annual
base salary.
F-22
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is involved in legal proceedings and litigation
arising in the ordinary course of business. In the opinion of
management, the outcome of such proceedings and litigation
currently pending will not materially affect the Companys
consolidated financial statements. The Company had no reserves
recorded for legal proceedings as of September 30, 2006 and
2005.
The provision (benefit) for income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
1,624,986
|
|
|
$
|
68,095
|
|
State
|
|
|
|
|
|
|
1,138,689
|
|
|
|
10,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
2,763,675
|
|
|
|
78,344
|
|
Deferred, net of change in
valuation allowance
|
|
|
|
|
|
|
22,272,607
|
|
|
|
(11,213,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
25,036,282
|
|
|
$
|
(11,135,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of significant temporary differences comprising
the Companys current and long-term net deferred tax assets
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Employee compensation and fringe
|
|
$
|
1,209,421
|
|
|
$
|
1,434,053
|
|
Bad debt reserve
|
|
|
1,488,262
|
|
|
|
582,751
|
|
Inventory related accruals
|
|
|
7,329,306
|
|
|
|
8,835,683
|
|
Self insured health insurance
accruals
|
|
|
457,803
|
|
|
|
645,110
|
|
Other
|
|
|
132,646
|
|
|
|
201,801
|
|
Deferred revenue
|
|
|
233,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax
assets current
|
|
|
10,850,560
|
|
|
|
11,699,398
|
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
6,243,969
|
|
|
|
3,711,461
|
|
Depreciation
|
|
|
3,893,915
|
|
|
|
(2,143,342
|
)
|
Deferred revenue
|
|
|
850,501
|
|
|
|
1,059,456
|
|
Deferred warrant expense
|
|
|
2,065,027
|
|
|
|
2,084,896
|
|
Federal NOL carry-forward asset
|
|
|
17,806,874
|
|
|
|
17,657,210
|
|
Unrealized gain on marketable
equity securities
|
|
|
|
|
|
|
(74,886
|
)
|
Goodwill and intangible assets
|
|
|
5,194,018
|
|
|
|
6,801,718
|
|
State NOL carry-forward asset
|
|
|
3,984,981
|
|
|
|
4,474,876
|
|
AMT credit carry-forward
|
|
|
801,791
|
|
|
|
307,288
|
|
Other
|
|
|
353,134
|
|
|
|
315,784
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax
assets long-term
|
|
|
41,194,210
|
|
|
|
34,194,461
|
|
Valuation allowance
|
|
|
(52,044,770
|
)
|
|
|
(45,893,859
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company has approximately $51.8 million of federal net
operating losses to be carried forward, that will begin to
expire in 2024, and $77.9 million of state net operating
losses to be carried forward, that will begin to expire
F-23
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in 2008. Management has determined that it is more likely than
not that it will not fully realize the deferred tax assets.
Consequently, a full valuation allowance was established for the
periods ended September 30, 2006 and 2005. The Company did
not have a valuation allowance for the period ended
September 30, 2004. The tax benefit associated with
approximately $1.1 million of the federal net operating
losses to be carried forward will be credited to additional paid
in capital when the deduction reduces income taxes payable. The
Company has recorded refundable income taxes of
$9.0 million based on its loss carry-back claims filed with
and under review by the Internal Revenue Service.
A reconciliation between the statutory and effective income tax
rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory income tax rate (benefit)
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State income taxes, net of federal
benefit
|
|
|
(2.0
|
)%
|
|
|
8.1
|
%
|
|
|
(4.1
|
)%
|
Other
|
|
|
(0.3
|
)%
|
|
|
1.2
|
%
|
|
|
1.1
|
%
|
Valuation allowance
|
|
|
37.3
|
%
|
|
|
76.5
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
50.8
|
%
|
|
|
(38.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Capital
Stock and Incentive Plans
|
Common Stock Holders of common stock are
entitled to dividends if declared by the Board of Directors and
each share carries one vote. The common stock has no cumulative
voting, redemption or preemptive rights.
Common Stock Incentive Plans In November of
1995, the Company implemented the 1995 Stock Option Plan, under
which incentive and nonqualified stock options were granted to
management, key employees and outside directors to purchase
shares of the Companys common stock. Options are generally
exercisable over a period from one to ten years from the date of
the grant and are dependent on the vesting schedule associated
with the grant. There were no options exercisable under the 1995
Stock Option Plan as of September 30, 2006. Options for
284,204 and 296,646 shares were exercisable under the 1995
Stock Option Plan at September 30, 2005 and 2004,
respectively.
As of June 1, 1998, no further awards could be granted
under the 1995 Stock Option Plan and the Company adopted the
1998 Stock Option and Incentive Plan (the 1998 Plan)
to provide incentives to attract and retain executive officers,
directors, key employees and consultants. The plan terminated on
June 1, 2004. There were 1,767,986, 2,747,064 and 2,750,957
options exercisable under the 1998 Plan at September 30,
2006, 2005 and 2004, respectively.
At the Companys Annual Meeting on January 15, 2004,
the Companys stockholders voted to adopt the 2004
Long-Term Incentive Plan (the 2004 Plan) effective
June 2, 2004. The plan allows the Company to provide
incentives to attract and retain executive officers, directors,
key employees and consultants. The aggregate number of shares of
common stock issuable under the 2004 Plan is 2,727,063. As
awards granted under the 2004 Plan are exercised the shares of
stock underlying such previously outstanding portion of the
award shall be added back to the shares available for issuance
under the 2004 Plan; provided, however, that this amount shall
not exceed 100,000 shares of stock in any given year. In
addition, if any portion of an award is forfeited, cancelled,
satisfied without the issuance of stock or otherwise terminated,
the shares of stock underlying such portion of the award shall
be added back to the shares of stock available for issuance
under the 2004 Plan. There were 1,516,005 of underlying shares
of common stock available for future grant under the 2004 Plan
as of September 30, 2006. Under the 2004 Plan, the Company
granted awards for underlying shares of common stock totaling
867,705 and canceled 126,884 of these awards as of
September 30, 2006. The outstanding awards for underlying
shares of common stock totaled 1,105,003 of which 396,964 were
exercisable as of September 30, 2006.
F-24
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The exercise prices for all incentive stock options granted to
employees and nonqualified options granted to outside directors
range from $0.31 to $32.13 per share.
The following summarizes the number of options exercisable under
the stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
1995 Stock Option Plan
|
|
|
|
|
|
|
284,204
|
|
|
|
296,646
|
|
1998 Stock Option and Incentive
Plan
|
|
|
1,767,986
|
|
|
|
2,747,064
|
|
|
|
2,750,957
|
|
2004 Long-Term Incentive Plan
|
|
|
396,964
|
|
|
|
568,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,164,950
|
|
|
|
3,599,755
|
|
|
|
3,047,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2004 Plan is administered by the Compensation Committee of
the Board of Directors and will allow the Company to issue one
or more of the following: stock options (incentive stock options
and non-qualified options), restricted stock awards, performance
shares awards, performance unit awards, deferred stock awards,
warrants and common stock in lieu of certain cash compensation
awards (collectively, Plan Awards). The 2004 Plan is
to expire five years following its adoption. Awards made there
under and outstanding at the expiration of the 2004 Plan will
survive in accordance with their terms. Other than stock
options, no other Plan Awards were granted during 2006, 2005 and
2004.
Under the 2004 Plan, no more than 500,000 of the shares of stock
initially reserved for issuance under the Plan may be used for
restricted stock awards. In addition, to the extent that shares
of stock are used for deferred stock awards, they shall reduce
(on a
share-for-share
basis) such number of shares available for restricted stock
awards. All grants of restricted stock under the 2004 Plan will
be subject to vesting over five years, subject, however, at the
administrators discretion, to acceleration of vesting upon
the achievement of specified performance goals.
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 Companys 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 Companys
common stock on that date. As a result, options to purchase
approximately 867,000 shares, including approximately
374,000 options held by the Companys executive officers
and directors, became immediately exercisable effective as of
September 30, 2005.
The stock incentive plan also provides for the grant or issuance
of Plan Awards to directors of the Company who are not employees
of the Company. These options are typically 100% vested at the
time of grant. The Board of Directors received grants of options
for a total of 40,000, 25,000 and 20,000 shares of common
stock for the years ended September 30, 2006, 2005 and
2004, respectively.
Issuance of Warrants On January 15,
2004, the Company issued 956,580 fully vested warrants to
purchase Tweeter common stock to RetailMasters as part payment
for consulting services. The fair value of the warrants amounted
to $5.0 million and was charged to operations in January
2004. The warrants have exercise prices and exercisable periods
as follows:
(i) Warrants with an exercise price of $8.00 per share
for 239,145 shares of Tweeters common stock are
exercisable up to January 15, 2007; (ii) warrants with
an exercise price of $11.00 per share for
239,145 shares of Tweeters common are exercisable up
to January 15, 2008; (iii) warrants with an exercise
price of $14.00 per share for 239,145 shares of
Tweeters common stock are exercisable up to
January 15, 2009; and (iv) warrants with an exercise
price of $17.00 per share for 239,145 shares of
Tweeters common stock are exercisable up to
January 15, 2010.
As of September 30, 2006, no warrants have been exercised.
F-25
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shareholder Rights Plan The Company has in
place a Shareholders Rights Agreement (the Rights
Plan). The effect of the Rights Plan is to make it more
difficult for a third party to acquire the Company or large
portions of its common stock.
Under the Rights Plan each share of common stock currently
outstanding has attached to it one preferred stock purchase
right (a Right). Each Right entitles the holder
thereof to purchase one one-thousandth of one share (each, a
Unit) of the Companys Junior Participating
Cumulative Preferred Stock, no par value (the Junior
Preferred Stock) at a cash purchase price per Unit of
$100.00. The Rights and their exercise price are subject to
adjustment to take into account dilutive events. Each share of
the Junior Preferred Stock entitles the holder to 1,000 votes on
all matters submitted to a vote.
Upon the earlier to occur of (i) the tenth calendar day
after an Acquiring Person has acquired beneficial
ownership of more than 20% of the outstanding shares of common
stock (such date being the Stock Acquisition Date),
or (ii) the tenth business day following the announcement
of a tender offer or exchange offer that, upon consummation,
would result in a person or group becoming the beneficial owner
of more than 20% of the outstanding shares of common stock (such
date being the Tender Offer Date), the Board may, in
its discretion, cause the Rights to separate from the common
stock and become exercisable (such earlier date of the Stock
Acquisition Date and the Tender Offer Date being the
Distribution Date). An Acquiring Person
is defined as a person or group of affiliated or associated
persons that has acquired more than 20% of the outstanding
shares of common stock, but is not deemed to include any
underwriters in their capacities as such. No person who was a
stockholder of the Company immediately prior to the consummation
of the Companys initial public offering will be an
Acquiring Person unless that person acquires beneficial
ownership of both (i) more than 20% of the outstanding
Common Stock, and (ii) a greater percentage of the then
outstanding common stock than the percentage held by such person
as of the consummation of the Companys initial public
offering.
At any time after a Distribution Date, the Board may, in its
discretion, exchange all or any part of the then outstanding and
exercisable Rights for shares of common stock or Units of Junior
Preferred Stock. The exchange ratio shall be one share of common
stock or one Unit of Junior Preferred Stock for each Right.
However, the Board will not have the authority to effect such an
exchange after any person becomes the beneficial owner of 50% or
more of the common stock of the Company. The Rights may be
redeemed in whole but not in part at a price of $0.001 per
Right by the Board of Directors only until the earlier of
(i) the tenth calendar year after a Distribution Date or
(ii) the expiration date of the Rights Plan. The Board in
its sole discretion may amend the Rights Plan until a
Distribution Date. After a Distribution Date, the Board may make
certain amendments to the Rights Plan but none that will
adversely affect the interests of the Rights holders.
Under the Rights Plan, in general, once an Acquiring Person
accumulates more than 20% of the outstanding shares of Common
Stock, all other shareholders of the Company have the right to
purchase securities from the Company at a discount to such
securities fair market value, thus causing substantial
dilution to the holdings of the Acquiring Person.
The Companys stockholders have no right to take action by
written consent and may not call special meetings of
stockholders. Any amendment of the by-laws by the stockholders
or certain provisions of the charter requires the affirmative
vote of at least 75% of the shares of voting stock then
outstanding. The Companys charter also provides for the
staggered election of directors to serve for one, two and
three-year terms, and for successive three-year terms
thereafter, subject to removal only for cause upon the vote of
not less than 75% of the shares of common stock represented at a
stockholders meeting.
|
|
13.
|
Related-Party
Transactions
|
Tweeter held an 18.75% ownership interest in Tivoli Audio, LLC
(Tivoli), a manufacturer of consumer electronic
products, as of September 30, 2006 and 2005. The Company
accounts for this investment in Tivoli under the equity method
of accounting, recognizing the Companys share of
Tivolis income or loss in the Companys
F-26
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statement of operations. Distributions received from Tivoli
amounted to $1.0 million, $1.6 million, and
$0.7 million for the years ended September 30, 2006,
2005 and 2004, respectively. The Company purchased inventory
from Tivoli costing approximately $1.1 million,
$1.6 million and $3.9 million for the years ended
September 30, 2006, 2005 and 2004, respectively. Amounts
receivable from Tivoli were $0.01 million at
September 30, 2006, reflecting prepayments on purchases of
inventory. Amounts payable to Tivoli were $0 and
$0.1 million at September 30, 2006 and 2005,
respectively.
On December 31, 2004, Tweeter made an initial investment of
$0.3 million in Sapphire to obtain a 25% ownership
interest. This investment was being accounted for under the
equity method of accounting. Sapphire was liquidated during the
Companys quarter ended June 30, 2006 and the Company
recorded a gain of $0.1 million in income from equity
investments in connection with the liquidation. Distributions
received from Sapphire amounted to $0.3 million and
$0.03 million for the fiscal years ended September 30,
2006 and 2005, respectively. The Company purchased inventory
from Sapphire costing $6.5 million and $5.2 million
for the fiscal years ended September 30, 2006 and 2005,
respectively. Amounts payable to Sapphire were $0 and
$0.01 million at September 30, 2006 and 2005,
respectively.
On March 31, 2005, the Company entered into a
sale-leaseback arrangement with Samuel Bloomberg, Chairman of
Tweeters Board of Directors. Tweeter sold its Warwick,
Rhode Island retail location at 1301 Bald Hill Road, Warwick,
Rhode Island to Mr. Bloomberg for the sum of
$3.0 million and entered into a
15-year
operating lease agreement (with two successive five year options
of extension) with Mr. Bloomberg. The $3.0 million
sales price was determined based upon three separate valuations
performed by independent third parties. Under the new lease
agreement the Company will make rental payments of
$0.3 million in each of lease years one through ten, and
$0.4 million in each of the remaining five years of the
lease term. The Company recorded a $0.2 million loss on the
sale in its statement of operations for the year ended
September 30, 2005.
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 Tweeters Board of Directors, has been with Gordon
Brothers Group LLC in the Office of the Chairman.
Mr. Jeffrey Bloomberg and Samuel Bloomberg, Chairman of
Tweeters Board of Directors, are brothers. Tweeter paid
$0.4 million and $0 to DJM associated with this agreement
during the fiscal years ended September 30, 2006 and 2005,
respectively. Effective May 26, 2006 the Company terminated
the agreement with DJM. As of September 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 $8.5 million and
$4.9 million during the fiscal year ended
September 30, 2006 and 2005, respectively and had amounts
payable to Nortek and its subsidiaries of approximately
$0.8 million and $0.9 million at September 30,
2006 and 2005, respectively.
The Companys investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Available-for-sale
equity securities
|
|
$
|
|
|
|
$
|
187,214
|
|
Equity investment in Tivoli
|
|
|
2,639,365
|
|
|
|
1,737,575
|
|
Equity investment in Sapphire
|
|
|
|
|
|
|
295,564
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
2,639,365
|
|
|
$
|
2,220,353
|
|
|
|
|
|
|
|
|
|
|
F-27
TWEETER
HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company sold all of its shares in its
available-for-sale
securities in September 2006 and recognized a gain of
approximately $0.2 million in its statement of operations.
At September 30, 2005 and 2004, unrealized gains, before
income tax effect, on securities of $0.2 million were
included in accumulated other comprehensive income reflected in
stockholders equity.
Sapphire was liquidated during the three months ended
June 30, 2006 and the Company recorded a gain of
$0.1 million in income from equity investments in
connection with the liquidation.
15. Staff
Accounting Bulletin No. 108
As discussed under Recent Accounting Pronouncements in
Note 2, in September 2006 the SEC released SAB 108.
The transition provisions of SAB 108 permit the Company to
adjust for the cumulative effect on retained earnings of
immaterial errors relating to prior years. SAB 108 also
requires the adjustment of any prior quarterly financial
statements within the fiscal year of adoption for the effects of
such errors on the quarters when the information is next
presented. Such adjustments do not require previously filed
reports with the SEC to be amended. The