##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 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.)
 40 PEQUOT WAY
CANTON, MA 02021(Address of principal executive offices including zip code)
 781-830-3000(Registrants telephone number including area code)
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YesxNoo 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 AUGUST 10, 2004Common Stock, $.01 par value
    
    
    24,273,000




---



##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES INDEX  
 PAGEPart I. FINANCIAL INFORMATIONItem 1 Unaudited Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets as of September 30, 2003 and June 30, 2004
    
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2003 and 2004
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2003 and 2004
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    9Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4 Controls and Procedures
    
    
    13Part II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    14Item 2 Changes in Securities and Use of Proceeds
    
    
    14Item 3 Defaults upon Senior Securities
    
    
    14Item 4 Submission of Matters to a Vote of Security Holders
    
    
    14Item 5 Other Information
    
    
    14Item 6 Exhibits and Reports on Form 8-K
    
    
    14EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICEREX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICEREX-32.1 SECTION 1350 CERTIFICATION OF C.E.O.EX-32.2 SECTION 1350 CERTIFICATION OF C.F.O.
  2




---



##### Table of Contents



Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Balance Sheets September 30,
    
    June 30,2003
    
    2004(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    1,850,449
    
    
    $
    1,414,604Accounts receivable, net of allowance for
doubtful accounts of $1,110,000 at September
30, 2003 and $1,011,000 at June 30, 2004
    
    
    18,263,564
    
    
    
    23,084,785Inventory
    
    
    117,569,528
    
    
    
    113,513,914Deferred tax assets
    
    
    5,938,916
    
    
    
    6,179,564Prepaid expenses and other current assets
    
    
    26,930,455
    
    
    
    19,317,555Total current assets
    
    
    170,552,912
    
    
    
    163,510,422Property and equipment, net
    
    
    126,220,975
    
    
    
    123,274,762Long-term investments
    
    
    2,113,020
    
    
    
    2,069,515Deferred tax assets
    
    
    5,217,877
    
    
    
    8,595,538Intangible assets, net
    
    
    1,926,667
    
    
    
    1,416,667Other assets, net
    
    
    2,404,938
    
    
    
    1,988,084Total
    
    $
    308,436,389
    
    
    $
    300,854,988Liabilities and Stockholders EquityCurrent Liabilities:Current portion of long-term debt
    
    $
    7,364,925
    
    
    $
    9,361,699Accounts payable
    
    
    32,493,675
    
    
    
    30,817,593Accrued expenses
    
    
    22,735,570
    
    
    
    22,764,956Customer deposits
    
    
    21,168,837
    
    
    
    21,257,984Deferred warranty
    
    
    215,381
    
    
    
    124,063Total current liabilities
    
    
    83,978,388
    
    
    
    84,326,295Long-Term Debt
    
    
    48,266,937
    
    
    
    38,943,292Other Long-Term Liabilities:Rent related accruals
    
    
    11,056,253
    
    
    
    10,779,164Deferred warranty
    
    
    98,262
    
    
    
    11,758Total other long-term liabilities
    
    
    11,154,515
    
    
    
    10,790,922Total liabilities
    
    
    143,399,840
    
    
    
    134,060,509Stockholders EquityPreferred stock, $.01 par value, 10,000,000
shares authorized, no shares issued
    
    
    
    
    
    
    Common stock, $.01 par value, 60,000,000
shares authorized; 25,748,489 shares issued
at September 30, 2003 and 25,994,803 at June
30, 2004
    
    
    257,485
    
    
    
    259,948Additional paid in capital
    
    
    294,969,338
    
    
    
    301,893,101Unearned equity compensation
    
    
    (408,142
    )
    
    
    (119,471
    )Accumulated other comprehensive income (loss)
    
    
    (15,931
    )
    
    
    87,083Accumulated deficit
    
    
    (127,967,415
    )
    
    
    (133,558,019
    )Total
    
    
    166,835,335
    
    
    
    168,562,642Less treasury stock: 1,742,616 shares at
September 30, 2003 and 1,698,869 shares at
June 30, 2004, at cost
    
    
    (1,798,786
    )
    
    
    (1,768,163
    )Total stockholders equity
    
    
    165,036,549
    
    
    
    166,794,479Total
    
    $
    308,436,389
    
    
    $
    300,854,988
 See notes to unaudited consolidated financial statements. 3




---



##### Table of Contents



Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited) Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Total revenue
    
    $
    170,472,384
    
    
    $
    168,579,834
    
    
    $
    602,092,785
    
    
    $
    613,093,770Cost of sales
    
    
    (107,116,295
    )
    
    
    (102,806,608
    )
    
    
    (387,046,684
    )
    
    
    (376,465,408
    )Gross profit
    
    
    63,356,089
    
    
    
    65,773,226
    
    
    
    215,046,101
    
    
    
    236,628,362Selling expenses
    
    
    58,636,281
    
    
    
    62,238,279
    
    
    
    182,380,081
    
    
    
    202,956,145Corporate, general and
administrative expenses
    
    
    10,227,439
    
    
    
    12,917,869
    
    
    
    32,141,124
    
    
    
    35,991,142Non-cash compensation charge
    
    
    1,084,534
    
    
    
    19,024
    
    
    
    1,084,534
    
    
    
    5,298,034Amortization of intangibles
    
    
    170,000
    
    
    
    170,000
    
    
    
    510,000
    
    
    
    510,000Loss from operations
    
    
    (6,762,165
    )
    
    
    (9,571,946
    )
    
    
    (1,069,638
    )
    
    
    (8,126,959
    )Income from equity investment
    
    
    322,201
    
    
    
    168,169
    
    
    
    426,075
    
    
    
    622,206Interest expense
    
    
    434,764
    
    
    
    833,802
    
    
    
    1,664,116
    
    
    
    2,140,587Interest income
    
    
    1,140
    
    
    
    1,870
    
    
    
    9,578
    
    
    
    327,667Loss before income taxes
    
    
    (6,873,588
    )
    
    
    (10,235,709
    )
    
    
    (2,298,101
    )
    
    
    (9,317,673
    )Income tax benefit
    
    
    (2,749,436
    )
    
    
    (4,094,283
    )
    
    
    (917,357
    )
    
    
    (3,727,069
    )Net loss
    
    $
    (4,124,152
    )
    
    $
    (6,141,426
    )
    
    $
    (1,380,744
    )
    
    $
    (5,590,604
    )Basic loss per share
    
    $
    (0.17
    )
    
    $
    (0.25
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )Diluted loss per share
    
    $
    (0.17
    )
    
    $
    (0.25
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )Weighted average shares
outstanding:Basic
    
    
    23,752,013
    
    
    
    24,220,419
    
    
    
    23,637,822
    
    
    
    24,082,977Diluted
    
    
    23,752,013
    
    
    
    24,220,419
    
    
    
    23,637,822
    
    
    
    24,082,977
 See notes to unaudited consolidated financial statements. 4




---



##### Table of Contents



Tweeter Home Entertainment Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows Nine Months EndedJune 30,2003
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net Loss
    
    $
    (1,380,744
    )
    
    
    (5,590,604
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    16,205,282
    
    
    
    17,223,318Non cash compensation
    
    
    1,084,534
    
    
    
    5,298,033Loss (gain) on disposal of property and equipment
    
    
    359,550
    
    
    
    (2,430
    )Provision for uncollectible accounts
    
    
    92,100
    
    
    
    324,928Tax benefit from options exercised
    
    
    
    
    
    
    186,805Deferred income tax benefit
    
    
    (1,208,207
    )
    
    
    (3,686,986
    )Amortization of deferred gain on sale leaseback
    
    
    (32,232
    )
    
    
    (33,632
    )Income from equity investment
    
    
    (426,075
    )
    
    
    (622,206
    )Changes in operating assets and liabilities:Decrease (increase) in accounts receivable
    
    
    4,470,921
    
    
    
    (5,146,149
    )Decrease in inventory
    
    
    10,726,802
    
    
    
    4,094,994(Increase) decrease in prepaid expenses and other assets
    
    
    (2,413,546
    )
    
    
    7,174,754Decrease in accounts payable and accrued expenses
    
    
    (26,144,760
    )
    
    
    (1,495,243
    )Increase in customer deposits
    
    
    2,356,211
    
    
    
    89,147Increase (decrease) in deferred rent
    
    
    124,493
    
    
    
    (243,457
    )Decrease in deferred warranty
    
    
    (404,124
    )
    
    
    (177,822
    )Net cash provided by operating activities
    
    
    3,410,205
    
    
    
    17,393,450CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (21,028,101
    )
    
    
    (12,932,775
    )Proceeds from sale of property and equipment
    
    
    6,993,255
    
    
    
    23,100Distributions from equity investment
    
    
    426,075
    
    
    
    646,569Net cash used in investing activities
    
    
    (13,608,771
    )
    
    
    (12,263,106
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net change in amount due to bank
    
    
    13,028,183
    
    
    
    (7,326,871
    )Proceeds from options exercised
    
    
    74,374
    
    
    
    1,475,626Proceeds from employee stock purchase plan
    
    
    296,653
    
    
    
    285,056Net cash provided by (used in) financing activities
    
    
    13,399,210
    
    
    
    (5,566,189
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    3,200,644
    
    
    
    (435,845
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,282,635
    
    
    
    1,850,449CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    5,483,279
    
    
    
    1,414,604SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid (received) during the period for:Interest
    
    $
    1,624,914
    
    
    $
    2,115,851Taxes
    
    $
    86,678
    
    
    $
    (7,486,798
    )
 See notes to unaudited consolidated financial statements. 5




---



##### Table of Contents



TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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, 2003. 2.    Accounting Policies The unaudited condensed consolidated financial statements of Tweeter have
been prepared in accordance with accounting principles generally accepted in
the United States of America. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the interim consolidated financial statements have been
included. Operating results for the nine-month period ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2004. Tweeter typically records its highest revenue
and earnings in its first fiscal quarter. Vendor Allowances, Allowance for Bad and Doubtful Accounts Accounts
receivable are primarily due from the vendors from which the Company buys its
product. The various types of accounts receivable are for purchase rebate
allowances, cooperative advertising allowances, returned merchandise and
warranty work performed by the Companys service departments. Cash discounts earned for timely payments of merchandise invoices are
recognized in the income statement upon the sale of the related inventory. Purchase rebate allowances and general cooperative advertising allowances
are earned based on the purchase of inventory and are recorded in accounts
receivable when the inventory is purchased. The carrying value of inventory is
initially reduced by the amount of purchase rebates earned, resulting in lower
cost of goods sold when the inventory is sold. Certain vendor agreements
include stretch goals where the level of funds earned is dependent upon the
Company achieving certain purchase levels. These program funds are recorded as
a reduction of inventory costs when it is determined that it is likely that the
Company will achieve the goal. Vendor allowances earned based on specific advertising activities and
other activities are recognized as a reduction to advertising expense as these
activities are performed and only to the extent that the cost of the activities
equals or exceeds the amount of the allowances. When the Company returns merchandise to a vendor, typically because it is
defective, the Company records a receivable for the value of the merchandise
returned and reduces the inventory balance. The Company sells products that come with a manufacturers warranty, but
the Company has service centers that repair products. When the Company repairs
products that are still under a manufacturers warranty, the vendor reimburses
the Company for the parts and the technicians labor. Once the product is
repaired, the Company establishes a receivable for the amounts due from the
vendor and records warranty revenue. During the quarter ended March 31, 2003, Tweeter adopted EITF 02-16,
Accounting by a Customer for Certain Consideration Received from a Vendor
(EITF 02-16) which addresses how and when to reflect consideration received
from vendors in the consolidated financial statements. Under EITF 02-16,
certain consideration received from vendors that would have previously been
recorded as a reduction to selling expenses, is now recorded as a reduction to
cost of goods sold. The amount of reimbursements received during the nine
months and three months ended June 30, 2004 that were treated as a reduction of
cost of goods sold but which would have been recorded as a reduction of
advertising expenses (selling expenses) prior to EITF 02-16 amounted to $27.0
million and $8.5 million, respectively. The amount of reimbursements received
during both the nine and three months ended June 30, 2003 that were treated as
a reduction of cost of goods sold but which would have been recorded as a
reduction of advertising expenses (selling expenses) prior to EITF 02-16
amounted to $5.7 million. Advertising Gross advertising including electronic media, newspaper,
buyers guides and direct mailings, are expensed when released. Cooperative
advertising funds specific to advertising activities received from vendors
reduce our gross advertising expense. 6




---



##### Table of Contents



Below are the gross expense, cooperative
funds received and net advertising for the three and nine months ended June 30,
2003 and 2004. Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Gross advertising
    
    $
    8,014,572
    
    
    $
    8,191,139
    
    
    $
    35,104,154
    
    
    $
    33,970,130Cooperative advertising funds
    
    
    (1,145,410
    )
    
    
    (983,681
    )
    
    
    (16,196,965
    )
    
    
    (2,390,148
    )Net advertising
    
    $
    6,869,162
    
    
    $
    7,207,458
    
    
    $
    18,907,189
    
    
    $
    31,579,983
 Stock-based compensation Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, addresses the
financial accounting and reporting standards for stock or other equity-based
compensation arrangements. The Company accounts for stock based compensation to
employees using the intrinsic method. The Company provides disclosures based on
the fair value as permitted by SFAS No. 123. Stock or other equity-based
compensation for non-employees must be accounted for under the fair value-based
method as required by SFAS No. 123 and EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, and other related interpretations.
Under this method, the equity-based instrument is valued at either the fair
value of the consideration received or the equity instrument issued on the date
of grant. The resulting compensation cost is recognized and charged to
operations over the service period, which is usually the vesting period. For purposes of determining the disclosures required by SFAS No. 123, the
fair value of each stock option granted in the three and nine months ended June
30, 2003 and June 30, 2004 under the Companys stock option plan was estimated
on the date of grant using the Black-Scholes option-pricing model. Key
assumptions used to apply this pricing model were as follows: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Risk free interest rate
    
    
    2.82
    %
    
    
    3.38
    %
    
    
    2.82
    %
    
    
    3.41
    %Expected life of options grants
    
    
    8.4
    
    
    
    7.7
    
    
    
    8.3
    
    
    
    7.4Expected volatility of underlying stock
    
    
    98.06
    %
    
    
    81.38
    %
    
    
    98.00
    %
    
    
    80.07
    %
 Had compensation cost for the Companys stock option plans been determined
using the fair value method, pro forma net income and pro forma diluted
earnings per share would have been: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net loss as reported
    
    $
    (4,124,152
    )
    
    $
    (6,141,426
    )
    
    $
    (1,380,744
    )
    
    $
    (5,590,604
    )Total stock-based
employee
compensation expense
recorded, net of
related tax effects
    
    
    21,432
    
    
    
    11,414
    
    
    
    21,432
    
    
    
    173,203Total stock-based
employee
compensation expense
determined under
fair value based
method for all
awards, net of
related tax effects
    
    
    (1,921,949
    )
    
    
    (2,032,997
    )
    
    
    (4,398,417
    )
    
    
    (5,011,975
    )Pro forma net loss
    
    $
    (6,024,669
    )
    
    $
    (8,163,009
    )
    
    $
    (5,757,729
    )
    
    $
    (10,429,376
    )Loss per shareBasic  as reported
    
    $
    (0.17
    )
    
    $
    (0.25
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )Basic  pro forma
    
    $
    (0.25
    )
    
    $
    (0.34
    )
    
    $
    (0.24
    )
    
    $
    (0.43
    )Diluted  as reported
    
    $
    (0.17
    )
    
    $
    (0.25
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )Diluted  pro forma
    
    $
    (0.25
    )
    
    $
    (0.34
    )
    
    $
    (0.24
    )
    
    $
    (0.43
    )
 3.    Earnings per Share The weighted average shares used in computing basic and diluted net income
per share are presented in the table below. Certain options are not included in
the earnings per share calculation when the exercise price is greater than the
average market price for the period or when the Company has a net loss, in
which case all options would be anti-dilutive. The number of options excluded
in each period is reflected in the table. 7




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Basic Loss Per Share:Numerator:Net loss
    
    $
    (4,124,152
    )
    
    $
    (6,141,426
    )
    
    $
    (1,380,744
    )
    
    $
    (5,590,604
    )Denominator:Weighted average common shares outstanding
    
    
    23,752,013
    
    
    
    24,220,419
    
    
    
    23,637,822
    
    
    
    24,082,977Basic loss per share
    
    $
    (0.17
    )
    
    $
    (0.25
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )Diluted Loss Per Share:Numerator:Net loss
    
    $
    (4,124,152
    )
    
    $
    (6,141,426
    )
    
    $
    (1,380,744
    )
    
    $
    (5,590,604
    )Denominator:Weighted average shares outstanding
    
    
    23,752,013
    
    
    
    24,220,419
    
    
    
    23,637,822
    
    
    
    24,082,977Potential common stock outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    23,752,013
    
    
    
    24,220,419
    
    
    
    23,637,822
    
    
    
    24,082,977Diluted loss per share
    
    $
    (0.17
    )
    
    $
    (0.25
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )Anti dilutive options not included in
earnings per share calculation
    
    
    1,114,035
    
    
    
    4,315,114
    
    
    
    1,111,520
    
    
    
    4,314,312Price range of anti dilutive options
    
    $
    0.305 to $32.125
    
    
    $
    0.305 to $32.125
    
    
    
    $0.305 to $32.125
    
    
    $
    0.305 to $32.125
 4.    Comprehensive Income Comprehensive loss for the three and nine months ended June 30, 2003 and
June 30, 2004 was as follows: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net Loss
    
    $
    (4,124,152
    )
    
    $
    (6,141,426
    )
    
    $
    (1,380,744
    )
    
    $
    (5,590,604
    )Change in fair value of long-term investments (net of tax)
    
    
    5,393
    
    
    
    (5,062
    )
    
    
    5,442
    
    
    
    12,142Change in fair value of interest rate forward contract (net of tax)
    
    
    
    
    
    
    91,767
    
    
    
    
    
    
    
    90,872Comprehensive Loss
    
    $
    (4,118,759
    )
    
    $
    (6,054,721
    )
    
    $
    (1,375,302
    )
    
    $
    (5,487,590
    )
 5.    Intangible Assets The financial information for acquired intangible assets is as follows: As of September 30, 2003
    
    As of June 30, 2004Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAmortized intangible assets:Non compete agreements and trade names
    
    
    3,400,000
    
    
    
    1,473,333
    
    
    
    3,400,000
    
    
    
    1,983,333
 For the nine months ended June 30, 2003 and 2004, the aggregate
amortization expense was $510,000 in each period. For each of the fiscal years
2004 through 2005, the amortization expense is estimated to be approximately
$680,000 and for fiscal year 2006, the amortization expense is estimated to be
approximately $567,000. 6.    Related-Party Transactions On June 30, 2003, Tweeter made an additional investment in Tivoli Audio,
LLC, a manufacturer of consumer electronic products, which increased its
ownership to 25%. The Company accounts for this investment in Tivoli under the
equity method of accounting, recognizing the Companys share of Tivolis income
or loss in the Companys statement of income. For the nine months ended June
30, 2003 and June 30, 2004 the Company purchased $1.1 million and $833,000,
respectively, of product from Tivoli. Dividends received from Tivoli amounted
to $426,000 and $647,000 for the nine months ended June 30, 2003 and June 30,
2004, respectively. Amounts payable to Tivoli were $39,800 and $52,700 at June
30, 2003 and June 30, 2004, respectively. 8




---



##### Table of Contents



7.    Reclassifications Certain 2003 reclassifications have been made to conform to the 2004
presentation. 8.    Subsequent Events On July 1, 2004, Tweeter completed the acquisition of Sumarc Electronics
Incorporated d/b/a NOW! AudioVideo (NOW!), by acquiring all of its
outstanding capital stock. This transaction will be accounted for as a purchase
and, accordingly, the results of operations of the Companys business relating
to NOW! will be included in the consolidated statements of income from the
acquisition date. The total purchase price was approximately $4.6 million of
which $3.8 million was paid in cash and $800,000 was paid through the issuance
of 133,824 shares of the Companys common stock. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Tweeter Home Entertainment Group, Inc. (Tweeter or the Company) is a
specialty retailer of mid- to high-end audio and video consumer electronics
products. Tweeter currently operates 175 stores under the Tweeter, HiFi Buys,
Sound Advice, Bang & Olufsen, Electronic Interiors, Showcase Home Entertainment
and Hillcrest names in the New England, Mid-Atlantic, Southeast, Texas,
Southern California, Chicago, Florida and Phoenix markets. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2004 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 Total Revenue.Total revenue includes delivered merchandise, labor, net
commissions on service contracts sold, completed service center work orders,
insurance replacement and corporate sales. Total revenue decreased $1.9
million, or 1.1%, to $168.6 million for the three months ended June 30, 2004
from $170.5 million for the three months ended June 30, 2003. Comparable store
sales decreased $3.3 million, or 2.1%. Comparable store sales are a term we use
to compare the year-over-year sales performance of our stores. A store is
included in the comparable store sales base after it is in operation for 12
full months. An acquired store is included after 12 full months from the date
of acquisition. Remodeled or relocated stores are excluded from the comparable
store base until they have competed 12 full months of operation from the date
the remodeling was completed or the store re-opened after relocation. In
addition, to offset the decrease in comparable store sales, $722,000 of sales
were generated from new stores that have not been opened for a twelve-month
period and are therefore not yet includable in the comparable store sales base.
There was also a decrease in sales of $1.3 million related to stores that
closed. In addition, our corporate sales/insurance replacement sales increased
by $1.4 million. For the quarter ended June 30, 2004, flat panel television
sales grew to 20.8% of total sales compared to 15.7% for the quarter ended June
30, 2003. For the quarter ended June 30, 2004, plasma televisions were 73.9% of
the flat panel categorys dollars and 50.6% of the units sold. The television
monitors category decreased to 3.3% of revenue from 6.7% of revenue for the
quarters ended June 30, 2004 and June 30, 2003, respectively. The projection
television category increased to 18.3% of revenue from 17.4% of revenue for the
quarters ended June 30, 2004 and June 30, 2003, respectively. Home installation
labor revenue grew to 4.1% of revenues during the quarter ended June 30, 2004
from 3.1% during the quarter ended June 30, 2003. Cost of Sales and Gross Profit.Cost of sales includes merchandise costs,
net delivery costs, distribution costs, home installation labor costs, purchase
discount and vendor allowances. Cost of sales decreased $4.3 million, or 4.0%,
to $102.8 million for the three months ended June 30, 2004 from $107.1 million
for the three months ended June 30, 2003. Gross profit increased $2.4 million,
or 3.8%, to $65.8 million for the three months ended June 30, 2004 from $63.4
million for the three months ended June 30, 2003. The gross margin percentage
increased 180 basis points to 39.0% for the three months ended June 30, 2004
from 37.2% for the three months ended June 30, 2003. The quarters ended June
30, 2004 and 2003 include $8.5 million and $5.7 million, respectively, that
were recorded as a reduction to cost of goods sold that would have previously
been recorded as a reduction of selling expenses prior to the adoption of EITF
02-16 during the quarter ended March 31, 2003. The reclassification moved
certain vendor allowances out of cooperative advertising (selling expenses) and
into vendor rebates (cost of sales). Without the reclassification, the gross
margin percentage for the quarter ended June 30, 2004 would have been 34.0%, an
increase of 20 basis points from the prior year. Overall margins, excluding
vendor allowances, distribution and labor costs, increased by 20 basis points.
Vendor allowances increased by 20 basis points, excluding the EITF 02-16
reclassification. Distribution costs decreased by 45 basis points, mainly
attributable to lower compensation costs, and labor costs increased by 20 basis
points. 9




---



##### Table of Contents



Selling Expenses.Selling expenses include the compensation of store
personnel and store specific support functions, occupancy costs, store level
depreciation, advertising, pre-opening expenses and bank service fees. Selling
expenses increased $3.6 million, or 6.1%, to $62.2 million for the three months
ended June 30, 2004 from $58.6 million for the three months ended June 30,
2003. As a percentage of revenue, selling expenses increased to 36.9% for the
three months ended June 30, 2004 from 34.4% for the three months ended June 30,
2003. The quarters ended June 30, 2004 and 2003 include a reclassification of
$8.5 million and $5.7 million, respectively, from the adoption of EITF 02-16
during the quarter ended March 31, 2003. The reclassification moved vendor
allowances out of cooperative advertising (selling expenses) and into vendor
rebates (cost of sales). Without the reclassification, selling expenses for the
quarter ended June 30, 2004 would have increased 80 basis points. This increase
in selling expenses as a percent of revenue is due to a 160 basis point
increase in compensation costs, mainly associated with building our in-home
installation infrastructure. In addition, occupancy costs and vehicle expenses
increased by 90 basis points, along with other minor increases. This was offset
by a 150 basis point decrease in net advertising expense, as well as, a 30
basis point decrease in bank service fees. Corporate, General and Administrative Expenses.Corporate, general and
administrative expenses include the costs of the finance, information systems,
merchandising, marketing, human resources and training departments, related
support functions and executive officers. Corporate, general and administrative
expenses increased 26.3% or $2.7 million to $12.9 million for the three months
ended June 30, 2004 from $10.2 million for the three months ended June 30,
2003. As a percentage of total revenue, corporate general and administrative
expenses were 6.0% and 7.7% for the three months ended June 30, 2003 and 2004,
respectively. This increase is attributed to increases in various consulting
and other professional service fees. Non-cash compensation charge.Non-cash compensation charge was $19,000 and
$1,085,000 for the three months ended June 30, 2004 and 2003 respectively.
These are attributed to equity-based executive compensation arrangements. Amortization of Intangibles.Amortization of intangibles was $170,000 for
the three months ended June 30, 2004 and June 30, 2003. Interest Expense.Interest expense increased to $834,000 for the three
months ended June 30, 2004 compared to $435,000 for the three months ended June
30, 2003. This increase is due to the increase in the interest rates on our
revolving credit agreement during the three months ended June 30, 2004 compared
to the three months ended June 30, 2003. In addition, there was $136,000
related to interest due on income tax liabilities. Interest Income.Interest income increased to $1,870 for the three months
ended June 30, 2004 compared to $1,140 for the three months ended June 30,
2003. Income from Equity Investment.Income from the equity investment in Tivoli
Audio, LLC decreased to $168,000 for the three months ended June 30, 2004 from
$322,000 for the three months ended June 30, 2003. In June 2003, the Company
increased its investment in Tivoli Audio, LLC to 25% from 17.5%. Income Taxes.The effective tax rate for the three months ended June 30,
2004 and June 30, 2003 was 40.0%. Seasonality.Tweeters operations, in common with other retailers, are
subject to seasonal influences. Historically, Tweeter has realized more of its
revenue and net earnings in the first fiscal quarter, which includes the
holiday season, than in any other fiscal quarter. The net earnings of any
interim quarter are seasonally disproportionate to net sales since certain
selling expenses and administrative expenses are relatively fixed during the
year. Therefore, interim results should not be relied upon as indicative of
results for the entire fiscal year. 10




---



##### Table of Contents



NINE MONTHS ENDED JUNE 30, 2004 AS COMPARED TO NINE MONTHS ENDED JUNE 30, 2003 Total Revenue.Total revenue increased $11.0 million, or 1.8% to $613.1
million for the nine months ended June 30, 2004 from $602.1 million for the
nine months ended June 30, 2003.Comparable store sales increased by $330,000
or .06%, excluding acquired stores. In addition to the increase in comparable
stores sales was an $18.4 million increase in sales from new and relocated
stores, as well as a $5.3 decrease in sales related to stores that closed.
Digital technology products continue to drive sales performance as they
represented 60% of revenues for the nine months ended June 30, 2004 compared to
57% for the nine months ended June 30, 2003. Gross Profit.Cost of sales decreased $10.6 million, or 2.7%, to $376.4
million for the nine months ended June 30, 2004 from $387.0 million for the
nine months ended June 30, 2003. Gross profit increased $21.6 million, or
10.0%, to $236.6 million for the nine months ended June 30, 2004 from $215.0
million for the nine months ended June 30, 2003. The gross margin percentage
increased 290 basis points to 38.6% from 35.7% last year. The main component of
this increase was due to the adoption of EITF 02-16. The nine months ended June
30, 2004 and June 30, 2003 include $27.0 million and $5.7 million,
respectively, which were recorded as a reduction to cost of goods sold that
would have previously been recorded as a reduction of selling expenses prior to
the adoption of EITF 02-16 during the quarter ended March 31, 2003. The
reclassification moved certain vendor allowances out of cooperative advertising
(selling expenses) and into vendor rebates (cost of sales). Without the
reclassification, the gross margin percentage for the nine months ended June
30, 2004 would have been 34.2%, down from 34.8% for the nine months ended June
30, 2003, a decrease of 60 basis points from the prior year. Contributing to
the decrease in gross margin percentage was a 120 basis point reduction in
product margins, driven by the increase in video products sold, a 50 basis
point decline in vendor allowances, excluding the EITF 02-16 reclassification,
and a 15 basis point increase in labor costs. Offsetting these increases was a
reduction of 100 basis points in distribution costs, mostly attributable to
reduced compensation and vehicle costs. Selling Expenses.Selling expenses increased $20.6 million, or 11.3%, to
$203.0 million for the nine months ended June 30, 2004 from $182.4 million for
the nine months ended June 30, 2003. As a percentage of revenue, selling
expenses increased 2.8% to 33.1% for the nine months ended June 30, 2004 from
30.3% in the prior year period. The nine months ended June 30, 2004 and June
30, 2003 include a reclassification of $27.0 million and $5.7 million,
respectively, from the adoption of EITF 02-16 during the quarter ended March
31, 2003. The reclassification moved vendor allowances out of cooperative
advertising (selling expenses) and into vendor rebates (cost of sales). Without
the reclassification, selling expenses for the nine months ended June 30, 2004
would have decreased 65 basis points. This decrease was primarily due to a 150
basis points reduction in gross advertising and a 30 basis point reduction in
bank service fees. These were offset by an 80 basis points increase in store
level compensation costs, and a 40 basis point increase in occupancy costs,
vehicle expenses, and depreciation. Corporate, General and Administrative Expenses.Corporate, general and
administrative expenses for the nine months ended June 30, 2004 increased 12.0%
to $36.0 million from $32.1 million for the nine months ended June 30, 2003. As
a percentage of total revenue, corporate, general and administrative expenses
increased to 5.9% for the nine months ended June 30, 2004 from 5.3% for the
prior year period. This increase is attributed to increases in various
consulting and other professional service fees. Non-cash compensation charge.Non-cash compensation charge was $5.3
million and $1.1 million for the nine months ended June 30, 2004 and 2003,
respectively. For the nine months ended June 30, 2004, $5.1 million is
attributed to the value of warrants issued to Retail Masters, LLC. In
addition, for the nine months ended June 30, 2004 and 2003, $200,000 and $1.1
million, respectively, represent other equity-based executive compensation
arrangements. Amortization of Intangibles.Amortization of intangibles was $510,000 for
the nine months ended June 30, 2004 and nine months ended June 30, 2003. Interest Expense.Interest expense increased to $2.1 million for the nine
months ended June 30, 2004 from $1.7 million for the nine months ended June 30,
2003. This increase is due to the increase in borrowings on our revolving
credit agreement during the nine months ended June 30, 2004 compared to the
balances borrowed during the nine months ended June 30, 2003, as well as
interest due on income taxes of $136,000 for the nine months ended June 30,
2004. Interest Income.Interest income increased to $328,000 for the nine months
ended June 30, 2004 compared to $10,000 for the nine months ended June 30,
2003. The increase was due to $300,000 of interest income paid by suppliers on
pre-payments to secure inventory purchases. In addition, there was $25,000 of
interest income received for both overpayments on federal income taxes and
interest accrued on construction escrow deposits. Income from Equity Investment.Income from equity investment increased to
$622,000 for the nine months ended June 30, 2004 from $426,000 for the nine
months ended June 30, 2003. In June 2003, the Company increased its investment
in Tivoli Audio, LLC to 25% from 17.5%. 11




---



##### Table of Contents



Income Taxes.The effective tax rate for the nine months ended June 30,
2004 and June 30, 2003 was 40.0%. BALANCE SHEET COMPARISON: JUNE 30, 2004 AS COMPARED TO SEPTEMBER 30, 2003 Inventory. Total inventory decreased during the nine months ended June 30,
2004 compared to September 30, 2003 by $4.1 million. The decrease is
attributable to a major supply chain initiative by the Company and a major
effort to improve inventory turns. Accounts receivable.Total accounts receivable increased by $4.8 million
during the nine months ended June 30, 2004 compared to September 30, 2003. The
increase was primarily attributable to monies due from vendors for allowances
that were higher as a result of the increase in purchases for the nine months
ended June 30, 2004. Prepaid expenses and other current assets.Prepaid expenses and other
current assets decreased by $7.6 million during the nine months ended June 30,
2004 compared to September 30, 2003. The decrease was primarily due to $7.1
million of income tax refunds received, $500,000 in amounts paid for taxes due,
and the receipt of a $1.0 million construction escrow deposit. Current portion of long-term debt.Current portion of long-term debt
increased by $2.0 million during the nine months ended June 30, 2004 compared
to September 30, 2003. The increase is a result of the timing of accounts
payable checks clearing the bank. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $17.4 million for the nine
months ended June 30, 2004 compared to $3.8 million for the nine months ended
June 30, 2003. Cash provided by operating activities for the nine months ended
June 30, 2004 was primarily the result of a decrease in prepaid expenses and
other current assets of $7.2 million and a decrease in inventory of $4.1
million. This was offset by a net loss of $5.6 million, an increase in
accounts receivable of $5.1 million, and a decrease in accounts payable and
accrued expenses of $1.5 million. In addition, there were adjustments to
reconcile net loss to net cash provided by operating activities primarily $17.2
million for depreciation and amortization, non cash compensation of $5.3
million, $3.7 million for deferred income tax benefit, and $622,000 of income
from equity investments, as well as other minor items. At June 30, 2004, working capital was $79.2 million, compared to $86.6
million at September 30, 2003. The ratio of current assets to current
liabilities was 1.94 to 1 at June 30, 2004 and 2.03 to 1 at September 30, 2003.
The decrease was primarily the result of a decrease in prepaid expenses and
current assets, in addition to an increase in amount due to bank. Net cash used in investing activities for the nine months ended June 30,
2004 consisted mainly of capital expenditures of $12.9 million, primarily used
for the building of new video displays in stores, new stores, and the
relocation of an existing store. Net cash used in financing activities during the nine months ended June
30, 2004 was $5.6 million, which was primarily due to net payments on debt of
$7.3 million. In addition, during the nine months ended June 30, 2004 there
were $1.7 million in proceeds from both options exercised and employee stock
purchases. On April 16, 2003, Tweeter entered into an agreement with Fleet National
Bank and Fleet Retail Finance Inc., on behalf of themselves and other
co-lenders, for a new three-year senior secured revolving credit facility in
the amount of $110 million. The facility replaced a $100 million line of credit
that was due to expire in 2004. Availability under the credit facility will be
based on a borrowing base tied to a percentage of eligible inventory,
receivables and real estate. The interest rate on the new facility ranges from
2.00% to 2.50% over LIBOR provided Tweeter commits the balances for a period of
thirty days or more, or 0% to .25% over the prime rate. The line is secured by
substantially all of the assets of Tweeter and its subsidiaries and contains
various covenants and restrictions, including that: (i) Tweeter cannot create,
incur, assume or permit additional indebtedness, (ii) Tweeter cannot create,
incur, assume or permit any lien on any property or asset, (iii) Tweeter cannot
merge or consolidate with any other person or permit any other person to merge
or consolidate with Tweeter, (iv) Tweeter cannot purchase, hold or acquire any
investment in any other person except those specifically permitted, (v) Tweeter
cannot sell, transfer, lease or otherwise dispose of any asset except permitted
exceptions, and (vi) Tweeter cannot declare or make any restricted payments.
The borrowers under the credit facility will be subsidiaries of Tweeter, and
Tweeter will be a guarantor of any amounts borrowed. In addition, there is a
commitment fee for the unused portion of the line of .375%. Our
weighted-average interest rate on outstanding borrowings under this credit
facility for the first nine months of fiscal 2004 was approximately 3.6%. The
credit facility has a maturity date of April 1, 2006, and there are no required
quarterly or monthly principal prepayments under the facility. 12




---



##### Table of Contents



Under the credit facility as originally signed, we were required to
maintain a certain fixed charge coverage ratio as of the end of each month. On
August 30, 2003, we amended the agreement to eliminate this requirement, and
replaced it with additional reserves in the amount of $6.0 million, used when
computing the available borrowing base under the facility. As of June 30, 2004, the Company had $15.5 million available under this
revolving credit facility and $38.9 million outstanding. 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. Furthermore, due to the seasonality of its
business, Tweeters working capital needs are significantly higher in the
fiscal third and fourth quarters and there is the possibility that this could
cause unforeseen capital constraints in the future. Within our credit facility,
there is an option during our peak holiday season buying periods to have more
availability on our credit line to meet these needs. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words expects,
anticipates, believes and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
various risks and uncertainties, including Company growth and acquisitions,
dependence on key personnel, the need for additional financing, competition and
seasonal fluctuations, and those referred to in the Companys Annual Report on
Form 10-K for the year ended September 30, 2003, filed on December 12, 2003,
that could cause actual future results and events to differ materially from
those currently anticipated. Readers are cautioned not to place undue reliance
on these forward-looking statements. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principle market risk inherent in our financial instruments and in our
financial position is the potential for loss arising from adverse changes in
interest rates. We do not enter into financial instruments for trading
purposes. At June 30, 2004, the Company had $38.9 million of variable rate
borrowings outstanding under its revolving credit agreements, which
approximates fair value. A hypothetical 10% adverse change in interest rates
for this variable rate debt would have an approximate $140,000 annual impact on
the Companys pre-tax earnings and cash flows. On July 14, 2003, the Company entered into an interest rate swap that
fixes the interest rate on up to $35 million of LIBOR-based borrowings under
the revolving term bank loan at 1.69%, plus the applicable margin, for the
period from January 1, 2004 to December 31, 2004. The interest rate swap has
been designated as a cash flow hedge. The effective portion of the gain or loss
on the derivative instrument is reported as a component of accumulated other
comprehensive income and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The remaining
gain or loss on the derivative instrument in excess of the cumulative change in
the present value of future cash flows of the hedged item, if any, is
recognized in current earnings during the period of change. For the quarter
ended June 30, 2004, we did not record any expense or income in the statement
of income with respect to this instrument. 
 ITEM 4. CONTROLS AND PROCEDURES Our chief executive officer and chief financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this quarterly report (the Evaluation Date),
have concluded that as of the Evaluation Date our disclosure controls and
procedures were effective and designed to ensure that material information
relating to Tweeter would be made known to them by others within the company.
During the period covered by this quarterly report, there were no changes in
our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting. 13




---



##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS None 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION (a) Subsequent Event On July 1, 2004, Tweeter completed the acquisition of Sumarc Electronics
Incorporated d/b/a NOW! AudioVideo (NOW!), by acquiring all of its
outstanding capital stock. This transaction will be accounted for as a purchase
and, accordingly, the results of operations of the Companys business relating
to NOW! will be included in the consolidated statements of income from the
acquisition date. The total purchase price was approximately $4.6 million of
which $3.8 million was paid in cash and $800,000 was paid through the issuance
of 133,824 shares of the Companys common stock. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications.31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications.32.1
    
    Section 1350 Certifications.32.2
    
    Section 1350 Certifications.
 (b) Reports on Form 8-K On April 7, 2004, Tweeter filed with the Securities and Exchange
Commission a Current Report on Form 8-K to announce its sales results for the
quarter ended March 31, 2004. On April 30, 2004, Tweeter filed with the Securities and Exchange
Commission a Current Report on Form 8-K to announce its earnings results for
the quarter ended March 31, 2004 and that it had reached an agreement in
principle to acquire Sumarc Electronics Incorporated d/b/a NOW! Audio Video. On May 4, 2004, Tweeter filed with the Securities and Exchange Commission a
Current Report on Form 8-K, which Form 8-K included the press releases
announcing sales results for the quarter and year ended September 30, 2003, and
the quarter ended December 31, 2003 On June 21, 2004, Tweeter filed with the Securities and Exchange Commission a
Current Report on Form 8-K announcing interim sales results for the quarter
ending June 30, 2004. 14




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. TWEETER HOME ENTERTAINMENT GROUP, INC.By:
    /s/ Joseph McGuireJoseph McGuire,
Senior Vice-President and Chief Financial OfficerDate: August 16, 2004
 15