Tweeter Home Entertainment Group Reports Results For Its Fourth Quarter and Fiscal Year Ended September 30, 2004

CANTON, Mass.--()--Nov. 23, 2004--Tweeter Home Entertainment Group, Inc. (Nasdaq: TWTR) announced its earnings results for the fourth fiscal quarter and fiscal year ended September 30, 2004.

For the quarter ended September 30, 2004, revenue from continuing operations decreased to $176 million from $182 million in the same period last year. Comparable store sales decreased 3.5%, with much of the decrease occurring in the Southeast as a result of the hurricanes and related weather issues. Net loss from continuing operations was $10.1 million in the fourth quarter in both 2004 and 2003. Loss per share from continuing operations was $0.42 in both quarterly periods. Including discontinued operations, net loss per share for the quarter was $0.52 compared to a net loss per share of $0.43 for the same period last year.

For the quarter, loss from continuing operations was $15.1 million, compared to a loss from continuing operations of $15.8 million in the same period last year. As a percentage of revenue, the operating loss was 8.6% compared to a loss of 8.7% in the same period last year. This was primarily due to a 950 basis point increase in gross profit, offset by a 770 basis point increase in selling expenses and a 170 basis point increase in corporate expenses.

The large increase in gross margin is due in part to an easy comparison to the prior year. In August and September of 2003 the company engaged in an aggressive campaign to reduce open box and discontinued inventory. The company opted to give up gross profit dollars to achieve its goal of lowering discontinued inventory to 10% of total inventory by September 2003. Improved product gross margins and an increase in vendor program funds account for approximately 840 basis points of the increase. The remaining 110 basis points are the result of supply chain improvements reducing associated inventory costs.

The increase in selling expenses is primarily the result of a 250 basis point increase in compensation, most of which is the result of new headcount in the installation group, 320 basis point reduction in cooperative advertising funds, 100 basis point increase in gross advertising expenditures and an 80 basis point increase in occupancy costs.

The $2.5 million increase in corporate expenses for the quarter is primarily the result of a $1.0 million increase in loss reserves for excess property and $1.7 million in additional consulting fees compared to the same period last year.

For the year ended September 30, 2004, revenue from continuing operations increased 1% to $778 million from $772 million the prior year. Comparable store sales decreased 1% for the period. The net loss from continuing operations was $15.1 million, compared to a net loss from continuing operations of $11.3 million in the prior year. Loss per share from continuing operations was $0.63 per share compared to a loss per share of $0.48 for the comparable period last year. Including discontinued operations, net loss per share was $0.75, compared to a net loss per share of $0.49 for the same period last year.

For the year, loss from continuing operations was $22.3 million compared to $16.2 million the prior year. As a percentage of revenue, the operating loss was 2.9% compared to 2.1% the prior year. This was primarily due to a 450 basis point increase in gross profit, offset by a 390 basis point increase in selling expenses and a 130 basis point increase in corporate general and administrative and non-cash compensation expenses.

The increase in gross margin is the result of an easier fourth quarter comparison described above, an increase in labor as a percentage of total revenue and a net increase in vendor program funds compared to the prior year.

The increase in selling expenses is attributable to a 120 basis point increase in compensation, primarily due to headcount increases within the installation staff, 260 basis points from reductions of coop funds and a 50 basis point increase in occupancy costs and vehicle expenses. This was offset by a 30 basis point reduction in bank fees associated with credit card processing.

The $10.9 million increase in corporate general and administrative and non-cash compensation expenses is primarily attributable to a $5.0 million charge for compensatory warrants to a consulting firm engaged by the company and approximately $5.4 million in other consulting fees paid during the year to several firms engaged by the company in its Foundations for Winning initiatives.

Discontinued operations, consisting primarily of the closed Bang & Olufsen stores, accounted for tax-effected charges of $2.4 million in the September 2004 quarter and $3.0 million for fiscal 2004.

Jeffrey Stone, President and CEO, said, "Our year end results reflect the decisions that we made this year to strengthen the foundation of our company. We believe that we have added the necessary infrastructure, enhanced systems such as supply chain and removed excess expenses to allow us to compete as a multibillion dollar, several hundred-store retailer. We intend to return to a positive comp store sales performance and produce profits for our shareholders in fiscal 2005, while simultaneously continuing our Foundations for Winning improvement plans."

Stone added, "We are incredibly proud of the efforts of the entire team and all of us have renewed confidence in our potential going into the most important quarter of the year."

Joe McGuire, Chief Financial Officer, said, "Yesterday the company amended its bank facility with Fleet Retail Group, a Bank of America Company, extending the term for an additional two years and lowering the pricing grid on both outstanding borrowings and the unused commitment fee. We also lowered the total size of the line to $90 million from $110 million, as we believe that we will not have a need for the larger credit line. We had a one-time right within the current agreement to lower the commitment without penalty and we elected to exercise that right. Our rate under this facility is expressed as a margin over LIBOR, and this new pricing is 25 basis points less on each of the pricing tiers. Our rate on the unused portion will go down by 7.5 basis points as well. In addition, the administrative availability block will drop to $7.5 million from the current $11 million. We believe that these rate reductions are reflective of our Bank's confidence in the company, resulting from the improvements that they have witnessed this past year in key areas."

McGuire continued, "We couldn't be more pleased with the results of our supply chain initiatives. Inventory days on hand continue to decline, while in-stock metrics have steadily improved during the year. Total receivables and the doubtful accounts reserve have declined as well, while days in accounts payable expand as we continue to explore innovative new partnerships with our vendors. We reduced our cash conversion cycle this year by 5 days in addition to the reduction of 5 days last year. Bank debt finished the year below plan, with $35 million outstanding. Net cash provided by operations was $41.5 million, the highest in company history. Our goal is to finish fiscal 2005 with less than $15 million in bank debt."

In connection with its audit procedures for the year ended September 30, 2004, Deloitte & Touche LLP ("Deloitte & Touche"), our independent auditors, advised our Audit Committee and management that controls relating to the accumulation of financial information within spreadsheets were not sufficient, resulting in a material weakness under standards established by the American Institute of Certified Public Accountants. The Company recorded adjustments for the items identified.

Deloitte & Touche reported that it had deemed our monitoring controls over the use of spreadsheets in the financial reporting process to be ineffective, because these controls did not detect the errors in a timely fashion. The errors were isolated to the fourth quarter of fiscal 2004 and did not affect prior periods. In accordance with Deloitte & Touche's recommendations, we will review, re-evaluate and improve these controls.

Tweeter Home Entertainment Group, Inc. (Nasdaq: TWTR) was founded in 1972 by current Chairman Sandy Bloomberg. Based in Canton, Massachusetts, the company is a national specialty consumer electronics retailer, providing entertaining consumer electronics solutions.

The company's fiscal 2004 revenues were $778 million. Tweeter has been named a "Consumer Electronics Retailer of the Year" by Audio-Video International every year since 1979 and was named one of the "100 Fastest Growing Companies" by Fortune in 2002. Tweeter Home Entertainment Group, Inc. now operates 176 stores under the Tweeter, hifi buys, Sound Advice, Bang & Olufsen, Electronic Interiors, Showcase Home Entertainment and Hillcrest High Fidelity names in the New England, Texas, Southern California, Mid-Atlantic, Chicago, Southeast, Florida and Phoenix markets. The company employs more than 3,600 associates.

Further information on the Tweeter Home Entertainment Group can be found on the company's web sites at www.twtr.com and www.tweeter.com.

                Tweeter Home Entertainment Group, Inc.
           Condensed Consolidated Statements of Operations
  For the Three and Twelve Months Ended September 30, 2003 and 2004
          (In thousands except share and per share amounts)

                          Three Months ended     Twelve Months ended
                            September 30,           September 30,
                       -----------------------------------------------
                       (unaudited) (unaudited)             (unaudited)
                           2003        2004        2003        2004
                       ----------- ----------- ----------- -----------

Total revenue            $181,601    $175,935    $771,553    $778,225
Cost of sales             127,594     106,904     506,658     476,243
                       ----------- ----------- ----------- -----------
     Gross profit          54,007      69,031     264,895     301,982
Selling expenses           55,530      67,466     233,481     265,741
Corporate, general and
 administrative
 expenses                  13,980      16,486      45,695      52,477
Amortization of
 intangibles                  170         170         680         680
Non-cash compensation
 charge                       135          44       1,219       5,342
                       ----------- ----------- ----------- -----------
Loss from continuing
 operations               (15,808)    (15,135)    (16,180)    (22,258)
Income from equity
 investments                  650         238         650         860
Interest income               103           -         112         328
Interest expense           (1,170)     (1,209)     (2,834)     (3,350)
                       ----------- ----------- ----------- -----------
Loss from continuing
 operations before
 income taxes             (16,225)    (16,106)    (18,252)    (24,420)
Income tax benefit         (6,127)     (5,970)     (6,936)     (9,280)
                       ----------- ----------- ----------- -----------
Net loss from
 continuing operations    (10,098)    (10,136)    (11,316)    (15,140)
Discontinued
 operations:
   Pre-tax loss from
    discontinued
    operations               (287)     (3,880)       (558)     (4,885)
   Income tax benefit        (104)     (1,438)       (212)     (1,856)
   Loss from
    discontinued
    operations               (183)     (2,442)       (346)     (3,029)
                       ----------- ----------- ----------- -----------
Net loss                 $(10,281)   $(12,578)   $(11,662)   $(18,169)
                       =========== =========== =========== ===========


Basic and diluted loss
 per share:
Loss from continuing
 operations                $(0.42)     $(0.42)     $(0.48)     $(0.63)
Loss from discontinued
 operations                 (0.01)      (0.10)      (0.01)      (0.12)
                       ----------- ----------- ----------- -----------
Net loss per common
 share                     $(0.43)     $(0.52)     $(0.49)     $(0.75)
                       =========== =========== =========== ===========

Weighted average shares
 outstanding
   Basic               23,843,736  24,408,144  23,689,724  24,164,729
                       =========== =========== =========== ===========
   Diluted             23,843,736  24,408,144  23,689,724  24,164,729
                       =========== =========== =========== ===========

                Tweeter Home Entertainment Group, Inc.
                 Condensed Consolidated Balance Sheets
                   As of September 30, 2003 and 2004
                            (in thousands)

                                         September 30,   September 30,
                                             2003            2004
ASSETS                                                    (unaudited)
                                         -------------- --------------
CURRENT ASSETS:
        Cash and cash equivalents               $1,850         $2,801
        Accounts receivable, net                18,264         17,796
        Inventory                              117,569        106,563
        Other current assets                    32,869         24,634
                                         -------------- --------------
             Total current assets              170,552        151,794
PROPERTY AND EQUIPMENT, NET                    126,221        124,864
LONG-TERM INVESTMENTS                            2,113          2,304
OTHER ASSETS, NET                                7,623         15,933
INTANGIBLES, NET                                 1,927          1,247
GOODWILL                                             -          4,885
                                         -------------- --------------
             TOTAL                            $308,436       $301,027
                                         ============== ==============


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
        Current portion of long-term debt       $7,365         $3,184
        Accounts payable, accrued
         expenses and other current
         liabilities                            76,613         92,507
                                         -------------- --------------
             Total current liabilities          83,978         95,691
                                         -------------- --------------

LONG-TERM DEBT                                  48,267         35,002
OTHER LONG-TERM LIABILITIES                     11,155         14,102
                                         -------------- --------------
             Total liabilities                 143,400        144,795
                                         -------------- --------------

STOCKHOLDERS' EQUITY                           165,036        156,232
                                         -------------- --------------
             TOTAL                            $308,436       $301,027
                                         ============== ==============


                Tweeter Home Entertainment Group, Inc.
           Condensed Consolidated Statements of Cash Flows
    For the Twelve Months Ended September 30, 2002, 2003 and 2004
                            (in thousands)

                                             Twelve Months Ended
                                                September 30,
                                      --------------------------------

                                         2002      2003        2004
                                                           (unaudited)
                                      ---------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                            $(165,129) $(11,662)   $(18,169)
  Adjustments to reconcile net loss to
   net cash provided by operating 
   activities:
      Depreciation and amortization      18,063    21,792      23,292
      Non-cash compensation                   -     1,219       5,342
      Effect from impairment of
       intangibles                      194,902         -           -
      Other non cash items               (3,301)    1,844     (10,353)

      Changes in operating assets and
       liabilities, net of effects
       from acquisition of businesses:
          Decrease (increase) in
           assets                       (12,253)   15,840      24,004
          (Decrease) increase  in
           liabilities                   (4,559)  (18,726)     17,392
                                      ---------- --------- -----------
               Net cash provided by
                operating activities     27,723    10,307      41,508
                                      ---------- --------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net activity from purchase and sale
   of property and equipment            (40,748)  (11,578)    (19,431)
  (Purchase) sale of investments             89      (750)          -
  Cash paid for acquisitions             (4,813)        -      (4,280)
  Distributions from investments          3,232        25         738
                                      ---------- --------- -----------
               Net cash used in
                investing activities    (42,240)  (12,303)    (22,973)
                                      ---------- --------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds (payments) of debt        10,177       749     (19,535)
  Equity transactions                     3,345       814       1,951
                                      ---------- --------- -----------
               Net cash provided (used
                in) by financing
                activities               13,522     1,563     (17,584)
                                      ---------- --------- -----------

(DECREASE) INCREASE IN CASH AND CASH
 EQUIVALENTS                               (995)     (433)        951
CASH AND CASH EQUIVALENTS, BEGINNING
 OF PERIOD                                3,278     2,283       1,850
                                      ---------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF
 PERIOD                                  $2,283    $1,850      $2,801
                                      ========== ========= ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION:
  Cash paid (received) during the
   period for:
    Interest                             $2,396    $2,624      $2,634
                                      ========== ========= ===========
    Taxes                               $10,151      $(40)    $(9,228)
                                      ========== ========= ===========

  Noncash investing activities:
     Issuance of common stock and
      assumption of options for
      acquisitions                       $1,000        $-        $752
                                      ========== ========= ===========
     Issuance of warrants                    $-        $-      $5,009
                                      ========== ========= ===========

Certain statements contained in this press release, including, without limitation, statements containing the words "expects," "anticipates," "believes," "plans," 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 and projections are subject to various risks and uncertainties including risks that the company has not added the necessary infrastructure, enhanced systems such as supply chain, or removed excess expenses to allow it to compete as a multibillion dollar, several-hundred store retailer, risks that the company may not achieve positive comp store sales performance or produce profits for its shareholders in fiscal 2005, risks that the newly amended credit agreement may not be sufficient for the company's needs, risks that the company may not achieve its goal of reducing bank debt to less than $15 million by the end of fiscal 2005, risks associated with management of growth, risks of economic downturns generally, and in Tweeter's industry specifically, risks associated with competitive pricing pressure and seasonal fluctuations, risks associated with the potential failure by Tweeter to anticipate and react to changes in consumer demand and preferences, risks associated with Tweeter's dependence on key personnel, risks associated with obtaining financing for the company's business model, and risks referred to in Tweeter's Annual Report on Form 10-K filed on December 12, 2003 (copies of which may be accessed through the SEC's web site at http://www.sec.gov) and its other filings with the SEC, 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 and financial projections.

Contacts

Tweeter Home Entertainment Group, Inc.
Kate MacKinnon, 781-830-3324
kmackinnon@twtr.com

Contacts

Tweeter Home Entertainment Group, Inc.
Kate MacKinnon, 781-830-3324
kmackinnon@twtr.com