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Wattles Boosts Tweeter Stake To 11.4%

8/22/2005 02:00:00 AM Eastern

Ultimate Electronics' CEO Mark Wattles has further raised his stake in Tweeter Home Entertainment Group, from 9.7 percent, to 11.4 percent of outstanding shares, and has asked the Boston-based A/V specialty chain to sell him more.

According to a filing with the Securities and Exchange Commission last week, Wattles' investment company, Wattles Capital Management, based here, purchased an additional 430,000 shares of Tweeter stock over the past week, on top of the 741,000 shares his firm had previously snapped up since June.

The filing said Wattles' group purchased the shares for investment purposes, but may also seek to acquire control of Tweeter through a merger, proxy solicitation, tender offer, significant equity investment, exchange offer or some other action.

Wattles now controls over 2.8 million of about 25 million outstanding shares, with the majority held by Tweeter's board and executive management team and several other investment groups.

In an open letter to Tweeter's directors that was attached to the filing, Wattles asserted that the chain suffers from “operating challenges” stemming from its aggressive growth through acquisition, which may have left the company undercapitalized. He said added liquidity would “mitigate the execution risks,” and proposed that Tweeter sell equity or other securities to raise additional capital — which Wattles Capital Management “would be interested in providing.”

“While some may consider your stock undervalued,” he wrote, “it is my opinion that if everything doesn't go according to management's near-term plan, the stock will be worth much less.”

Tweeter responded in a written statement that its board doesn't agree with Wattles' conclusions, nor believe that accessing capital from him is in the best interest of the company or its shareholders.

“Based on his letter, Mr. Wattles has radically changed his opinion of Tweeter's capital position since my conversation with him just two weeks ago,” said Tweeter's president/CEO Joe McGuire. “At the time, Mr. Wattles told me that he was purchasing Tweeter shares because he saw them as a sound investment. It is also unusual to attach such a letter to a 13D amendment, particularly as Mr. Wattles is now affiliated with Ultimate Electronics, which competes with Tweeter in certain markets.”

McGuire also described Wattles' public suggestion that Tweeter is undercapitalized as “highly inappropriate.”

Tweeter's board has decided to take no further action on Wattles' letter, the company said.

Industry observers told TWICE that despite Wattles' assurances to McGuire, they believe the founder and former CEO of Hollywood Video is clearly looking to expand his CE retailing footprint.

Wattles wrested control of Ultimate Electronics in a bankruptcy deal last January, and acquired 32 of the chain's stores last April with proceeds from the sale of Hollywood Video to Movie Gallery. He also tried but failed to acquire half of Hollywood Video's 2,000 stores as part of a hostile takeover bid by Blockbuster.

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