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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, 2006
 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
  o þ o
 o þ
  TITLE OF CLASS 
Common Stock, $0.01 par value
    
    OUTSTANDING AT February 1, 2007
25,527,943




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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, 2006, September 30, 2006 and December 31, 2005.
    
    
    2Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2006 and 2005.
    
    
    3Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2006 and 2005.
    
    
    4Notes to Condensed Consolidated Financial Statements.
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    
    
    14Item 4. Controls and Procedures.
    
    
    14PART II  OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    15Item 1A. Risk Factors
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    15Item 3. Defaults upon Senior Securities.
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    15Item 5. Other Information.
    
    
    15Item 6. Exhibits.
    
    
    15SIGNATURESEX-31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley ActEX-31.2 Certification of 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350




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##### Table of Contents



PART
I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements.
 TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 (Amounts in thousands except share data)
 December 31,
    
    
    September 30,
    
    
    December 31,2006
    
    
    2006
    
    
    2005(Revised)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    2,124
    
    
    $
    1,296
    
    
    $
    2,831Accounts receivable, net of allowance for doubtful accounts of $4,314, $3,766 and $1,395, respectively
    
    
    36,347
    
    
    
    20,197
    
    
    
    40,439Inventory
    
    
    112,726
    
    
    
    109,039
    
    
    
    129,351Refundable income taxes
    
    
    9,011
    
    
    
    9,006
    
    
    
    8,907Prepaid expenses and other current assets
    
    
    19,846
    
    
    
    6,895
    
    
    
    13,435Total current assets
    
    
    180,054
    
    
    
    146,433
    
    
    
    194,963Property and equipment, net
    
    
    100,622
    
    
    
    102,072
    
    
    
    112,059Long-term investments
    
    
    3,619
    
    
    
    2,639
    
    
    
    3,112Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    397Goodwill
    
    
    5,251
    
    
    
    5,251
    
    
    
    5,251Other assets, net
    
    
    1,845
    
    
    
    2,178
    
    
    
    2,267Total Assets
    
    $
    291,391
    
    
    $
    258,573
    
    
    $
    318,049LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent portion of long-term debt
    
    $
    6,282
    
    
    $
    6,480
    
    
    $
    15,709Current portion of deferred consideration
    
    
    647
    
    
    
    590
    
    
    
    1,103Accounts payable
    
    
    41,453
    
    
    
    37,843
    
    
    
    37,532Accrued expenses
    
    
    49,722
    
    
    
    40,189
    
    
    
    55,716Customer deposits
    
    
    25,309
    
    
    
    21,976
    
    
    
    25,673Total current liabilities
    
    
    123,413
    
    
    
    107,078
    
    
    
    135,733Long-term debt
    
    
    66,982
    
    
    
    50,362
    
    
    
    65,056Rent related accruals
    
    
    24,988
    
    
    
    25,411
    
    
    
    20,203Long-term restructuring and discontinued stores reserve
    
    
    4,428
    
    
    
    5,415
    
    
    
    Deferred consideration
    
    
    2,107
    
    
    
    2,151
    
    
    
    2,424Commitments and ContingenciesStockholders EquityPreferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued
    
    
    
    
    
    
    
    
    
    
    Common stock, $.01 par value, 60,000,000 shares authorized; 27,013,997, 27,013,997 and 26,383,244 shares issued, respectively
    
    
    270
    
    
    
    270
    
    
    
    264Additional paid in capital
    
    
    310,355
    
    
    
    309,937
    
    
    
    305,436Accumulated other comprehensive income
    
    
    
    
    
    
    
    
    
    
    124Accumulated deficit
    
    
    (239,533
    )
    
    
    (240,407
    )
    
    
    (209,519
    )Treasury stock, 1,486,054, 1,521,819 and 1,561,165 shares, at cost, respectively
    
    
    (1,619
    )
    
    
    (1,644
    )
    
    
    (1,672
    )Total stockholders equity
    
    
    69,473
    
    
    
    68,156
    
    
    
    94,633Total Liabilities and Stockholders Equity
    
    $
    291,391
    
    
    $
    258,573
    
    
    $
    318,049
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (Amounts in thousands except share and per share data)
 Three Months EndedDecember 31,2006
    
    
    2005(Revised)Total revenue
    
    $
    234,058
    
    
    $
    266,007Cost of sales
    
    
    (141,416
    )
    
    
    (156,985
    )Gross profit
    
    
    92,642
    
    
    
    109,022Selling, general and administrative expenses
    
    
    90,227
    
    
    
    93,298Amortization of intangibles
    
    
    
    
    
    
    170Restructuring charges
    
    
    (429
    )
    
    
    83Operating income
    
    
    2,844
    
    
    
    15,471Interest (expense), net of interest income of $1 and
$0, respectively
    
    
    (1,533
    )
    
    
    (1,386
    )Income from continuing operations before income taxes
    
    
    1,311
    
    
    
    14,085Income tax provision
    
    
    
    
    
    
    100Income from continuing operations before income from
equity investments  related parties
    
    
    1,311
    
    
    
    13,985Income from equity investments  related parties
    
    
    956
    
    
    
    695Net income from continuing operations
    
    
    2,267
    
    
    
    14,680Discontinued operations:Pre-tax loss from discontinued operations
    
    
    (1,393
    )
    
    
    (274
    )Income tax benefit
    
    
    
    
    
    
    Net loss from discontinued operations
    
    
    (1,393
    )
    
    
    (274
    )Net income
    
    $
    874
    
    
    $
    14,406Basic income per share:Income from continuing operations
    
    $
    0.08
    
    
    $
    0.59Loss from discontinued operations
    
    
    (0.05
    )
    
    
    (0.01
    )Basic net income per share
    
    $
    0.03
    
    
    $
    0.58Diluted income per share:Income from continuing operations
    
    $
    0.08
    
    
    $
    0.59Loss from discontinued operations
    
    
    (0.05
    )
    
    
    (0.01
    )Diluted net income per share
    
    $
    0.03
    
    
    $
    0.58Weighted average shares outstanding:Basic
    
    
    25,492,567
    
    
    
    24,731,264Diluted
    
    
    25,492,567
    
    
    
    24,845,671
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (Amounts in thousands)
 Three Months EndedDecember 31,2006
    
    
    2005(Revised)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    874
    
    
    $
    14,406Adjustments to reconcile net income to net cash
used in operating activities:Depreciation and amortization
    
    
    6,490
    
    
    
    6,287Asset retirement obligation accretion expense
    
    
    7
    
    
    
    Stock-based compensation  vendor
    
    
    
    
    
    
    191Stock-based compensation  employee
    
    
    379
    
    
    
    169Income from equity investments-related parties
    
    
    (956
    )
    
    
    (696
    )Impairment charge
    
    
    1,237
    
    
    
    140Loss on disposal of property and equipment
    
    
    732
    
    
    
    61Allowance for doubtful accounts
    
    
    549
    
    
    
    21Recognition of deferred gain on sale leaseback
    
    
    (82
    )
    
    
    (11
    )Recognition of deferred lease incentives
    
    
    288
    
    
    
    (167
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (16,699
    )
    
    
    (12,270
    )Inventory
    
    
    (3,711
    )
    
    
    (18,022
    )Prepaid expenses and other assets
    
    
    (13,038
    )
    
    
    (5,064
    )Accounts payable and accrued expenses
    
    
    14,423
    
    
    
    10,707Customer deposits
    
    
    3,333
    
    
    
    49Rent related accruals
    
    
    (356
    )
    
    
    (2
    )Deferred consideration
    
    
    20
    
    
    
    497Net cash used in operating activities
    
    
    (6,510
    )
    
    
    (3,704
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (9,177
    )
    
    
    (4,068
    )Proceeds from sale of property and equipment
    
    
    21
    
    
    
    Net cash used in investing activities
    
    
    (9,156
    )
    
    
    (4,068
    )CASH FLOWS FROM FINANCING ACTIVITIES:(Decrease) increase in amount due to bank
    
    
    (198
    )
    
    
    6,431Net proceeds of long-term debt
    
    
    16,628
    
    
    
    2,438Proceeds from options exercised
    
    
    
    
    
    
    344Proceeds from employee stock purchase plan
    
    
    64
    
    
    
    80Net cash provided by financing activities
    
    
    16,494
    
    
    
    9,293INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    828
    
    
    
    1,521CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    1,296
    
    
    
    1,310CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    2,124
    
    
    $
    2,831
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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
 Accounting for the Impairment or Disposal of Long-Lived Assets Topic 1N, Financial Statements, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
   2. Summary of Selected Accounting Policies
 Vendor Rebates and Allowances  
  Inventory 
 Long-Term Investments
 5




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Self-Insurance
Accruals
 Revenue Recognition 
    Stock-Based
Compensation
    6




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Weighted-AverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding at September 30, 2006
    
    
    2,872,989
    
    
    $
    6.10Granted
    
    
    753,425
    
    
    
    5.01Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    (103,338
    )
    
    
    5.58Outstanding at December 31, 2006
    
    
    3,523,076
    
    
    $
    5.89Exercisable at December 31, 2006
    
    
    2,418,364
    
    
    $
    6.47
  Recent Accounting Pronouncements
 Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement 109.
 Fair Value Measurements.
 Topic 1N, Financial Statements, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 3. Restructuring Charges
   7




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Accounting for Costs Associated with Exit or Disposal Activities
  LeaseTerminationand OtherRelated
    
    
    ProfessionalCharges
    
    
    Fees
    
    
    TotalBalance as of September 30, 2006
    
    $
    5,174
    
    
    $
    151
    
    
    $
    5,325Payments
    
    
    (282
    )
    
    
    
    
    
    
    (282
    )Change in estimate  revised assumptions
    
    
    (386
    )
    
    
    (43
    )
    
    
    (429
    )Balance as of December 31, 2006
    
    $
    4,506
    
    
    $
    108
    
    
    $
    4,614
  4. Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets
    8




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LeaseTerminationand Other
    
    
    
    
    
    
    Fixed AssetRelated
    
    
    Professional
    
    
    ImpairmentCharges
    
    
    Fees
    
    
    Charges
    
    
    TotalBalance as of September 30, 2006
    
    $
    1,719
    
    
    $
    46
    
    
    $
    
    
    
    $
    1,765Payments
    
    
    (139
    )
    
    
    
    
    
    
    
    
    
    
    (139
    )Increases to reserve for new charges/credits
    
    
    90
    
    
    
    
    
    
    
    1,237
    
    
    
    1,327Reductions to reserve for new charges/credits
    
    
    160
    
    
    
    
    
    
    
    (1,237
    )
    
    
    (1,077
    )Balance as of December 31, 2006
    
    $
    1,830
    
    
    $
    46
    
    
    $
    
    
    
    $
    1,876
 5. Income Taxes
 Accounting for Income Taxes
 6. Earnings (Loss) per Share
   7. Related-Party Transactions
   9




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8. Subsequent Events
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 INTRODUCTION
    RESULTS OF OPERATIONS
 THREE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2005
 Total Revenue 
 10




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Cost of Sales and Gross Profit  ,
 Selling, General and Administrative Expenses 
 11




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Amortization of Intangibles 
 Restructuring Charges 
 Interest Expense, net 
 Income Tax Expense  Accounting for Income Taxes
 Income from Equity Investment 
 Discontinued Operations 
 LIQUIDITY AND CAPITAL RESOURCES
  12




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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.
    14




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 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 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 15




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SIGNATURES
  TWEETER HOME ENTERTAINMENT GROUP, INC.By:
    
    /s/ Gregory W. Hunt

Gregory W. HuntSenior Vice President and Chief Financial
Officer