TheaterXtreme ‘Suspends’ Operations but Franchises Live On

Theater Xtreme Entertainment Group (OTCBB: TXEG), the A/V installation franchise company, is "suspending its operations," according to a form filed yesterday with the SEC.

The company is "suspending the employment" of all employees as of today, but some senior managers will work on a "voluntary basis" as they seek funding.

TX managed to raise $795,000 in new investment capital last month, but still ran out of money. The company's suspension of operations, according to the filing, is "due to having an insufficient amount of cash on hand."

If they can't raise the cash, Theater Xtreme will file for bankruptcy, according to the filing.

According to TX's most recent quarterly report, filed on November 19, 2008:

Total revenue includes delivered and installed merchandise, installation and service labor customer service revenues, earned franchise license fees and franchise royalties. Total revenue for the three months ended September 30, 2008 was $817,263 compared to $1,203,013 for the three months ended September 30, 2007, reflecting a decrease of $385,750 or 32%. This decrease is a result of decreased retail sales due to the closing of three of the Company’s corporate stores, the change to allow most franchise purchases to be made directly from vendors versus through the Company, the decline in collected franchise royalties, the unavailability of import private label products, and some softening of consumer demand in the later part of the quarter, offset by the recognition of revenue from deferred franchise sales.

Calls to the corporate offices in Newark, Del. and to the last remaining company-owned store in Wilmington, Del., were not returned. Presumably, that store has closed, since TX "suspended" all corporate employees.

I had high hopes for Theater Xtreme, which appeared to be the first A/V franchise business that might possibly succeed, as I wrote in 2005.

The business model? Theater Xtreme would test and then market a turnkey home-theater retail operation, and entrepreneurs could have the system they needed to launch a semi-custom integration business fast.

"I've got a pretty extensive business background," says Tim Ciccone, owner of the Pittsburgh TX store. "I liked the model."

Indeed, TX did well attracting franchisees – at one point 16 of them – but ultimately the corporate entity couldn't make the business work.

Franchisees Doing Just Fine

The good news is that Theater Xtreme became so uninvolved with their franchisees' business that the individual shops learned to go it alone.

In fact, 16 of them filed a lawsuit awhile ago to disenfranchise themselves from corporate.

TX's suspension of operations is not likely to affect the franchisees – except they can stop paying lawyers for the disenfranchisement suit.

"Basically, there should be no effect," says Ciccone. "My interaction with them [corporate] has been basically none for quite some time."

Did Ciccone and his cohorts really need anything from TX corporate? "Actually no," he says.

In the beginning, Ciccone explains, being part of a national network was important for credibility, but once his store earned the trust of customers, the association with a national entity became a "non-factor."

Another franchisee, Terry Tudhope of the Auburn Hills, Mich. Store, also says he needed the backing of a company like TX to get a retail business going. A 20-year veteran of the custom installation industry, Tudhope says he needed a store front to gain access to certain product lines.

TX was a good vehicle for that, but Tudhope doesn't really need the corporate entity anymore. "Oh sure, we can operate without them," he says.