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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)

10 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 [ ]

      Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

INDEX

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Tweeter Home Entertainment Group, Inc. and Subsidiaries

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

See notes to unaudited condensed consolidated financial statements.

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Tweeter Home Entertainment Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

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TWEETER HOME ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

      The unaudited condensed consolidated financial statements of Tweeter Home Entertainment Group, Inc. and its subsidiaries (“Tweeter” or the “Company”), included herein, should be read in conjunction with the consolidated financial statements and notes thereto included in Tweeter’s Annual Report on Form 10-K for the fiscal year ended September 30, 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:

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4. Comprehensive Income

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

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:

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.

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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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      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.

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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.

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PART II. OTHER INFORMATION

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.

Date: January 31, 2001

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