##### Table of Contents



Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 Commission file number: 0-24091 Tweeter Home Entertainment Group, Inc. (Exact name of Registrant as specified in its charter)
 DELAWARE
    
    04-3417513(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 40 PEQUOT WAY
CANTON, MA 02021(Address of principal executive offices including zip code) 781-830-3000(Registrants telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).Yes þ No o Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date. TITLE OF CLASS
    
    OUTSTANDING AT MAY 10, 2005Common Stock, $.01 par value
    
    24,599,242




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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES INDEX PAGEPart I.
    
    FINANCIAL INFORMATIONItem 1
    
    Condensed Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2004, September 30, 2004 and March 31, 2005
    
    
    3Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2004 and 2005
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2004 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6-11Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4
    
    Controls and Procedures
    
    
    17Part II.
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    18Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3
    
    Defaults upon Senior Securities
    
    
    18Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 5
    
    Other Information
    
    
    18Item 6
    
    Exhibits
    
    
    18Ex-31.1 Section 302 Certification of the C.E.O. and C.F.O.Ex-32.1 Section 906 Certification of the C.E.O. and C.F.O.
 2




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Tweeter Home Entertainment Group, Inc. and Subsidiaries 
 Consolidated Balance Sheets
 March 31,
    
    
    September 30,
    
    
    March 31,2004
    
    
    2004
    
    
    2005(Unaudited)
    
    
    
    
    
    
    (Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    1,316,857
    
    
    $
    2,801,005
    
    
    $
    1,368,569Accounts receivable, net of allowance for doubtful
accounts of $1,181,000, $475,000, and $682,000 at March
31, 2004, September 30, 2004, and March 31, 2005,
respectively
    
    
    19,747,044
    
    
    
    17,795,922
    
    
    
    23,940,644Inventory
    
    
    123,950,624
    
    
    
    106,562,804
    
    
    
    108,733,209Deferred tax assets
    
    
    7,571,302
    
    
    
    7,801,864
    
    
    
    Prepaid expenses and other current assets
    
    
    15,961,462
    
    
    
    17,019,121
    
    
    
    16,896,185Total current assets
    
    
    168,547,289
    
    
    
    151,980,716
    
    
    
    150,938,607Property and equipment, net
    
    
    124,376,444
    
    
    
    124,863,799
    
    
    
    128,144,932Long-term investments
    
    
    2,032,937
    
    
    
    2,304,166
    
    
    
    3,372,071Deferred tax assets
    
    
    3,932,785
    
    
    
    14,470,743
    
    
    
    Intangible assets, net
    
    
    1,586,667
    
    
    
    1,246,667
    
    
    
    906,667Goodwill
    
    
    
    
    
    
    4,885,133
    
    
    
    4,885,133Other assets, net
    
    
    2,357,586
    
    
    
    1,461,909
    
    
    
    1,820,676Total
    
    $
    302,833,708
    
    
    $
    301,213,133
    
    
    $
    290,068,086Liabilities and Stockholders EquityCurrent Liabilities:Current portion of long-term debt
    
    $
    3,367,987
    
    
    $
    3,184,274
    
    
    $
    13,989,526Current portion of deferred consideration
    
    
    
    
    
    
    518,199
    
    
    
    493,199Accounts payable
    
    
    29,521,535
    
    
    
    41,637,673
    
    
    
    28,134,140Accrued expenses
    
    
    20,938,093
    
    
    
    28,362,551
    
    
    
    30,756,574Customer deposits
    
    
    18,611,338
    
    
    
    21,893,905
    
    
    
    19,949,805Deferred warranty
    
    
    154,503
    
    
    
    93,625
    
    
    
    46,812Total current liabilities
    
    
    72,593,456
    
    
    
    95,690,227
    
    
    
    93,370,056Long-Term Debt
    
    
    46,936,851
    
    
    
    35,001,930
    
    
    
    43,816,413Other Long-Term Liabilities:Rent related accruals
    
    
    10,682,490
    
    
    
    11,071,389
    
    
    
    15,483,883Deferred warranty
    
    
    38,230
    
    
    
    
    
    
    
    Deferred consideration
    
    
    
    
    
    
    3,030,413
    
    
    
    2,787,980Total other long-term liabilities
    
    
    10,720,720
    
    
    
    14,101,802
    
    
    
    18,271,863Total liabilities
    
    
    130,251,027
    
    
    
    144,793,959
    
    
    
    155,458,332Commitments and ContingenciesStockholders EquityPreferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued
    
    
    
    
    
    
    
    
    
    
    Common stock, $.01 par value, 60,000,000 shares
authorized; 25,990,183, 26,175,965, and 26,243,693 shares
issued at March 31, 2004, September 30, 2004, and at
March 31, 2005, respectively
    
    
    259,902
    
    
    
    261,760
    
    
    
    262,437Additional paid in capital
    
    
    301,659,117
    
    
    
    304,006,333
    
    
    
    304,533,247Unearned equity compensation
    
    
    (138,494
    )
    
    
    (75,727
    )
    
    
    (1,410
    )Accumulated other comprehensive income
    
    
    378
    
    
    
    115,391
    
    
    
    100,556Accumulated deficit
    
    
    (127,416,593
    )
    
    
    (146,136,052
    )
    
    
    (168,555,005
    )Total
    
    
    174,364,310
    
    
    
    158,171,705
    
    
    
    136,339,825Less treasury stock: 1,718,106, 1,676,537, and 1,644,452
shares at March 31, 2004, September 30, 2004, and March
31, 2005, at cost, respectively
    
    
    (1,781,629
    )
    
    
    (1,752,531
    )
    
    
    (1,730,071
    )Total stockholders equity
    
    
    172,582,681
    
    
    
    156,419,174
    
    
    
    134,609,754Total
    
    $
    302,833,708
    
    
    $
    301,213,133
    
    
    $
    290,068,086
 See notes to unaudited condensed consolidated financial statements. 3




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Tweeter Home Entertainment Group, Inc. and Subsidiaries 
 Consolidated
Statements of Operations 
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Total revenue
    
    $
    185,788,229
    
    
    $
    184,692,964
    
    
    $
    436,554,860
    
    
    $
    446,667,634Cost of sales
    
    
    (112,917,216
    )
    
    
    (109,581,927
    )
    
    
    (268,410,593
    )
    
    
    (266,632,763
    )Gross Profit
    
    
    72,871,013
    
    
    
    75,111,037
    
    
    
    168,144,267
    
    
    
    180,034,871Selling expenses
    
    
    63,229,573
    
    
    
    70,173,527
    
    
    
    137,463,952
    
    
    
    155,496,657Corporate, general and administrative expenses
    
    
    11,310,814
    
    
    
    12,592,279
    
    
    
    23,073,273
    
    
    
    23,106,454Amortization of intangibles
    
    
    170,000
    
    
    
    170,000
    
    
    
    340,000
    
    
    
    340,000Non-cash compensation charges
    
    
    5,144,186
    
    
    
    30,573
    
    
    
    5,279,010
    
    
    
    74,317Income (loss) from continuing operations
    
    
    (6,983,560
    )
    
    
    (7,855,342
    )
    
    
    1,988,032
    
    
    
    1,017,443Interest expense
    
    
    (652,192
    )
    
    
    (684,432
    )
    
    
    (1,306,785
    )
    
    
    (1,228,232
    )Interest income
    
    
    100,124
    
    
    
    607
    
    
    
    325,797
    
    
    
    14,041Income (loss) from continuing operations before
income taxes
    
    
    (7,535,628
    )
    
    
    (8,539,167
    )
    
    
    1,007,044
    
    
    
    (196,748
    )Income taxes (provision) benefit
    
    
    (3,014,251
    )
    
    
    18,583,570
    
    
    
    402,817
    
    
    
    21,920,538Net income (loss) from continuing operations before
Income from equity investments
    
    
    (4,521,377
    )
    
    
    (27,122,737
    )
    
    
    604,227
    
    
    
    (22,117,286
    )Income from equity investments
    
    
    109,057
    
    
    
    22,234
    
    
    
    272,422
    
    
    
    290,945Net income (loss) from continuing operations
    
    
    (4,412,320
    )
    
    
    (27,100,503
    )
    
    
    876,649
    
    
    
    (21,826,341
    )Discontinued operations:Pre-tax loss from discontinued operations
    
    
    (240,512
    )
    
    
    (38,581
    )
    
    
    (543,045
    )
    
    
    (592,612
    )Income tax (provision) benefit
    
    
    (96,205
    )
    
    
    221,613
    
    
    
    (217,218
    )
    
    
    Loss from discontinued operations
    
    
    (144,307
    )
    
    
    (260,194
    )
    
    
    (325,827
    )
    
    
    (592,612
    )NET INCOME (LOSS)
    
    $
    (4,556,627
    )
    
    $
    (27,360,697
    )
    
    $
    550,822
    
    
    $
    (22,418,953
    )Basic earnings per share:Income(loss) from continuing operations
    
    
    (0.18
    )
    
    
    (1.10
    )
    
    
    0.04
    
    
    
    (0.89
    )Loss from discountinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    (0.02
    )Net income (loss) per share
    
    
    (0.19
    )
    
    
    (1.11
    )
    
    
    0.02
    
    
    
    (0.91
    )Diluted earnings per share:Income(loss) from continuing operations
    
    
    (0.18
    )
    
    
    (1.10
    )
    
    
    0.04
    
    
    
    (0.89
    )Loss from discountinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    (0.02
    )Net income(loss) per share
    
    
    (0.19
    )
    
    
    (1.11
    )
    
    
    0.02
    
    
    
    (0.91
    )Weighted average shares outstanding:Basic
    
    
    24,107,171
    
    
    
    24,561,204
    
    
    
    24,014,632
    
    
    
    24,508,041Diluted
    
    
    24,107,171
    
    
    
    24,561,204
    
    
    
    24,824,514
    
    
    
    24,508,041
 See notes to unaudited condensed consolidated financial statements. 4




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Tweeter Home Entertainment Group, Inc. and Subsidiaries 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months EndedMarch 31,2004
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    550,822
    
    
    $
    (22,418,953
    )Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    11,376,228
    
    
    
    12,281,200Non-cash compensation
    
    
    5,279,010
    
    
    
    74,317Loss on disposal of property and equipment
    
    
    16,570
    
    
    
    29,890Provision for uncollectible accounts
    
    
    249,928
    
    
    
    232,658Tax benefit from options exercised
    
    
    50,367
    
    
    
    43,568Deferred income tax (benefit) provision
    
    
    (358,168
    )
    
    
    22,282,497Amortization of deferred gain on sale leaseback
    
    
    (22,421
    )
    
    
    (22,421
    )Income from equity investment
    
    
    (454,037
    )
    
    
    (484,908
    )Changes in operating assets and liabilities:Increase in accounts receivable
    
    
    (1,733,408
    )
    
    
    (6,377,380
    )Increase in inventory
    
    
    (6,358,558
    )
    
    
    (2,452,259
    )Decrease (increase) in prepaid expenses and other assets
    
    
    10,446,345
    
    
    
    (454,573
    )Decrease in accounts payable and accrued expenses
    
    
    (4,771,108
    )
    
    
    (11,135,382
    )Decrease in customer deposits
    
    
    (2,557,499
    )
    
    
    (1,944,096
    )(Increase) decrease in deferred rent
    
    
    (351,342
    )
    
    
    338,574Decrease in deferred considerations
    
    
    
    
    
    
    (267,433
    )Decrease in deferred warranty
    
    
    (120,910
    )
    
    
    (46,813
    )Net cash provided by (used in) operating activities
    
    
    11,241,819
    
    
    
    (10,321,514
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (8,647,117
    )
    
    
    (14,111,185
    )Proceeds from sale of property and equipment
    
    
    8,850
    
    
    
    3,174,045Purchase of investments
    
    
    
    
    
    
    (300,000
    )Distributions from equity investment
    
    
    540,256
    
    
    
    Net cash used in investing activities
    
    
    (8,098,011
    )
    
    
    (11,237,140
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net change in amount due to bank
    
    
    (3,919,609
    )
    
    
    10,815,418Net (repayments) proceeds of long term debt
    
    
    (1,407,415
    )
    
    
    8,804,317Proceeds from options exercised
    
    
    1,452,868
    
    
    
    336,534Proceeds from employee stock purchase plan
    
    
    196,756
    
    
    
    169,949Net cash (used in) provided by financing activities
    
    
    (3,677,400
    )
    
    
    20,126,218DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (533,592
    )
    
    
    (1,432,436
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    1,850,449
    
    
    
    2,801,005CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,316,857
    
    
    $
    1,368,569SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid (received) during the period for:Interest
    
    $
    1,499,134
    
    
    $
    973,137Taxes
    
    $
    (7,085,895
    )
    
    $
    (260,763
    )Non-cash activities:Impairment of deferred tax assets
    
    $
    
    
    
    $
    22,236,282Deferred lease incentives
    
    $
    
    
    
    $
    4,096,341
 See notes to unaudited condensed consolidated financial statements. 5




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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation The unaudited condensed consolidated financial statements of Tweeter Home Entertainment Group,
Inc. and its subsidiaries (Tweeter or the Company), included herein, should be read in
conjunction with the consolidated financial statements and notes thereto included in Tweeters
Annual Report on Form 10-K for the fiscal year ended September 30, 2004. 2. Accounting Policies The unaudited condensed consolidated financial statements of Tweeter have been prepared in
accordance with accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the interim consolidated financial statements have been
included. Operating results for the six-month period ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the fiscal year ending September 30, 2005.
Tweeter typically records its highest revenue and earnings in its first fiscal quarter. Vendor Allowances, Allowance for Bad and Doubtful Accounts Accounts receivable are primarily
due from the vendors from which the Company buys its product. The various types of accounts
receivable are for purchase rebate allowances, cooperative advertising allowances, returned
merchandise and warranty work performed by the Companys service departments. Vendor allowances are only recorded if evidence of a binding arrangement exists with the
vendor and the amounts that will be received are both probable and estimable. Evidence of an
arrangement takes different forms. Arrangements with vendors are principally evidenced by written
contracts. In the absence of written contracts, the other documentation evidencing an arrangement
are documentation received from vendors, including end-of-period settlements, vendor presentation
materials, term sheets, and emails or other forms of documentation that specify the terms and
conditions of the vendor allowance receivable. The Company only considers these forms of
documentation binding when they are consistent with historical business practices relating to a
vendor and when settlement has occurred or is reasonably assured. Cash discounts earned for timely payments of merchandise invoices are recognized in the income
statement upon the sale of the related inventory. Purchase rebate allowances and general cooperative advertising allowances are earned based on
the purchase of inventory and are recorded in accounts receivable when the inventory is purchased.
The carrying value of inventory is initially reduced by the amount of purchase rebates earned,
resulting in lower cost of goods sold when the inventory is sold. Certain vendor agreements include
stretch goals where the level of funds earned is dependent upon the Company achieving certain
purchase levels. These program funds are recorded as a reduction of inventory costs when it is
determined that it is likely that the Company will achieve the goal. Vendor allowances earned based on specific advertising activities and other activities are
recognized as a reduction to advertising expense as these activities are performed and only to the
extent that the cost of the activities equals or exceeds the amount of the allowances. When the Company returns merchandise to a vendor, typically because it is defective, the
Company records a receivable for the value of the merchandise returned and reduces the inventory
balance. The Company sells products that come with a manufacturers warranty, and the Company has
service centers that repair products. When the Company repairs products that are still under a
manufacturers warranty, the vendor reimburses the Company for the parts and the technicians
labor. Once the product is repaired, the Company establishes a receivable for the amounts due from
the vendor and records service revenue. 6




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Property and Equipment- Historically, construction allowances provided by our landlords have
been classified on the balance sheet as a reduction of property, plant and equipment and
amortized as a reduction of depreciation expense over the lease term. In the Consolidated
Statements of Cash Flows, these allowances had been recorded as a reduction
in the purchase of property and equipment. The Company undertook a review of its lease
accounting practices as a result of changes in lease accounting announced by other public
companies in January and February of 2005 and guidance provided by the SEC in its February
7, 2005 letter to the accounting industry. As a result of its review, the Company determined
that construction allowances should be reflected as part of the lease financing and not as a
reduction of the capital expenditure. For the quarter ended March 31, 2005, the Company recorded
a reclassification adjustment to increase leasehold improvements by $4.1 million and increase
deferred lease incentives by the same amount for construction allowances provided to reflect
the cumulative unamortized portion of construction allowances. This reclassification adjustment
to the balance sheet had no effect on net loss, stockholders equity or cash flows. As a
result, the Company believes the effects of this reclassification are not material to the
Companys previously issued consolidated financial statements. Rent
Related Accruals- Rent expense under non-cancelable operating leases is recorded on a
straight-line basis over the lease term, including build-out period, which typically ranges from
90 to 120 days prior to the store opening. The excess straight-line rent expense over scheduled
payment amounts is recorded as a deferred liability. AdvertisingGross advertising including electronic media, newspaper, buyers guides and
direct mailings, are expensed when released. Cooperative advertising funds specific to advertising
activities received from vendors reduce gross advertising expense. Below are the gross advertising
expense, cooperative funds received and net advertising expense for the three and six months ended
March 31, 2004 and 2005. Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Gross advertising
    
    $
    9,894,189
    
    
    $
    9,445,672
    
    
    $
    25,778,991
    
    
    $
    29,115,099Cooperative
advertising funds
    
    
    (174,299
    )
    
    
    (153,433
    )
    
    
    (1,406,466
    )
    
    
    (160,022
    )Net advertising
    
    $
    9,719,890
    
    
    $
    9,292,239
    
    
    $
    24,372,525
    
    
    $
    28,955,077
 Stock-based compensation Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, addresses the financial accounting and reporting standards
for stock or other equity-based compensation arrangements. The Company accounts for stock based
compensation to employees using the intrinsic method. The Company provides disclosures based on the
fair value as permitted by SFAS No. 123. Stock or other equity-based compensation for non-employees
must be accounted for under the fair value-based method as required by SFAS No. 123 and EITF No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services, and other related interpretations. Under this
method, the equity-based instrument is valued at either the fair value of the consideration
received or the equity instrument issued on the date of grant. The resulting compensation cost is
recognized and charged to operations over the service period, which is usually the vesting period. For purposes of determining the disclosures required by SFAS No. 123, the fair value of each
stock option granted in the three and six months ended March 31, 2004 and March 31, 2005 under the
Companys stock option plan was estimated on the date of grant using the Black-Scholes
option-pricing model. During the quarter ended March 31, 2005, we did not issue any stock options
under our 2004 Long-Term Incentive Plan. Key assumptions used to apply this pricing model were as
follows: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Risk free interest rate
    
    
    3.04
    %
    
    
    
    
    
    
    3.42
    %
    
    
    3.35
    %Expected life of options grants
    
    
    7.2
    
    
    
    
    
    
    
    7.2
    
    
    
    10.0Expected volatility of underlying stock
    
    
    77.05
    %
    
    
    
    
    
    
    79.22
    %
    
    
    83.21
    %
 7




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Had compensation cost for the Companys stock option plans and employee stock purchase plan
been determined using the fair value method, pro forma net income and pro forma diluted earnings
per share would have been: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Net income (loss) as reported
    
    $
    (4,556,627
    )
    
    $
    (27,360,697
    )
    
    $
    550,822
    
    
    $
    (22,418,953
    )Total stock-based employee
compensation expense
recorded, net of related tax
effects
    
    
    80,894
    
    
    
    30,573
    
    
    
    161,789
    
    
    
    74,317Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (1,551,116
    )
    
    
    (1,147,318
    )
    
    
    (2,978,978
    )
    
    
    (2,329,805
    )Pro forma loss
    
    $
    (6,026,849
    )
    
    $
    (28,477,442
    )
    
    $
    (2,266,367
    )
    
    $
    (24,674,441
    )Earnings (loss) per shareBasic  as reported
    
    $
    (0.19
    )
    
    $
    (1.11
    )
    
    $
    0.02
    
    
    $
    (0.91
    )Basic  pro forma
    
    $
    (0.25
    )
    
    $
    (1.16
    )
    
    $
    (0.09
    )
    
    $
    (1.01
    )Diluted  as reported
    
    $
    (0.19
    )
    
    $
    (1.11
    )
    
    $
    0.02
    
    
    $
    (0.91
    )Diluted  pro forma
    
    $
    (0.25
    )
    
    $
    (1.16
    )
    
    $
    (0.09
    )
    
    $
    (1.01
    )
 See Note 8 for discussion of SFAS No. 123R, Share-Based Payment. Reclassifications Certain 2004 reclassifications have been made to conform to the 2005
presentation. 3. Income Taxes SFAS No. 109, Accounting for Income Taxes, requires that we record a valuation allowance
when it is more likely than not that some portion or all of the deferred tax assets will not be
realized. At March 31, 2005, the Company evaluated the recorded deferred tax assets and determined
that it is more likely than not that the Company will not realize the deferred tax benefits related
to those assets. Therefore the Company has provided a valuation allowance of approximately $22.2
million related to net federal and state deferred tax assets. In future periods the Company will
re-evaluate the likelihood of realizing benefits from the deferred tax assets and adjust the
valuation allowance as deemed necessary. 4. Earnings per Share The weighted average shares used in computing basic and diluted net income per share are
presented in the table below. Options and warrants are not included in the earnings per share
calculation when the exercise price is greater than the average market price for the period. The
number of options and warrants excluded in each period is reflected in the table. 8




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Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Basic Earnings (Loss) Per Share:Numerator:Net income (loss) from continuing operations
    
    $
    (4,412,320
    )
    
    $
    (27,100,503
    )
    
    $
    876,649
    
    
    $
    (21,826,341
    )Denominator:Weighted average common shares outstanding
    
    
    24,107,171
    
    
    
    24,561,204
    
    
    
    24,014,632
    
    
    
    24,508,041Basic earnings (loss) per share
    
    $
    (0.18
    )
    
    $
    (1.10
    )
    
    $
    0.04
    
    
    $
    (0.89
    )Diluted Earnings (Loss) Per Share:Numerator:
    
    $
    (4,412,320
    )
    
    $
    (27,100,503
    )
    
    $
    876,649
    
    
    $
    (21,826,341
    )Denominator:Weighted average shares outstanding
    
    
    24,107,171
    
    
    
    24,561,204
    
    
    
    24,014,632
    
    
    
    24,508,041Potential common stock outstanding
    
    
    
    
    
    
    
    
    
    
    809,882
    
    
    
    Total
    
    
    24,107,171
    
    
    
    24,561,204
    
    
    
    24,824,514
    
    
    
    24,508,041Diluted earnings (loss) per share
    
    $
    (0.18
    )
    
    $
    (1.10
    )
    
    $
    0.04
    
    
    $
    (0.89
    )Anti dilutive options and warrants not included in
earnings per share calculation
    
    
    3,159,489
    
    
    
    4,553,493
    
    
    
    2,526,446
    
    
    
    4,510,955Price range of anti dilutive options and warrants
    
    $
    0.305 to $32.125
    
    
    $
    0.305 to $32.125
    
    
    $
    12.00 to $32.125
    
    
    $
    0.305 to $32.125
 5. Comprehensive Income Comprehensive income (loss) for the three and six months ended March 31, 2004 and March 31,
2005 was as follows: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Net income (loss)
    
    $
    (4,556,627
    )
    
    $
    (27,360,697
    )
    
    $
    550,822
    
    
    $
    (22,418,953
    )Change in fair value of
long-term investments
    
    
    10,572
    
    
    
    3,655
    
    
    
    17,204
    
    
    
    686Change in fair value of
interest rate forward contract
    
    
    (17,956
    )
    
    
    
    
    
    
    (895
    )
    
    
    (15,521
    )Comprehensive income (loss)
    
    $
    (4,564,011
    )
    
    $
    (27,357,042
    )
    
    $
    567,131
    
    
    $
    (22,433,788
    )
 6. Intangible Assets and Goodwill Acquired amortizable intangible assets are as follows: As of September 30, 2004
    
    
    As of March 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationNon compete agreements and tradenames
    
    
    3,400,000
    
    
    
    2,153,333
    
    
    
    3,400,000
    
    
    
    2,493,333
 For the six months ended March 31, 2004 and 2005, amortization expense was
$340,000. For the full fiscal year 2005, the amortization expense is estimated to be
approximately $680,000 and for fiscal year 2006, the amortization expense is estimated to be
approximately $567,000. 9




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Goodwill On July 1, 2004, the Company acquired 100% of the outstanding common stock of Sumarc
Electronics Incorporated d/b/a NOW! AudioVideo (NOW!). The results of operations have been included
in the consolidated financial statements since that date. NOW! is a full service specialty retailer
of consumer electronics products with five North Carolina-based stores and one Tennessee-based
store. This acquisition was consummated for a number of reasons, including the compatibility of
NOW! with Tweeters existing go to market strategy, the protection of growing markets in North
Carolina and Tennessee, expected efficiencies of a combined infrastructure and the timing of the
acquisition (i.e., prior to the fiscal 2004 holiday selling season). The aggregate purchase price, including acquisition costs, was $5,031,746, which included the
issuance of 133,824 shares of common stock valued at $752,091 and cash of $4,279,655. The following
table provides a preliminary allocation of the purchase price and is subject to refinement and
finalization as additional information becomes available. Current assets
    
    $
    2,780,174Property and equipment
    
    
    1,039,778Goodwill
    
    
    4,885,133Total assets acquired
    
    
    8,705,085Current liabilities
    
    
    1,645,156Assumed debt
    
    
    2,028,183Total liabilities assumed
    
    
    3,673,339Total purchase price
    
    $
    5,031,746
 The goodwill is not tax deductible. Historical pro forma results of operations have not been
provided due to immateriality. 7. Related-Party Transactions Tweeter has a 25% ownership interest in Tivoli Audio, LLC, a manufacturer of consumer
electronic products. The Company accounts for this investment in Tivoli under the equity method of
accounting, recognizing the Companys share of Tivolis income or loss in the Companys statement
of income. For the six months ended March 31, 2004 and March 31, 2005 the Company purchased
approximately $612,000 and $360,000, respectively, of product from Tivoli. Distributions received
from Tivoli amounted to $540,000 for the six months ended March 31, 2004. There were no
distributions received from Tivoli for the six months ended March 31, 2005. Amounts payable to
Tivoli were $36,800 and $70,100 at March 31, 2004 and March 31, 2005, respectively. On December 31, 2004, Tweeter made an initial investment of $300,000 in Sapphire Audio, LLC, a
manufacturer of consumer electronic products, to obtain a 25% ownership interest. This investment
is being accounted for under the equity method of accounting. For the six months ended March 31,
2005 the Company purchased approximately $1,493,000 of product from Sapphire Audio, LLC. There
were no distributions received from Sapphire Audio, LLC for the six months ended March 31, 2005.
Amounts payable to Sapphire Audio, LLC were $581,000 at March 31, 2005. On March 31, 2005, Tweeter entered into a sale-leaseback arrangement with Samuel Bloomberg,
Chairman of Tweeters 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 has entered into a
fifteen-year lease agreement (with two successive five year options of extension) with Mr.
Bloomberg. The Company will pay rent of $288,000 in each of lease years one through five, $316,800
in each of lease years six through ten, and $348,480 in each of the remaining five years of the
lease term. Prior to entering into the transaction, Tweeter obtained three independent valuations
for the facility. The Company recorded a $169,000 loss on the sale, in its income
statement for this transaction for the period ended March 31, 2005. 10




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8. New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment(SFAS No. 123R), 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 No. 123R replaces SFAS No. 123 and
supersedes APB Opinion No. 25, and its related interpretations. SFAS No. 123R is effective for
periods beginning after June 15, 2005. The Company will adopt SFAS No. 123R on October 1, 2005 as
required. The Company is in the process of determining which transition method it will adopt. Adoption of SFAS No. 123R will not effect Tweeters cash flow or financial position, but it
will reduce reported net income and earnings per share because Tweeter currently uses the intrinsic
value method as permitted by Opinion No. 25. Accordingly, no compensation expense is currently
recognized for share purchase rights granted under the Companys employee stock option and employee
stock purchase plans. Specifically, adopting SFAS No. 123R will result in Tweeter recording
compensation cost for employee stock options and employee share purchase rights. The Company is
evaluating the impact of the adoption of this standard. On December 16, 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29.Statement No. 153 addresses the measurement of exchanges of
nonmonetary assets and redefines the scope of transactions that should be measured based on the
fair value of the assets exchanged. Statement 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not believe adoption of
Statement No. 153 will have a material effect on its consolidated financial position, results of
operations or cash flows. 9. Subsequent events Interim Chief Executive Officer On
March 15, 2005 the Company announced that Jeffrey Stone, its President and Chief Executive
Officer, would be leaving the Company effective April 26, 2005. The Companys Board of Directors
has designated Joseph McGuire, Chief Financial Officer, to serve as Interim Chief Executive Officer
effective April 26, 2005. The Board has initiated a search process and expects to move quickly to
name a permanent Chief Executive Officer. Jeffrey Stone will continue to serve on the Companys
Board of Directors. Store closing The Board of Directors voted on April 25, 2005 to close 19 stores. It expects to incur costs
related to the store closings of between $25 and $30 million, most of which will occur during the
June quarter. Of this, approximately $10.0 million will be non-cash charges in the form of fixed
asset write-offs, with the balance coming from estimated lease terminations, severance and other
related closing costs. The Company expects to reduce its total workforce by approximately 6% as a
result of the store closings and expects to reduce other expenses in conjunction with the
store-closing plan. Proceeds from Sale of Tivoli Audio, LLC On May 4, 2005, the Company sold 68,750 shares, representing
31% of the Companys total investment in Tivoli Audio, LLC for
$10.3 million, the transaction decreased the Companys total
ownership in Tivoli Audio, LLC from 25% to 17.25% after completion
of the sale. The Company will continue to be an active participant in
the investment and expects to receive future distributions. 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Tweeter Home Entertainment Group, Inc. (Tweeter or the Company) is a specialty retailer of
mid- to high-end audio and video consumer electronics products. As of March 31, 2005, Tweeter
operates 177 stores under the Tweeter, hifi Buys, Sound Advice, Showcase Home Entertainment and
Hillcrest names in the New England, Mid-Atlantic, Southeast, Texas, Southern California, Chicago,
Florida and Phoenix markets. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2005 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2004 Total Revenue.Total revenue includes delivered merchandise, labor, net commissions on service
contracts sold, completed service center work orders, and insurance replacement and corporate
sales. Total revenue from continuing operations decreased $1.1 million, or 0.6%, to $184.7 million
for the three months ended March 31, 2005 from $185.8 million for the three months ended March 31,
2004. Comparable store sales decreased $7.5 million, or 4.3%, despite an increase in home
installation labor sales of $2.7 million. 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. 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 addition to the comparable store sales
decrease, $8.2 million of sales were generated from new stores that have not been opened for a
twelve-month period and are therefore not yet includable in the comparable store sales base. There

was also a decrease in sales of $720,000 related to stores that closed and are excluded from
discontinued operations. In addition, our corporate sales/insurance replacement sales decreased by
$1.4 million, while sales at our service departments increased $650,000. For the quarter ended March 31, 2005, flat panel television sales grew to 24.6% of total sales
compared to 18.8% for the quarter ended March 31, 2004. For the quarter ended March 31, 2005,
plasma televisions represented 37.2% of the flat panel categorys dollars and 34.4% of the units
sold. The television monitors category decreased to 2.0% of revenue from 4.8% of revenue for the
quarters ended March 31, 2005 and March 31, 2004, respectively. The projection television category
decreased to 19.5% of revenue from 24.6% of revenue for the quarters ended March 31, 2005 and March
31, 2004, respectively. Home installation labor revenue grew to 5.2% of revenues from continuing
operations for the quarter ended March 31, 2005 from 3.5% of revenues for the quarter ended March
31, 2004.Total digital sales represented over 61.6% of total revenue for the quarter ended March
31, 2005 as compared to 60.4% for the quarter ended March 31, 2004. Cost of Sales and Gross Profit.Cost of sales includes merchandise costs, net delivery costs,
distribution costs, home installation labor costs, purchase discount and vendor allowances. Cost of
sales decreased $3.3 million, or 3.0%, to $109.6 million for the three months ended March 31, 2005
from $112.9 million for the three months ended March 31, 2004. Gross profit increased $2.2 million,
or 3.1%, to $75.1 million for the three months ended March 31, 2005 from $72.9 million for the
three months ended March 31, 2004. The gross margin percentage increased 150 basis points to 40.7%
for the three months ended March 31, 2005 from 39.2% for the three months ended March 31, 2004.
Vendor allowances increased by 230 basis points, which is a reduction of cost of sales.
Distribution and labor costs increased by 80 basis points. Selling Expenses.Selling expenses include the compensation of store personnel and store
specific support functions, occupancy costs, store level depreciation, advertising, pre-opening
expenses and credit card fees. Selling expenses increased $7.0 million, or 11.0%, to $70.2 million
for the three months ended March 31, 2005 from $63.2 million for the three months ended March 31,
2004. As a percentage of revenue, selling expenses increased to 38.0% for the three months ended
March 31, 2005 from 34.0% for the three months ended March 31, 2004. The increase in selling
expenses, as a percentage of revenue is primarily due to a 200 basis point increase in store level
and in home 12




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installation compensation costs. In addition, insurance costs increased by 40 basis
points due to settlement of some larger claims. Vehicle costs also increased by 20 basis points,
which was directly attributable to the increased sales in our home installation division and an
increase in fuel costs. Occupancy and depreciation costs increased by 50 and 30 basis points,
respectively. Credit card fees increased by 20 basis points and supplies were 20 basis points
higher than last year as well. Corporate, General and Administrative Expenses.Corporate, general and administrative expenses
include the costs of the finance, information systems, merchandising, marketing, human resources
and training departments, related support functions and executive officers. Corporate, general and
administrative expenses increased 11.3% or $1.3 million to $12.6 million for the three months ended
March 31, 2005 from $11.3 million for the three months ended March 31, 2004. As a percentage of
total revenue, corporate, general and administrative expenses were 6.8% and 6.1% for the three
months ended March 31, 2005 and the three months ended March 31, 2004, respectively. The increase
is mainly attributable to an increase in compensation costs. Amortization of Intangibles.Amortization of intangibles was $170,000 for the three months
ended March 31, 2005 and March 31, 2004. Non-cash Compensation Charge.Non-cash compensation charge was $30,600 and $5.1 million for
the three months ended March 31, 2005 and March 31, 2004, respectively. The $5.1 million is
attributed to the value of warrants issued to Retail Masters, LLC, a
consulting firm and for equity-based
executive compensation arrangements. Interest Expense.Interest expense increased to $684,000 for the three months ended March 31,
2005 compared to $652,000 for the three months ended March 31, 2004. This increase is due to the
increase in interest rates on borrowings on our revolving credit
agreement during the three months ended March 31, 2005 compared to the three
months ended March 31, 2004. Interest Income.Interest income decreased to $600 for the three months ended March 31, 2005
compared to $100,000 for the three months ended March 31, 2004. During the three months ended March
31, 2004 we received $75,000 of interest income paid by suppliers on pre-payments to secure
inventory purchases. In addition, there was $25,000 of interest income received for both
overpayments on federal income taxes and interest accrued on construction escrow deposits. There
were no such payments received during the three months ended March 31, 2005. Income from Equity Investment.Income from equity investment decreased to $37,000 for the
three months ended March 31, 2005 from $182,000 for the three months ended March 31, 2004 as
profitability decreased. Income
Taxes.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 March 31, 2005, we have
provided a full  valuation allowance of approximately $22.2 million related to previously recorded net
federal and state deferred tax assets. The effective tax rate for the three months ended March 31, 2005 and March 31, 2004 was
(219.2%) and 40.0% respectively. The effective tax rate for the three months ended March 31, 2005
includes the deferred tax asset expense of $22.2 million. Discontinued Operations.In the fourth quarter of fiscal 2004, we closed, sold or committed to
close eight stores. We completed the store closures by December 31, 2004. The decision to exit
these stores was to allow us to focus on our core operating strategy. We classified the operating results of these stores as discontinued operations
in the accompanying consolidated statements of operations. Prior year information has been
reclassified to conform to current year presentation. Revenues from the closed stores, included in
pre-tax loss from discontinued operations, amounted to $3,494,838 and $8,882 for the three months
ended March 31, 2004 and 2005, respectively. 13




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Seasonality.Tweeters operations, in common with other retailers, are subject to seasonal
influences. Historically, Tweeter has realized more of its revenue and net earnings in the first
fiscal quarter, which includes the holiday season, than in any other fiscal quarter. The net
earnings of any interim quarter are seasonally disproportionate to net sales since certain selling
expenses and administrative expenses are relatively fixed during the year. Therefore, interim
results should not be relied upon as indicative of results for the entire fiscal year. SIX MONTHS ENDED MARCH 31, 2005 AS COMPARED TO SIX MONTHS ENDED MARCH 31, 2004 Total Revenue.Total revenue from continuing operations increased $10.1 million, or 2.3%, to
$446.7 million for the six months ended March 31, 2005 from $436.6 million for the six months ended
March 31, 2004.Comparable store sales decreased by $3.9 million or 0.9%, excluding acquired and
remodeled stores. In addition to the comparable store sales decrease, $17.6 million of sales were
generated from new stores that have not been opened for a twelve-month period and are therefore not
yet includable in the comparable store sales base. Sales related to remodeled stores increased by
$400,000. There was also a decrease in sales of $1.7 million related to stores that closed that are
excluded from discontinued operations. In addition, our corporate sales/insurance replacement
sales decreased by $3.6 million, while our service sales increased $1.7 million. Digital technology
products continue to drive sales performance as they represented over 64% of revenues for the six
months ended March 31, 2005 compared to 62% for the six months ended March 31, 2004. Cost
of Sales and Gross Profit.Cost of Sales decreased $1.8 million, or 0.7%, to $266.6 million for the six
months ended March 31, 2005 from $268.4 million for the six months ended March 31, 2004. Gross
profit increased $11.9 million, or 7.1%, to $180.0 million for the six months ended March 31, 2005
from $168.1 million for the six months ended March 31, 2004. The gross margin percentage increased
180 basis points to 40.3% from 38.5% last year. Contributing to the increase in gross margin
percentage was a 150 basis point increase in vendor allowances, which are a reduction of cost of
sales, and a 70 basis point increase in product margins, which was driven by the increase in the
Companys ability to execute its plan to sell a complete basket of merchandise and services to our
customers. These were offset by a 40 basis point increase in labor costs. Selling Expenses.Selling expenses increased $18.0 million, or 13.1%, to $155.5 million for
the six months ended March 31, 2005 from $137.5 million for the six months ended March 31, 2004. As
a percentage of revenue, selling expenses increased to 34.8% for the six months ended March 31,
2005 from 31.5% in the prior year period. The increase in selling expenses as a percent of revenue
is primarily due to a 140 basis point increase in store level compensation costs.There was also a
100 basis point increase in gross advertising expense due to the implementation of a new
advertising strategy. In addition, depreciation increased by 25 basis points, while vehicle costs,
credit card fees and supplies increased by 40 basis points. Corporate, General and Administrative Expenses.Corporate, general and administrative expenses
for the six months ended March 31, 2005 remained flat at $23.1 million. As a percentage of total
revenue, corporate, general and administrative expenses decreased to 5.2% for the six months ended
March 31, 2005 from 5.3% for the prior year period. Amortization of Intangibles.Amortization of intangibles was $340,000 for the six months ended
March 31, 2005 and March 31, 2004. Non-cash Compensation Charge.Non-cash compensation charge was $74,300 and $5.3 million for
the six months ended March 31, 2005 and March 31, 2004, respectively. The $5.3 million is
attributed to the value of warrants issued to Retail Masters, LLC, a
consulting firm  and for equity-based
executive compensation arrangements. Interest Expense.Interest expense decreased to $1.2 million for the six months ended March
31, 2005 from $1.3 million for the six months ended March 31, 2004. This decrease is due to
interest payments made in the prior years under capital lease
obligations. The capital lease obligations were fully paid off prior
to the three months ended March 31, 2005, thus reducing interest expense. Interest Income.Interest income decreased to $14,000 for the six months ended March 31, 2005
compared to $326,000 for the six months ended March 31, 2004. During the six months ended March 31,
2004 we received 14




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$300,000 of interest income paid by suppliers on pre-payments to secure inventory
purchases. In addition, there was $25,000 of interest income received for both overpayments on
federal income taxes and interest accrued on construction escrow deposits. There were no such
payments received during the six months ended March 31, 2005. Income from Equity Investment.Income from equity investment increased to $485,000 for the six
months ended March 31, 2005 from $454,000 for the six months ended March 31, 2004. Income
Taxes.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 March 31, 2005, we have provided a full valuation allowance of approximately $22.2
million related to previously recorded net federal and state deferred tax assets. The effective tax rate for the six months ended March 31, 2005 and March 31, 2004 was
(2,777.0%) and 40.0% respectively. The effective tax rate for the six months ended March 31, 2005
includes the deferred tax asset expense of $22.2 million. Discontinued Operations.In the fourth quarter of fiscal 2004, we closed, sold or committed to
close eight stores. We completed the store closures by December 31, 2004. The decision to exit
these stores was to allow us to focus on our core operating strategy.  We classified the operating results of these stores as discontinued operations in the
accompanying consolidated statements of operations. Prior year information has been reclassified to
conform to current year presentation. Revenues from the closed stores, included in pre-tax loss
from discontinued operations, amounted to $7,959,076 and $494,094 for the six months ended March
31, 2004 and 2005, respectively. BALANCE SHEET COMPARISON: MARCH 31, 2005 AS COMPARED TO SEPTEMBER 30, 2004 and MARCH 31, 2004 Inventory. Total inventory increased during the six months ended March 31, 2005 compared to
September 30, 2004 by $2.1 million. Total inventory decreased by $15.2 million compared to March
31, 2004. The increase is attributable to the change in the Companys mix percentage as video
products are driving the business. Video products have a higher cost per unit than the other
categories sold by the Company. The decrease is attributable to the Company managing its inventory
levels at a rate consistent with customer demands. Accounts Receivable.Total accounts receivable increased by $6.1 million during the six months
ended March 31, 2005 compared to September 30, 2004. The increase was primarily attributable to
monies due from vendors for allowances that were higher as a result of the increase in purchases
for the quarter. Total accounts receivable increased by
$4.2 million compared to March 31, 2004 due to the similar reasons. Current Portion of Long-Term debt.Current portion of long-term debt increased by $10.8
million, and $10.6 million at March 31, 2005 compared to September 30,
2004 and March 31, 2004. The increase is a result of the timing of accounts payable checks clearing
the bank. Accounts
Payable.Total accounts payable decreased $13.5 million and
$1.8 million at  March 31, 2005 compared to September 30, 2004 and March 31, 2004. This is a result
of a decrease in inventory payables and timing of disbursement of vendor payables. Rent Related Accruals.Total rent related accruals increased $4.4 million and
$4.8 million at  March 31, 2005 compared to September 30, 2004 and March 31, 2004. This is a
result of the re-classing of $4.1 million of deferred lease
incentives disclosed in Note #2. 15




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LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $10.3 million for the six months ended March 31,
2005 compared to net cash provided by operations of $11.2 million for the six months ended March
31, 2004. Cash used in operating activities for the six months ended March 31, 2005 was primarily
the result of an increase in inventory of $2.5 million, an increase in accounts receivables of $6.4
million, a decrease in accounts payable and accrued expenses of $11.1 million, and a decrease in
customer deposits of $1.9 million. The adjustments to reconcile net income (loss) to net cash
provided by operating activities consisted primarily of $12.3 million for depreciation and
amortization and $560,000 related to other items. Non-cash activities for the six months ended
March 31, 2005 included an impairment charge for deferred tax assets of $22.2 million. At March 31, 2005, working capital was $57.6 million, compared to $56.3 million at September
30, 2004. The ratio of current assets to current liabilities was 1.62 to 1 at March 31, 2005 and
1.59 to 1 at September 30, 2004. The increase was primarily the result of a decrease in accounts
payable and customer deposits. Net cash used in investing activities for the six months ended March 31, 2005 consisted mainly
of capital expenditures of $14.1 million, primarily used for the building of new stores and
displays. Net cash provided by financing activities during the six months ended March 31, 2005 was $20.1
million, which was primarily due to an increase in current portion of long-term debt and proceeds
from long term debt of $19.6 million. This increase was due to the timing and clearing of
outstanding checks. The Company has a $90 million line of credit that will expire on April 1, 2008.
Under the agreement the availability under the credit facility is based on a borrowing base tied to
a percentage of eligible inventory, receivables and real estate. The interest rate on the facility
ranges from 1.75% to 2.25% over LIBOR provided the Company commits the loan balances for a period
of thirty days or more, or 0% to .25% over the prime rate. The line is secured by substantially all
of the assets of the Company and its subsidiaries and contains various covenants and restrictions,
including that: (i) the Company cannot create, incur, assume or permit additional indebtedness,
(ii) the Company cannot create, incur, assume or permit any lien on any property or asset, (iii)
the Company cannot merge or consolidate with any other person or permit any other person to merge
or consolidate with the Company, (iv) the Company cannot purchase, hold or acquire any investment
in any other person except those specifically permitted, (v) the Company cannot sell, transfer,
lease, or otherwise dispose of any asset except permitted exceptions, and (vi) the Company cannot
declare or make any restricted payments. The borrowers under the credit facility are subsidiaries
of the Company, and the Company is the guarantor of any amounts borrowed. In addition, there is a
commitment fee for the unused portion of the line of .300%. Our weighted average interest rate on
outstanding borrowings under this credit facility for the six months ended March 31, 2005 and March
31, 2004 was approximately 4.8%, and 3.5%, respectively. The Company is required to have $6.0
million on reserve when computing the available borrowing base. The administrative availability
block under the agreement is presently at $7.5 million. As of March 31, 2005, the Company had $9.0 million available under this revolving credit
facility and $43.8 million outstanding. The Company believes that its existing cash, together with cash generated by operations and
available borrowings under its credit facility, will be sufficient to finance its working capital
and capital expenditure requirements for at least the next twelve months. Furthermore, due to the
seasonality of our business, our working capital needs are significantly higher in the fiscal third
and fourth 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. 16




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FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q, including, without
limitation, statements containing the words expects, anticipates, believes and words of
similar import, constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various
risks and uncertainties, including Company growth and acquisitions, dependence on key personnel,
the need for additional financing, competition and seasonal fluctuations, and those referred to in
the Companys Annual Report on Form 10-K filed on December 14, 2004, that could cause actual future
results and events to differ materially from those currently anticipated. Readers are cautioned not
to place undue reliance on these forward-looking statements. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principle market risk inherent in our financial instruments and in our financial position
is the potential for loss arising from adverse changes in interest rates. We do not enter into
financial instruments for trading purposes. At March 31, 2005, the Company had $43.8 million of variable rate borrowings outstanding under
its revolving credit agreements, which approximates fair value. A hypothetical 10% adverse change
in interest rates for this variable rate debt would have an approximate $200,000 annual impact on
the Companys earnings and cash flows. 
 ITEM 4. CONTROLS AND PROCEDURES Our interim chief executive officer, who is also our chief financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report (the Evaluation Date), has concluded that as of the Evaluation Date our
disclosure controls and procedures were effective and designed to ensure that material information
relating to Tweeter would be made known to them by others within the company. During the period
covered by this quarterly report, there were no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 17




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS None 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 25, 2005, the Company held its Annual Meeting of Stockholders. At the meeting, the
stockholders elected as directors Matthew Bronfman (with 22,704,831 affirmative votes and 667,939
votes withheld) and Steven Fischman (with 23,141,902 affirmative votes and 230,868 votes withheld).
The stockholders also approved the designation of Deloitte & Touche LLP to audit the books and
records of the Company for the fiscal year ending September 30, 2005 (with 22,965,464 shares voting
for, 311,339 against and 95,967 abstaining). 
 ITEM 5. OTHER INFORMATION None 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Section 1350 Certifications. 18




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TWEETER HOME ENTERTAINMENT GROUP, INC.By:
    
    /s/ Joseph McGuireJoseph McGuire,Chief Financial Officer and Interim Chief Executive OfficerDate:
May 10, 2005
 19