##### 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 December 31, 2000

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
incorporation or organization) |  | (I.R.S. Employer Identification No.)

10 PEQUOT WAYCANTON, 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 [X] No [ ]

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 JANUARY 31, 2001
|Common Stock, $.01 par value |                                 |  | 18,628,819 | 

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TABLE OF CONTENTS



|                                                                                                                    |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|Condensed Consolidated Balance Sheets                                                                              
|Tweeter Home Entertainment Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|Condensed Consolidated Statements of Cash Flows                                                                    
|NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                     
|PART II. OTHER INFORMATION                                                                                         



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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

INDEX

|        |  |                                                                                                       |  |      |    | 
|------- |  | ----------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                                                       |  | PAGE
|Part I  |  | FINANCIAL INFORMATION                                                                                
|       
|       
|       
|       
|Item 1  |  | Financial Statements (Unaudited)                                                                     
|       
|       
|       
|       
|        |  | Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 2000                  |  |      | 3  | 
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Operations For the Three Months Ended December 31,
1999 and 2000 |  |      | 4  | 
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Cash Flows For the Three Months Ended December 31,
1999 and 2000 |  |      | 5  | 
|       
|       
|       
|       
|        |  | Notes to Unaudited Condensed Consolidated Financial Statements                                        |  |      | 6  | 
|       
|       
|       
|       
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  |      | 8  | 
|       
|       
|       
|       
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  |      | 10 | 
|       
|       
|       
|       
|Part II |  | OTHER INFORMATION                                                                                     |  |      | 11 | 

2



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##### Table of Contents



Tweeter Home Entertainment Group, Inc. and Subsidiaries







Condensed Consolidated Balance Sheets


|                                     |                                                                                                                                                |                            |   |               |             |              |   |             |             | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | - | ------------- | ----------- | ------------ | - | ----------- | ----------- | 
|                                     |                                                                                                                                                |                            |   | September 30, |             | December 31,
|                                     |                                                                                                                                                |                            |   | 2000          |             | 2000        
|                                     |                                                                                                                                                |                            |   |               |             |             
|                                     |                                                                                                                                                |                            |   |               |             |              |   | (Unaudited)
|Assets                              
|                                    
|                                    
|                                    
|                                    
|Current Assets:                     
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                                                      |                            | $ | 34,292,555    |             |              | $ | 38,686,879  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, net of allowance for doubtful accounts of
$800,000 at September 30, 2000 and $824,000 at December 31, 2000                |                            |   | 14,662,914    |             |              |   | 28,486,663  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Inventory                                                                                                                                      |                            |   | 85,967,261    |             |              |   | 96,995,823  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax assets                                                                                                                            |                            |   | 2,424,294     |             |              |   | 2,424,294   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other current assets                                                                                                      |                            |   | 1,578,893     |             |              |   | 1,834,296   |            
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|                                     |                                                                                                                                                | Total current assets       |   |               | 138,925,917 |              |   |             | 168,427,955 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Investment in joint venture                                                                                                                    |                            |   | 3,214,451     |             |              |   | 3,684,658   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Long-term investments                                                                                                                          |                            |   | 1,653,109     |             |              |   | 1,062,863   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Property and equipment, net                                                                                                                    |                            |   | 51,937,902    |             |              |   | 56,208,504  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets, net                                                                                                                              |                            |   | 1,262,874     |             |              |   | 933,951     |            
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill, net                                                                                                                                  |                            |   | 38,043,290    |             |              |   | 40,743,741  |            
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|                                     |                                                                                                                                                | Total                      |   | $             | 235,037,543 |              |   | $           | 271,061,672 | 
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|Liabilities and Stockholders Equity
|                                    
|                                    
|                                    
|                                    
|Current Liabilities:                
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of long-term debt                                                                                                              |                            | $ | 63,074        |             |              | $ | 65,261      |            
|                                    
|                                    
|                                    
|                                    
|                                     | Amount due to bank                                                                                                                             |                            |   | 8,865,870     |             |              |   | 9,749,903   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                                                               |                            |   | 21,499,910    |             |              |   | 22,480,447  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued expenses                                                                                                                               |                            |   | 19,509,166    |             |              |   | 37,985,025  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Customer deposits                                                                                                                              |                            |   | 5,153,801     |             |              |   | 8,409,488   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred warranty                                                                                                                              |                            |   | 294,477       |             |              |   | 762,027     |            
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|                                     |                                                                                                                                                | Total current liabilities  |   |               | 55,386,298  |              |   |             | 79,452,151  | 
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|Long-Term Debt:                     
|                                    
|                                    
|                                    
|                                    
|                                     | Notes payable to bank                                                                                                                          |                            |   | 13,638        |             |              |   | 2,088       |            
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|Other Long-Term Liabilities:        
|                                    
|                                    
|                                    
|                                    
|                                     | Rent related accruals                                                                                                                          |                            |   | 3,489,645     |             |              |   | 3,674,976   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred warranty                                                                                                                              |                            |   | 72,504        |             |              |   | 1,362,524   |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax liabilities                                                                                                                       |                            |   | 1,124,656     |             |              |   | 808,558     |            
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|                                     | Total other long-term liabilities                                                                                                              |                            |   | 4,686,805     |             |              |   | 5,846,058   |            
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|                                     | Total liabilities                                                                                                                              |                            |   | 60,086,741    |             |              |   | 85,300,297  |            
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|Stockholders Equity                
|                                    
|                                    
|                                    
|                                    
|                                     | Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares
issued and outstanding                                                |                            |   |              |             |              |   |            |            
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, $.01 par value, 60,000,000 shares authorized;
20,251,734 shares issued at September 30, 2000 and
20,366,935 at December 31, 2000 |                            |   | 202,517       |             |              |   | 203,674     |            
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid in capital                                                                                                                     |                            |   | 144,538,059   |             |              |   | 146,018,499 |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive income                                                                                                         |                            |   | 176,208       |             |              |   | (297,940    | )          
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                                                                                                              |                            |   | 31,928,911    |             |              |   | 41,726,906  |            
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|                                     |                                                                                                                                                | Total                      |   |               | 176,845,695 |              |   |             | 187,651,139 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Less treasury stock: 1,879,911 shares at September 30, 2000 and
1,872,585 shares at December 31, 2000, at cost                                 |                            |   | (1,894,893    | )           |              |   | (1,889,764  | )          
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|                                     |                                                                                                                                                | Total stockholders equity |   |               | 174,950,802 |              |   |             | 185,761,375 | 
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            
|                                     |                                                                                                                                                | Total                      |   | $             | 235,037,543 |              |   | $           | 271,061,672 | 
|                                     |                                                                                                                                                |                            |   |               |             |              |   |            







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##### Table of Contents









Tweeter Home Entertainment Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

|                                               |              |   |                    |            |      |   |              |            | 
|---------------------------------------------- | ------------ | - | ------------------ | ---------- | ---- | - | ------------ | ---------- | 
|                                               |              |   | Three Months Ended
|                                               |              |   | December 31,      
|                                               |              |   |                   
|                                               |              |   | 1999               |            | 2000
|                                               |              |   |                    |            |     
|Total revenue                                  |              | $ | 123,443,294        |            |      | $ | 161,968,381  |           
|                                              
|                                              
|                                              
|                                              
|Cost of sales                                  |              |   | (77,796,132        | )          |      |   | (103,514,885 | )         
|                                               |              |   |                    |            |      |   |              |           
|                                               | Gross Profit |   |                    | 45,647,162 |      |   |              | 58,453,496 | 
|                                              
|                                              
|                                              
|                                              
|Selling expenses                               |              |   | 26,981,949         |            |      |   | 36,388,883   |           
|                                              
|                                              
|                                              
|                                              
|Corporate, general and administrative expenses |              |   | 4,647,302          |            |      |   | 6,061,338    |           
|                                              
|                                              
|                                              
|                                              
|Amortization of goodwill                       |              |   | 331,892            |            |      |   | 480,000      |           
|                                               |              |   |                    |            |      |   |              |           
|Income from operations                         |              |   | 13,686,019         |            |      |   | 15,523,275   |           
|                                              
|                                              
|                                              
|                                              
|Income from joint venture                      |              |   | 107,349            |            |      |   | 485,206      |           
|                                              
|                                              
|                                              
|                                              
|Interest income (expense)                      |              |   | (256,863           | )          |      |   | 321,509      |           
|                                               |              |   |                    |            |      |   |              |           
|Income before income taxes                     |              |   | 13,536,505         |            |      |   | 16,329,990   |           
|                                              
|                                              
|                                              
|                                              
|Income taxes                                   |              |   | 5,414,602          |            |      |   | 6,531,996    |           
|                                               |              |   |                    |            |      |   |              |           
|NET INCOME                                     |              | $ | 8,121,903          |            |      | $ | 9,797,994    |           
|                                               |              |   |                    |            |      |   |              |           
|Basic earnings per share                       |              | $ | 0.53               |            |      | $ | 0.53         |           
|                                               |              |   |                    |            |      |   |              |           
|Diluted earnings per share                     |              | $ | 0.48               |            |      | $ | 0.51         |           
|                                               |              |   |                    |            |      |   |              |           
|Weighted average shares outstanding:          
|                                              
|                                              
|                                              
|                                              
|                                               | Basic        |   |                    | 15,276,825 |      |   |              | 18,481,100 | 
|                                               |              |   |                    |            |      |   |              |           
|                                               | Diluted      |   |                    | 17,044,278 |      |   |              | 19,237,496 | 
|                                               |              |   |                    |            |      |   |              |           

See notes to unaudited condensed consolidated financial statements.

4



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##### Table of Contents



Tweeter Home Entertainment Group, Inc. and Subsidiaries







Condensed Consolidated Statements of Cash Flows

(Unaudited)

|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |           |             |            |  
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------ | --------- | ------------------ | ---------- | ---------- | --------- | ----------- | ---------- | -
|                                                                                  |                                                                                           |                                                   |                                                  |           | Three months ended
|                                                                                  |                                                                                           |                                                   |                                                  |           | December 31,      
|                                                                                  |                                                                                           |                                                   |                                                  |           |                   
|                                                                                  |                                                                                           |                                                   |                                                  |           | 1999               |            | 2000      
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                                                           | $                                                 | 8,121,903                                        |           |                    | $          | 9,797,994  |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash provided by
operating activities:
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                             |                                                   |                                                  | 1,570,250 |                    |            |            | 2,329,930 |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Equity earnings in joint venture investment                                               |                                                   |                                                  | (107,349  | )                  |            |            | (485,207  | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Gain on disposal of equipment                                                             |                                                   |                                                  | (10,300   | )                  |            |            | (5,000    | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities, net of effects from
acquisition of business:
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Increase in accounts receivable                   |                                                  |           | (9,040,857         | )          |            |           | (13,679,964 | )         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Increase in inventory                             |                                                  |           | (5,756,373         | )          |            |           | (5,601,946  | )         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Increase in prepaid expenses and other assets     |                                                  |           | 179,825            |            |            |           | 164,758     |           
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Increase in accounts payable and accrued expenses |                                                  |           | 17,141,132         |            |            |           | 17,844,040  |           
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Increase in customer deposits                     |                                                  |           | 1,050,834          |            |            |           | 2,204,648   |           
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Increase in deferred rent                         |                                                  |           | 110,683            |            |            |           | 185,331     |           
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Decrease in deferred warranty                     |                                                  |           | (203,055           | )          |            |           | (128,475    | )         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Decrease in other liabilities                     |                                                  |           | (228,680           | )          |            |           |            |           
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|                                                                                  |                                                                                           |                                                   | Net cash provided by operating activities        |           |                    | 12,828,013 |            |           |             | 12,626,109 |  
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of property and equipment                                                |                                                                                           |                                                   | (4,065,582                                       | )         |                    |            | (4,155,931 | )        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from sale of property and equipment                                      |                                                                                           |                                                   | 10,300                                           |           |                    |            | 5,000      |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of marketable equity securities                                          |                                                                                           |                                                   |                                                 |           |                    |            | (200,000   | )        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Investment in joint venture                                                       |                                                                                           |                                                   | (2,675,203                                       | )         |                    |            |           |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition of businesses                                                         |                                                                                           |                                                   | (100,321                                         | )         |                    |            | (3,837,048 | )        
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|                                                                                  |                                                                                           |                                                   | Net cash used in investing activities            |           |                    | (6,830,806 | )          |           |             | (8,187,979 | )
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Amount due to bank                                                                |                                                                                           |                                                   | 2,209,118                                        |           |                    |            | (191,289   | )        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payments of long-term debt                                                        |                                                                                           |                                                   | (5,714,299                                       | )         |                    |            | (9,363     | )        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Other equity transactions                                                         |                                                                                           |                                                   | 236,203                                          |           |                    |            | 156,846    |          
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|                                                                                  |                                                                                           |                                                   | Net cash provided (used) by financing activities |           |                    | (3,268,978 | )          |           |             | (43,806    | )
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|INCREASE IN CASH AND CASH EQUIVALENTS                                             |                                                                                           |                                                   | 2,728,229                                        |           |                    |            | 4,394,324  |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                    |                                                                                           |                                                   | 999,495                                          |           |                    |            | 34,292,555 |          
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                          |                                                                                           | $                                                 | 3,727,724                                        |           |                    | $          | 38,686,879 |          
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                               
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Cash paid during the period for:                                                         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                           | Interest                                          |                                                  | $         | 203,003            |            |            | $         | 4,569       |           
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          
|                                                                                  |                                                                                           | Taxes                                             |                                                  | $         | 989,000            |            |            | $         | 827,500     |           
|                                                                                  |                                                                                           |                                                   |                                                  |           |                    |            |            |          

See notes to unaudited condensed consolidated financial statements.

5



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##### Table of Contents



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, 2000.

2. Accounting Policies

The unaudited 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 accruals) considered necessary for a fair
presentation of the interim consolidated financial statements have been
included. Operating results for the three-month period ended December 31, 2000
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2001. Tweeter typically records its highest
revenue and earnings in this first fiscal quarter.

3. Earnings per Share

Tweeter computed earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Basic
earnings per share is calculated based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average
number of common shares outstanding, adjusted for the nominal issuance of
certain warrants and dilutive potential common shares (common stock options and
warrants).

The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share:

|                            |                                            |   |                    |            |      |   |            |            | 
|--------------------------- | ------------------------------------------ | - | ------------------ | ---------- | ---- | - | ---------- | ---------- | 
|                            |                                            |   | Three Months Ended
|                            |                                            |   | December 31,      
|                            |                                            |   |                   
|                            |                                            |   | 1999               |            | 2000
|                            |                                            |   |                    |            |     
|Basic Earnings Per Share:  
|                           
|                           
|                           
|                           
|Numerator:                 
|                           
|                           
|                           
|                           
|                            | Net income                                 |   | $                  | 8,121,903  |      |   | $          | 9,797,994  | 
|                           
|                           
|                           
|                           
|Denominator:               
|                           
|                           
|                           
|                           
|                            | Weighted average common shares outstanding |   |                    | 15,276,825 |      |   |            | 18,481,100 | 
|                            |                                            |   |                    |            |      |   |            |            | 
|Basic earnings per share    |                                            | $ | 0.53               |            |      | $ | 0.53       |           
|                            |                                            |   |                    |            |      |   |            |            | 
|Diluted Earnings Per Share:
|                           
|                           
|                           
|                           
|Numerator                   |                                            | $ | 8,121,903          |            |      | $ | 9,797,994  |           
|                           
|                           
|                           
|                           
|Denominator:               
|                           
|                           
|                           
|                           
|                            | Weighted average shares outstanding        |   |                    | 15,276,825 |      |   |            | 18,481,100 | 
|                           
|                           
|                           
|                           
|                            | Potential common stock outstanding         |   |                    | 1,767,453  |      |   |            | 756,396    | 
|                            |                                            |   |                    |            |      |   |            |            | 
|Total                       |                                            |   | 17,044,278         |            |      |   | 19,237,496 |           
|                            |                                            |   |                    |            |      |   |            |            | 
|Diluted earnings per share  |                                            | $ | 0.48               |            |      | $ | 0.51       |           
|                            |                                            |   |                    |            |      |   |            |            | 

6



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##### Table of Contents



4. Comprehensive Income

Comprehensive income for the three months ended December 31, 1999 and
December 31, 2000 was as follows:

|                                                           |  |                    |           |      |  |   |           |  
|---------------------------------------------------------- |  | ------------------ | --------- | ---- |  | - | --------- | -
|                                                           |  | Three Months Ended
|                                                           |  | December 31,      
|                                                           |  |                   
|                                                           |  | 1999               |           | 2000
|                                                           |  |                    |           |     
|Net income                                                 |  | $                  | 8,121,903 |      |  | $ | 9,797,994 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Change in fair value of long-term investments (net of tax) |  |                    | 453,809   |      |  |   | (474,148  | )
|                                                           |  |                    |           |      |  |   |           |  
|Comprehensive income                                       |  | $                  | 8,575,712 |      |  | $ | 9,323,846 |  
|                                                           |  |                    |           |      |  |   |           |  

5. Douglas TV

On October 2, 2000, Tweeter completed the acquisition of the retail
operations of Douglas TV, Inc. (Douglas TV). Douglas TV has four stores in
the greater Chicago area, and reported retail revenue of approximately $30
million for calendar 1999. This transaction is being accounted for as a
purchase. Tweeters total purchase price was $5.78 million in cash and shares
of its common stock from its shelf registration filed on April 13, 1999 with
the Securities and Exchange Commission. The results of operations for the
acquired entity in the fiscal quarter ended December 31, 2000 were not
significant. Accordingly, pro forma information has not been presented. The
allocation of the purchase price resulted in goodwill to date of approximately
$3,086,000, which is being amortized over twenty years using the straight-line
method. The net assets acquired at fair market value on October 2, 2000 were
allocated as follows:

|                                                                                                                                        |                      |   |            |           | 
|--------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ---------- | --------- | 
|Inventory                                                                                                                               |                      | $ | 5,427,000  |          
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Property and equipment                                                                                                                  |                      |   | 1,939,000  |          
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Accounts receivable/Prepaids                                                                                                            |                      |   | 246,000    |          
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Other current liabilities                                                                                                               |                      |   | (2,739,000 | )        
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Deferred Warranty                                                                                                                       |                      |   | (1,886,000 | )        
|                                                                                                                                        |                      |   |            |          
|                                                                                                                                        | Net assets purchased |   |            | 2,987,000 | 
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Total purchase price and related costs (including the issuance of 36,849
shares of common stock with a fair market value of $1,330,000) |                      |   | 6,073,000  |          
|                                                                                                                                        |                      |   |            |          
|                                                                                                                                        | Goodwill             |   | $          | 3,086,000 | 
|                                                                                                                                        |                      |   |            |          

6. New Accounting Pronouncements

During 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 was not required
to be implemented until fiscal year 2000. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133  an amendment of FASB
Statement No. 133. SFAS No. 137 delayed the original implementation date of
SFAS No. 133 by one year. In June 2000, the FASB issued SFAS 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an amendment
of FASB Statement No. 133. Tweeter has implemented FASB Statement No. 133
during this quarter and there is no effect on the consolidated financial
statements.

On December 3, 1999, the Securities and Exchange Commission published Staff
Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. This SAB summarizes certain of
the staffs views in applying generally accepted accounting principles to
revenue recognition in financial statements. This SAB requires, among other
things, that revenues derived from products or services in which companies
typically act as an agent be reported on a net basis. Tweeter implemented SAB
No. 101 during the quarter ended December 31, 2000 and the net effect was a
reduction in total revenues and cost of sales of $1,842,000 and $1,369,000 for
the quarter ended December 31, 1999. The adoption of SAB No. 101 did not have
any imp act on the results of operations for the quarter ended December 31,
2000.

7



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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


INTRODUCTION

Tweeter is a specialty retailer of mid to high-end audio and video
consumer electronics products. Tweeter currently operates 96 stores under the
Tweeter, Bryn Mawr Stereo & Video, HiFi Buys, United Audio Centers and Douglas
TV names.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2000 AS COMPARED
TO THREE MONTHS ENDED DECEMBER 31, 1999

Total Revenue.Total revenue includes delivered sales, completed service
center work orders, insurance replacement and corporate sales. Total revenue
increased $38.5 million, or 31.2%, to $162.0 million for the three months ended
December 31, 2000 from $123.4 million for the three months ended December 31,
1999. The increase was mainly comprised of $11.4 million from new stores, a
comparable store sales increase of $1.5 million, and $24.8 million derived by
sales from the acquis itions of United Audio Centers and Douglas TV. Comparable
store sales, excluding United Audio Centers and Douglas TV, increased by 1.3%.
The United Audio Centers and Douglas TV stores had a comparable store sales
decrease of 10.4%. Digital technology products continued to drive sales in the
first quarter of fiscal 2001. Digital product sales in all categories exceeded
43% of revenues for the quarter. Digital and digital ready projection
televisions accounted for over 79% of all projection TV sales, and 13.8% of the
total revenue. Projection television sales were up from last year 19.3% for the
quarter ended December 31, 2000. Digital and digital ready tube televisions
accounted for almost 40% of all tubes sold in the quarter ended December 31,
2000, and represented 5.1% of total revenue. Tube television sales were up
12.0% for the quarter from last year. Digital camcorder sales represented
almost 85% of the category and digital receivers represented 75% of the
receiver category.

Gross Profit.Cost of sales includes merchandise, net delivery costs,
distribution costs, purchase discounts, and vendor volume rebates. Cost of
sales increased $25.7 million, or 33.1%, to $103.5 million for the three months
ended December 31, 2000 from $77.8 million for the three months ended December
31, 1999. Gross profit increased $12.8 million, or 28.1%, to $58.5 million for
the three months ended December 31, 2000 from $45.6 million for the three
months ended December 31, 1999. The gross margin percentage decreased 90 basis
points, to 36.1% for the three months ended December 31, 2000, from 37.0% for
the three months ended December 31, 1999. The decrease in margin was primarily
due to the acquisition of Douglas TV, which for the quarter had a higher mix of
video than Tweeters other stores. Douglas TV stores had a 24 basis point
negative impact for the quarter. In addition, the Company had an overall
increase in video as part of the total product mix. Video gross margins are not
typically as high as the other product categories. Lastly, Tweeter had higher
than planned for distribution costs, which are included in cost of goods. This
is primarily due to running three separate facilities in the Chicago
marketplace in the first quarter. This accounted for 35 basis points of the
gross margin decline.

Selling Expenses.Selling expenses include the compensation of store
personnel, occupancy costs, store level depreciation, advertising expenses,
pre-opening expenses and credit card fees and excludes corporate, general and
administrative expenses. Selling expenses increased $9.4 million, or 34.9%, to
$36.4 million for the three months ended December 31, 2000 from $27.0 million
for the three months ended December 31, 1999. As a percentage of revenue,
selling expenses increased to 22.5% for the three months ended December 31,
2000 from 21.9% for the three months ended December 31, 1999. This increase was
primarily due to higher payroll costs associated with increased infrastructure
of the home installation departments.

Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses include the costs of executive officers, finance,
merchandising, marketing, information systems, human resources, training, and
related support functions. Corporate, general and administrative expenses
increased 30.4% to $6.1 million for the three months ended December 31, 2000
from $4.6 million for the three months ended December 31, 1999. As a percentage
of total revenue, corporate general and administrative expenses decreased to
3.7% for the three months ended December 31, 2000 from 3.8% for the three
months ended December 31, 1999. This decrease was the result of leveraging the
additional sales volume of new stores and the acquisitions of United Audio
Centers and Douglas TV.

Amortization of Goodwill. Amortization of goodwill increased to $480,000
for the three months ended December 31, 2000 from $332,000 for the three months
ended December 31, 1999. The increase was due to the completion of the United
Audio Centers acquisition on April 1, 2000 and the Douglas TV acquisition on
October 2, 2000.





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##### Table of Contents



Net Interest Income (Expense).Net interest income increased to $322,000
for the three months ended December 31, 2000 from a net interest expense of
$257,000 for the three months ended December 31, 1999. The increase was due to
the elimination of outstanding debt with the proceeds from our follow-on
offering on February 7, 2000 and investment income realized on our outstanding
cash balances.

Income Taxes. The effective tax rate for the fiscal quarters ended
December 31, 2000 and December 31, 1999 was 40.0%. Tweeter expects that the
income tax rate for the fiscal year ending September 30, 2001 will remain
substantially unchanged.

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 this 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 necessarily
indicative of results for the entire fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $12.6 million for the three
months ended December 31, 2000 compared to $12.8 million in cash provided by
operating activities for the three months ended December 31, 1999. Cash used by
operations in 2000 was primarily the result of increases in inventory of $5.6
million and accounts receivable of $13.7 million. Cash generated from
operations included, primarily, an increase in accounts payable and accrued
expenses of $17.8 million, $9.8 million in net income and an increase in
customer deposits of $2.2 million. The adjustments to reconcile net income to
cash provided by operating activities consist primarily of $2.3 million for
depreciation and amortization, as well as minor changes in other operating
accounts.

At December 31, 2000, working capital was $89.0 million, compared to $83.5
million at September 30, 2000. The ratio of current assets to current
liabilities was 2.12 to 1 at December 31, 2000 and 2.51 to 1 at September 30,
2000. Capital expenditures for the three months ended December 31, 2000 were
$4.2 million, primarily used for the building of new stores and the relocation
of existing stores.

Net cash used by financing
activities during the three months ended December 31, 2000 was $44,000.

Tweeter had available at December 31, 2000 a $50,000,000 revolving credit
facility, and there were no balances outstanding at December 31, 2000.

On October 2, 2000, Tweeter completed the acquisition of certain assets
and liabilities of Douglas TV. This transaction was accounted for as a purchase
and, accordingly, the results of operations of the Companys business relating
to Douglas TV are included in the consolidated statements of operations from
the acquisition date. The total purchase price, including acquisition costs to
date, was approximately $6.1 million, $1.3 million of which was paid through
the issuance of 36,849 shares of the Companys common stock.

Tweeter 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. If management pursues additional
acquisitions within this period, however, such acquisitions could strain
Tweeters capital resources. Furthermore, due to the seasonality of its
business, Tweeters working capital needs are significantly higher the fiscal
third and fourth quarters and there is the possibility that this could cause
unforeseen capital constraints in the future.

New Accounting Pronouncements

During 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 was not required
to be implemented until fiscal year 2000. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133  an amendment of FASB
Statement No. 133. SFAS No. 137 delayed the original implementation date of
SFAS No. 133 by one year. In June 2000, the FASB issued SFAS 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an amendment
of FASB Statement No.

9



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##### Table of Contents



133. Tweeter has implemented FASB Statement No. 133 during this quarter and
there is no effect on the consolidated financial statements.

On December 3, 1999, the Securities and Exchange Commission published Staff
Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. This SAB summarizes certain of
the staffs views in applying generally accepted accounting principles to
revenue recognition in financial statements. This SAB requires, among other
things, that revenues derived from products or services in which companies
typically act as an agent be reported on a net basis. Tweeter implemented SAB
No. 101 during the quarter ended December 31, 2000 and the net effect was a
reduction in total revenues and cost of sales of $1,842,000 and $1,369,000 for
the quarter ended December 31, 1999. The adoption of SAB No. 101 did not have
any impact on the results of operations for the quarter ended December 31,
2000.

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 those relating to the income tax
rate for fiscal 2001, Company growth and acquisitions, dependence on key
personnel, the need for additional financing, competition and seasonal
fluctuations, and those referred to in Tweeters Registration Statement filed
on Form S-3 (SEC file number 333-94433) on January 11, 2000 and in the
Companys Annual Report on Form 10-K filed on December 18, 2000, 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

Tweeters credit facility provides for borrowings which bear interest at
variable rates based on either (i) the higher of Fleet National Banks Base
Rate or the Federal Funds rate plus 0.50% or (ii) the London Interbank Offering
Rate (LIBOR) plus an applicable margin varying from 100 to 175 basis points.
Tweeter had no borrowings outstanding pursuant to the credit facility as of
December 31, 2000. Tweeter believes that the effect, if any, of reasonably
possible near-term changes in interest rates on Tweeters financial position,
results of operations, and cash flows should not be material.

At December 31, 2000, the Company had approximately $1.1 million in
marketable equity securities classified as available-for-sale. Equity market
fluctuations can impact fair values (although not earnings, unless such equity
positions are actually liquidated). A 10% fluctuation in the value of such
securities would either reduce or increase total assets by approximately
$110,000.

Currently, Tweeter does not enter into financial instrument transactions
for speculative purposes or to manage interest rate exposure.

10



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##### Table of Contents









PART II. OTHER INFORMATION

|                                         |                          |  |  | 
|---------------------------------------- | ------------------------ |  |  | 
|                                        
|ITEM 5. OTHER INFORMATION               
|                                        
|                                         | None                    
|                                        
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
|                                        
|                                         | (a) Exhibits            
|                                        
|                                         | None                     |  | 
|                                        
|                                         | (b) Reports on Form 8-K.
|                                        
|                                         | None                    

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 McGuire
JOSEPH MCGUIRE,
Chief Financial Officer

Date: January 31, 2001

11