##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number: 0-24091
 Tweeter Home Entertainment Group, Inc.
  Delaware
    
    04-3417513(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 40 Pequot Way
Canton, MA 02021
 781-830-3000
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ
  TITLE OF CLASS
    
    OUTSTANDING AT FEBRUARY 6, 2006Common Stock, $.01 par value
    
    25,077,214




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##### 



TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 PAGEPART I  FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited).Condensed Consolidated Balance Sheets as of December 31, 2005, September 30, 2005 and December 31, 2004.
    
    
    2Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2005 and 2004.
    
    
    3Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2005 and 2004.
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk.
    
    
    15Item 4.
    
    Controls and Procedures.
    
    
    15PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    17Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    17Item 3.
    
    Defaults upon Senior Securities.
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    17Item 5.
    
    Other Information.
    
    
    17Item 6.
    
    Exhibits.
    
    
    17SIGNATURESEXHIBIT INDEXEx-31.1 Section 302 Certification of CEOEx-31.1 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.1 Section 906 Certification of CFO




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (Unaudited).
 TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 December 31,
    
    
    September 30,
    
    
    December 31,2005
    
    
    2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,831,142
    
    
    $
    1,309,871
    
    
    $
    2,181,540Accounts receivable, net of allowance for doubtful accounts of $1,395,379,
$1,400,172 and $617,693, respectively
    
    
    40,438,782
    
    
    
    28,189,414
    
    
    
    32,690,271Inventory
    
    
    129,350,864
    
    
    
    111,506,056
    
    
    
    130,276,341Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    7,338,656Refundable income taxes
    
    
    8,906,841
    
    
    
    9,006,740
    
    
    
    Prepaid expenses and other current assets
    
    
    13,435,385
    
    
    
    8,189,625
    
    
    
    17,260,157Total current assets
    
    
    194,963,014
    
    
    
    158,201,706
    
    
    
    189,746,965Property and equipment, net
    
    
    112,058,621
    
    
    
    115,306,933
    
    
    
    126,882,908Long-term investments
    
    
    3,112,254
    
    
    
    2,220,353
    
    
    
    3,065,604Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    11,792,841Intangible assets, net
    
    
    396,666
    
    
    
    566,667
    
    
    
    1,076,667Goodwill
    
    
    5,250,868
    
    
    
    5,250,868
    
    
    
    4,885,133Other assets, net
    
    
    2,267,469
    
    
    
    2,470,599
    
    
    
    2,150,451Total Assets
    
    $
    318,048,892
    
    
    $
    284,017,126
    
    
    $
    339,600,569LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term debt
    
    $
    15,708,539
    
    
    $
    9,278,849
    
    
    $
    23,686,105Current portion of deferred consideration
    
    
    1,103,307
    
    
    
    484,866
    
    
    
    505,699Accounts payable
    
    
    37,531,699
    
    
    
    34,885,458
    
    
    
    39,175,677Accrued expenses
    
    
    55,716,731
    
    
    
    48,775,158
    
    
    
    39,862,346Customer deposits
    
    
    25,673,196
    
    
    
    25,623,763
    
    
    
    24,825,349Deferred warranty
    
    
    
    
    
    
    
    
    
    
    70,219Total current liabilities
    
    
    135,733,472
    
    
    
    119,048,094
    
    
    
    128,125,395Long-term debt
    
    
    65,055,686
    
    
    
    62,617,263
    
    
    
    35,791,036Rent related accruals
    
    
    16,859,175
    
    
    
    16,939,556
    
    
    
    11,186,122Deferred consideration
    
    
    2,424,330
    
    
    
    2,545,547
    
    
    
    2,909,196Commitments and ContingenciesStockholders Equity:Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued
    
    
    
    
    
    
    
    
    
    
    Common stock, $.01 par value, 60,000,000 shares
authorized; 26,383,244,
26,249,725 and 26,196,193 shares issued, respectively
    
    
    263,832
    
    
    
    262,497
    
    
    
    261,962Additional paid in capital
    
    
    305,435,762
    
    
    
    304,663,875
    
    
    
    304,197,442Unearned equity compensation
    
    
    
    
    
    
    
    
    
    
    (31,983
    )Accumulated other comprehensive income
    
    
    123,716
    
    
    
    112,329
    
    
    
    96,902Accumulated deficit
    
    
    (206,175,310
    )
    
    
    (220,488,691
    )
    
    
    (141,194,308
    )Treasury stock, 1,561,165, 1,577,698 and 1,660,343 shares, at cost, respectively
    
    
    (1,671,771
    )
    
    
    (1,683,344
    )
    
    
    (1,741,195
    )Total stockholders equity
    
    
    97,976,229
    
    
    
    82,866,666
    
    
    
    161,588,820Total Liabilities and Stockholders Equity
    
    $
    318,048,892
    
    
    $
    284,017,126
    
    
    $
    339,600,569
  2




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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months EndedDecember 31,2005
    
    
    2004Total revenue
    
    $
    266,519,474
    
    
    $
    258,222,884Cost of sales
    
    
    (157,282,481
    )
    
    
    (154,463,236
    )Gross profit
    
    
    109,236,993
    
    
    
    103,759,648Selling, general and administrative expenses
    
    
    93,660,208
    
    
    
    94,113,170Amortization of intangibles
    
    
    170,000
    
    
    
    170,000Restructuring charges
    
    
    83,243
    
    
    
    Income from continuing operations
    
    
    15,323,542
    
    
    
    9,476,478Interest expense
    
    
    (1,386,991
    )
    
    
    (543,800
    )Interest income
    
    
    36
    
    
    
    13,434Income from continuing operations before income taxes
    
    
    13,936,587
    
    
    
    8,946,112Income tax provision
    
    
    100,000
    
    
    
    3,578,445Income from continuing operations before income from
equity investments
    
    
    13,836,587
    
    
    
    5,367,667Income from equity investments
    
    
    695,647
    
    
    
    268,711Net income from continuing operations
    
    
    14,532,234
    
    
    
    5,636,378Discontinued operations:Pre-tax loss from discontinued operations
    
    
    (218,853
    )
    
    
    (1,157,724
    )Income tax benefit
    
    
    
    
    
    
    (463,090
    )Net loss from discontinued operations
    
    
    (218,853
    )
    
    
    (694,634
    )Net income
    
    $
    14,313,381
    
    
    $
    4,941,744Basic earnings per share:Income from continuing operations
    
    $
    0.59
    
    
    $
    0.23Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.03
    )Basic net income per share
    
    $
    0.58
    
    
    $
    0.20Diluted earnings per share:Income from continuing operations
    
    $
    0.59
    
    
    $
    0.23Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.03
    )Diluted net income per share
    
    $
    0.58
    
    
    $
    0.20Weighted average shares outstanding:Basic
    
    
    24,731,264
    
    
    
    24,456,033Diluted
    
    
    24,845,671
    
    
    
    24,737,778
  3




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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months EndedDecember 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    14,313,381
    
    
    $
    4,941,744Adjustments to reconcile net income to net cash used in
operating activities:Depreciation and amortization
    
    
    6,287,490
    
    
    
    6,134,969Stock-based compensation  vendor
    
    
    191,000
    
    
    
    Stock-based compensation  employee
    
    
    169,375
    
    
    
    43,744Income from equity investment
    
    
    (695,647
    )
    
    
    (447,852
    )Loss (gain) on disposal of property and equipment
    
    
    60,820
    
    
    
    (8,250
    )Allowance for doubtful accounts
    
    
    20,697
    
    
    
    157,426Tax benefit from options exercised
    
    
    
    
    
    
    12,659Deferred income tax provision
    
    
    
    
    
    
    3,153,436Amortization of deferred gain on sale leaseback
    
    
    (11,211
    )
    
    
    (11,211
    )Impairment charge
    
    
    140,183
    
    
    
    Recognition of deferred lease incentives
    
    
    (166,911
    )
    
    
    Changes in operating assets and liabilities:Increase in accounts receivable
    
    
    (12,270,065
    )
    
    
    (15,051,775
    )Increase in inventory
    
    
    (18,022,082
    )
    
    
    (23,732,070
    )Increase in prepaid expenses and other assets
    
    
    (5,063,714
    )
    
    
    (1,078,764
    )Increase in accounts payable and accrued expenses
    
    
    10,706,141
    
    
    
    9,011,931Increase in customer deposits
    
    
    49,433
    
    
    
    2,931,444Decrease in deferred warranty
    
    
    
    
    
    
    (23,406
    )Increase in rent related accruals
    
    
    90,148
    
    
    
    125,944Increase (decrease) in deferred consideration
    
    
    497,224
    
    
    
    (133,717
    )Net cash used in operating activities
    
    
    (3,703,738
    )
    
    
    (13,973,748
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (4,067,524
    )
    
    
    (7,834,892
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    8,250Purchase of equity investments
    
    
    
    
    
    
    (300,000
    )Net cash used in investing activities
    
    
    (4,067,524
    )
    
    
    (8,126,642
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net change in amount due to bank
    
    
    6,430,757
    
    
    
    20,510,427Net proceeds of long-term debt
    
    
    2,437,356
    
    
    
    780,510Proceeds from options exercised
    
    
    344,036
    
    
    
    95,284Proceeds from employee stock purchase plan
    
    
    80,384
    
    
    
    94,704Net cash provided by financing activities
    
    
    9,292,533
    
    
    
    21,480,925INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,521,271
    
    
    
    (619,465
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    1,309,871
    
    
    
    2,801,005CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    2,831,142
    
    
    $
    2,181,540
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
  2. Summary of Selected Accounting Policies
  Rent Related Accruals 
 Advertising 
 Three Months EndedDecember 31,2005
    
    
    2004Gross advertising expenses
    
    $
    15,313,161
    
    
    $
    19,660,792Cooperative advertising funds received
    
    
    (201,660
    )
    
    
    (6,589
    )Net advertising expenses
    
    $
    15,111,501
    
    
    $
    19,654,203
 Stock-based compensation  Share-Based Payment Accounting
for Stock-Based Compensation Accounting
for Stock Issued to Employees
 5




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Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services
   6




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Three Months EndedDecember 31, 2005StockOptionPlan
    
    
    ESPPRisk-free interest rate
    
    
    4.24
    %
    
    
    3.47
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life of option grants and ESPP shares (years)
    
    
    4.33
    
    
    
    0.25Expected volatility of underlying stock
    
    
    75.8
    %
    
    
    89.3
    %Expected forfeitures as percentage of total option grants and ESPP shares
    
    
    7.0
    %
    
    
    0.0
    %
   Three Months EndedDecember 31,2004Net income as reported
    
    $
    4,941,744Add:Total stock-based employee compensation expense recorded, net of
related tax effects
    
    
    26,246Deduct:Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects
    
    
    (1,182,487
    )Pro forma net income
    
    $
    3,785,503Earnings per shareBasic and diluted  as reported
    
    $
    0.20Basic and diluted  pro forma
    
    $
    0.15
  7




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Three Months EndedDecember 31,2004Risk-free interest rate
    
    
    3.35
    %Expected dividend yield
    
    
    0.00
    %Expected life of option grants (years)
    
    
    4.33Expected volatility of underlying stock
    
    
    83.2
    %Expected
forfeitures as percentage of total grants
    
    
    7.0
    %
  3. Restructuring Charges
   Accounting for
Costs Associated with Exit or Disposal Activities
  Terminationand OtherRelated
    
    
    ProfessionalCharges
    
    
    Fees
    
    
    Severance
    
    
    TotalBalance as of September 30, 2005
    
    $
    6,394,552
    
    
    $
    928,564
    
    
    $
    8,992
    
    
    $
    7,332,108Change in estimate  revised assumptions
    
    
    83,243
    
    
    
    
    
    
    
    
    
    
    
    83,243Payments
    
    
    (1,725,959
    )
    
    
    (111,597
    )
    
    
    (8,992
    )
    
    
    (1,846,548
    )Balance as of December 31, 2005
    
    $
    4,751,836
    
    
    $
    816,967
    
    
    $
    
    
    
    $
    5,568,803
  4. Discontinued Operations
  8




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Accounting for the Impairment or Disposal of Long-Lived
Assets
 LeaseTerminationand OtherRelated
    
    
    ProfessionalCharges
    
    
    Fees
    
    
    Severance
    
    
    TotalBalance as of September 30, 2005
    
    $
    1,565,310
    
    
    $
    530,885
    
    
    $
    6,653
    
    
    $
    2,102,848Change in estimate  revised assumptions
    
    
    218,853
    
    
    
    
    
    
    
    
    
    
    
    218,853Payments
    
    
    (203,640
    )
    
    
    (126,521
    )
    
    
    (6,653
    )
    
    
    (336,814
    )Balance as of December 31, 2005
    
    $
    1,580,523
    
    
    $
    404,364
    
    
    $
    
    
    
    $
    1,984,887
  5. Income Taxes
 Accounting for Income Taxes
 6. Net Income per Share
   9




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Three Months EndedDecember 31,2005
    
    
    2004Basic Earnings Per Share:Numerator:Net income from continuing operations
    
    $
    14,532,234
    
    
    $
    5,636,378Denominator:Weighted-average shares outstanding
    
    
    24,731,264
    
    
    
    24,456,033Basic net income per share
    
    $
    0.59
    
    
    $
    0.23Diluted Earnings Per Share:Numerator:Net income from continuing operations
    
    $
    14,532,234
    
    
    $
    5,636,378Denominator:Weighted-average shares outstanding
    
    
    24,845,671
    
    
    
    24,737,778Diluted net income per share
    
    $
    0.59
    
    
    $
    0.23Anti-dilutive options and warrants not included in
earnings per share calculation
    
    
    3,930,138
    
    
    
    5,049,659Exercise price range of anti-dilutive options and warrantsLow
    
    $
    5.18
    
    
    $
    6.90High
    
    $
    32.13
    
    
    $
    32.13
 7. Comprehensive Income
  Three Months EndedDecember 31,2005
    
    
    2004Net income
    
    $
    14,313,381
    
    
    $
    4,941,744Change in fair value of long-term investments
    
    
    11,388
    
    
    
    (2,968
    )Change in fair value of interest rate forward contract
    
    
    
    
    
    
    (15,521
    )Comprehensive income
    
    $
    14,324,769
    
    
    $
    4,923,255
 8. Related-Party Transactions
   10




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9. Subsequent events
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 INTRODUCTION
   Accounting for the Impairment or Disposal of
Long-Lived Assets
  11




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RESULTS OF OPERATIONS
 THREE MONTHS ENDED DECEMBER 31, 2005 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2004
 Total Revenue 
  Cost of Sales and Gross Profit  ,
 Selling, General and Administrative Expenses 
 12




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Amortization of Intangibles 
 Restructuring Charges 
 Interest Expense 
 Income from Equity Investment 
 Income Taxes  Accounting for Income Taxes
 Discontinued Operations 
 LIQUIDITY AND CAPITAL RESOURCES
   13




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14




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FORWARD-LOOKING STATEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control over Financial Reporting.
 
 
 
 15




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
 16




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 Ex. 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley ActEx. 31.2
    
    Certification of interim Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley ActEx. 32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350Ex. 32.2
    
    Certification of interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 17




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SIGNATURES
  TWEETER HOME ENTERTAINMENT GROUP, INC.By:
    
    /s/ Joseph G. McGuireJoseph G. McGuire,
President and Chief Executive OfficerBy:
    
    /s/ Paul BurmeisterPaul Burmeister,
interim Chief Financial Officer