BOSTON ACOUSTICS
1996
ANNUAL
REPORT
[Photograph of Rally RS10 Subwoofer]
FINANCIAL HIGHLIGHTS
[Bar graph presenting the following data regarding net sales
(amounts in thousands): '92 - $32,583; '93 - $32,603; '94 - $34,488;
'95 - $41,046; '96 - $46,325.]
[Bar graph presenting the following data regarding net income
(amounts in thousands): '92 - $4,933; '93 - $4,772; '94 - $4,682;
'95 - $5,949; '96 - $6,631.]
TO THE SHAREHOLDERS:
[Photograph of Frances L. Reed, Chairman and Chief Executive Officer]
[Photograph of Andrew G. Kotsatos, President]
FISCAL 1996 WAS OUR SEVENTEENTH STRAIGHT YEAR OF RECORD SALES. DESPITE A
FOURTH QUARTER THAT WAS DEPRESSED BY ONE OF THE SNOWIEST WINTERS IN HISTORY,
NET SALES FOR THE YEAR WERE UP BY 13%, TO $46,324,791, FROM $41,045,703 IN
FISCAL 1995. NET INCOME ALSO REACHED A NEW RECORD, INCREASING 11% TO
$6,630,576. EARNINGS PER SHARE HIT A NEW HIGH OF $1.52, UP 10% COMPARED TO
LAST YEAR'S $1.38.
IT WAS ANOTHER EXCITING YEAR FOR THE COMPANY. IN ADDITION TO SETTING NEW
SALES AND EARNINGS RECORDS, WE MOVED INTO A NEW FACILITY, INTRODUCED A HOST
OF NEW PRODUCTS, STRENGTHENED OUR INTERNATIONAL DISTRIBUTION NETWORK, AND
ANNOUNCED THE ACQUISITION OF A NEW SUBSIDIARY.
WHILE SALES WERE STRONG ACROSS THE BOARD, OUR GROWTH WAS FUELED BY NEW
PRODUCTS--NEW COMPACT REFERENCE AND DESIGNER SERIES IN-WALL HOME
SPEAKERS--AND NEW AUTOMOTIVE SYSTEMS. OUR PRODUCT LINES NOW INCLUDE MORE THAN
75 SPEAKERS, RANGING IN PRICE FROM $60 TO $5,000 A PAIR.
HOME IS WHERE THE THEATER IS
The "action" in home speaker systems is in the home theater market. During
fiscal 1996, we enhanced our position as the company best prepared to serve
this market.
[Photograph of CR400. Caption: "CR400, introduced January 1996."]
We added two new products to the highly successful CR (Compact Reference)
line that we launched in late 1994. The CR2 is a video-shielded center
channel speaker, with a $200 suggested retail price, and the CR400 is a high
performance powered subwoofer, affordably priced at a suggested retail of
$400. Both products can be combined with other members of the CR family to
create complete high performance home theater speaker systems.
[Photograph of Lynnfield VR System for Dolby Digital. Caption: "Lynnfield VR
System for Dolby Digital, introduced December 1995."]
We also added three new models to our highly acclaimed Lynnfield VR family.
Our new THX-certified VRS Pro diffuse-field surround speakers--priced at $500
per pair--offer the low frequency extension and power handling capabilities
demanded by the new Dolby Digital-TM- (AC-3) systems. The new $1,200 VR2000
subwoofer incorporates a Boston-designed 300-watt amplifier and is the
smallest single-unit subwoofer to meet THX requirements. Combined with our
VR40 main speakers, the VRS Pro surround sounds and the VR12 center channel
speaker, the subwoofer is a key component of a first-class $3,500 home
theater speaker system.
[Photograph of Designer Series 381. Caption: "Designer Series 381,
introduced November 1995."]
The third new VR speaker is the VR10 center channel. Smaller than the VR12,
and with a $300 suggested retail price, this three-way speaker also meets the
demands of Dolby Digital.
We introduced three new Designer Series of flush mount speakers in fiscal
1996. Featuring broad-dispersion Kortec-TM- tweeters and butyl rubber
surrounds, the 351, 361 and 381 models feature improved sound and
weather-proofing qualities.
2
NEW AUTO SOUNDS
We enriched our automotive product lines by completing the introduction of
the Boston Rally-TM- RX Coaxial Series and the addition of the Rally RS
subwoofer line. The new RS series consists of three models with suggested
retail prices from $200 to $260 per pair.
[Photograph of Rally RS10. Caption: "Rally RS10, introduced July 1995."]
PRIZE PRODUCTS
Awards, positive reviews, and other forms of recognition are important in our
industry. Faced with an overwhelming array of choices, consumers and
professional sales people look to experts to evaluate alternatives and,
through awards and reviews, to make recommendations. As a result, we are
always pleased to see our name on the winners' list.
We had winners in seven categories of the AUDIOVIDEO INTERNATIONAL 17th
Annual Hi-Fi Grand Prix Awards.
- - The VR40: mid-size floor standing speaker of the year.
- - The Lynnfield VR system: A/V speaker system of the year.
- - The SubSat7 system: best sub/sat speaker system.
- - The VR12: center channel speaker of the year.
- - Our VRS: special recognition in the rear channel/surround sound category.
- - The 380: in-wall speaker honors.
In the under 12" Subwoofer category, the VR500 was cited for features that
include video shielding and automatic turn-on, as well as for its audiophile
sound qualities.
We also won AutoSound 1996 Grand-Prix Awards in six categories:
- - The CX9: best of 6 x 9" speakers.
- - The RX67: best flush-mounted speaker.
- - The ProSeries 5.4: best speaker component system.
- - The ProSeries Neo4t: best tweeter.
- - The ProSeries 6.4LF: best midrange and midbass speaker.
- - The RS12: special speaker separates recognition.
Boston Acoustics products took three prestigious Innovations '96 awards for
new product design and engineering at the International Winter Consumer
Electronics Show in January. The awards are based on innovation, value,
aesthetics and contributions to users' quality of life. The judges are
consumer electronics experts that include industrial designers and members of
the trade press. The winners were the VRS Pro Surround, the VR10 Center
Channel and the Compact Reference CRX surround.
As a company, we made the BOSTON GLOBE's Eighth Annual Globe 100 "Best of
Massachusetts Business" List, moving up from 98th place to 57th.
QUOTABLE REVIEWS
Reviewers consistently recognize the sound quality and the value of our
products. During the past year, AUDIO magazine praised the CR7 as "a fine
choice for a budget high-performance stereo system." VIDEO said that "Boston
Acoustics' CR Series sounds great--and doesn't break the bank doing it."
STEREOPHILE GUIDE TO HOME THEATER called the VR500 "remarkable."
OUR NEW BUILDING
In February, we moved our entire company--all manufacturing, warehouse and
administrative offices--into a new building in Peabody, Massachusetts. We
paid for the new building--the first designed for us--out of earnings, so we
are still debt-free. With 150,000 square feet of floor space and a large
high-bay area, we have more than twice the usable space we had before. Its
facilities include our new automated tweeter manufacturing line, the first of
its kind in the world.
[Photograph of interior of Company's new building]
IMPROVING OUR DISTRIBUTION NETWORK
Our international distribution network is a key factor in the continuing
growth of our sales overseas. In fiscal 1996, we strengthened our Latin
American organization and expanded our distribution channels in Asia and
Europe.
OUR FIRST ACQUISITION
During fiscal 1996, we agreed to purchase Snell Acoustics, Inc. of Haverhill,
Massachusetts. The closing is scheduled to occur in late June of 1996.
Snell has an excellent reputation for quality, and its high-end speaker
systems complement ours. It was the first company to introduce a THX speaker
system. Snell has its own distribution network, so we believe we can increase
our total volume without adding distribution.
MORE NEW PRODUCTS ON THE WAY
To help fuel sales in the coming year, we have a number of new products for
home and auto applications in the pipeline--a new Micro Reference Series to
replace the SubSat Series, 3-way THX Tower and Center Channel speakers for
the finest home theater and music systems, and new Boston Rally-TM- subwoofer
enclosures for cars and trucks.
LOOKING AHEAD
We will celebrate our tenth year as a public company in fiscal 1997. While we
are a well established, mature organization in many ways, we are still
growing and developing at a healthy rate.
We are looking forward to another excellent year.
Sincerely,
/s/ Francis L. Reed /s/ Andrew G. Kotsatos
Francis L. Reed Andrew G. Kotsatos
CHAIRMAN AND PRESIDENT
CHIEF EXECUTIVE OFFICER
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the years ended
March 30, 1996, March 25, 1995, and March 26, 1994 expressed as percentages
of net sales.
For the Year Ended
March 30, March 25, March 26,
1996 1995 1994
(53 wks)
- --------------------------------------------------------------------
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold 57.1 56.1 57.3
- --------------------------------------------------------------------
Gross profit 42.9 43.9 42.7
Selling and marketing
expenses 12.6 12.4 12.8
General & administrative
expenses 5.5 6.0 5.7
Engineering & development
expenses 5.4 5.0 5.0
- --------------------------------------------------------------------
23.5 23.4 23.5
- --------------------------------------------------------------------
Income from operations 19.4 20.5 19.2
Interest income 1.7 1.9 2.0
- --------------------------------------------------------------------
Income before provision for
income taxes 21.1 22.4 21.2
Provision for income taxes 6.8 7.9 7.6
- --------------------------------------------------------------------
Net income 14.3% 14.5% 13.6%
- --------------------------------------------------------------------
- --------------------------------------------------------------------
FISCAL 1996 COMPARED WITH FISCAL 1995
Net sales increased 13% from approximately $41.0 million to $46.3 million.
Because the Company works on a 5-4-4 week quarter, there is an extra week
every five years. The third quarter fiscal 1996 represents 14 weeks of sales
and earnings compared to 13 weeks during the third quarter fiscal 1995.
Fiscal 1996, therefore, represents 53 weeks of sales and earnings compared to
52 weeks during fiscal 1995.
New product introductions throughout fiscal 1996 contributed to the continued
growth in sales, both domestically and to international distributors. The
Company augmented its automotive speaker categories by completing the
introduction of the Boston Rally Coaxial Series during the first quarter. The
RX57, RX67, RX87 and RX97 have suggested retail prices ranging from $140 to
$200 per pair. In addition, during the second fiscal quarter the Rally RS
subwoofer category of products was introduced. The Rally RS subwoofers are
high power handling, low distortion woofers that work in small enclosures.
The three models, the RS8, RS10 and RS12, have suggested retail prices
ranging from $200 to $260 per pair.
The Company also expanded its home category of loudspeaker models. The CR2
video-shielded center channel speaker with a suggested retail price of $200
and the CR400 powered subwoofer with a suggested retail price of $400 were
added to the CR Series of products. The VR2000, a powered subwoofer, the
THX-certified VRS Pro diffuse-field surround speakers and the VR10 center
channel with suggested retail prices of $1200, $500 and $300, respectively,
were added to the highly acclaimed Lynnfield VR Series of products. These
products make excellent components of a first class home theater speaker
system. Our Designer Series was enhanced with the introduction of the 351,
361, and 381 models featuring improved sound and weather-proofing qualities.
The Company's gross margin decreased from 43.9% in fiscal 1995 to 42.9%
primarily due to a shift in sales mix to products with lower margins, certain
raw material price increases absorbed by the Company, and increased expenses
relating to new production equipment and tooling. In addition, the Company
had increased costs relating to temporary additional offsite warehouse space
during the fiscal year, as well as an increased allocation of costs relating
to the relocation of the Company's office and manufacturing facilities.
Total operating expenses remained relatively stable as a percentage of net
sales in fiscal 1996 despite an increase in absolute dollars and increases
associated with the allocation of facility relocation costs. Selling and
marketing expenses have increased slightly due primarily to increased
salaries and related payroll expenses along with certain advertising and
international sales related expenses. General and administrative expenses as
a percentage of net sales decreased slightly from 6.0% in fiscal 1995 to 5.5%
in fiscal 1996. Increased salary and related expenses, as well as costs
associated with the termination of the lease of the Company's former
manufacturing and office facilities were partially offset by non-recurring
legal costs expensed during fiscal 1995. Engineering and development expenses
have increased primarily due to increased salaries and payroll related
expenses, as well as materials and supplies relating to new product
development.
Interest income decreased slightly as a percentage of net sales due primarily
to long-term investments maturing and designated for capital expenditures
during fiscal 1996.
The Company's effective income tax rate decreased from 35.3% in fiscal 1995
to 32.0%, primarily due to a lower effective state tax rate resulting from
the favorable tax treatment afforded the Company's foreign sales corporation
and Massachusetts securities corporation, as well as to tax credits relating
to fiscal 1996 capital expenditures.
Net income increased 11%, from approximately $5.9 million to $6.6 million,
while earnings per share increased 10% from $1.38 to $1.52 per share.
FISCAL 1995 COMPARED WITH FISCAL 1994
Net sales increased 19% from approximately $34.5 million to $41.0 million.
Increases were reflected in all product categories, stimulated by new product
introductions in fiscal 1995 and the latter part of fiscal 1994, and
increased demand for the Company's products in both the domestic and
international markets.
During fiscal 1995 the Company introduced the Lynnfield VR Series of home
theater speaker systems. The VR20, VR30 and VR40 video-reference speaker
systems, with suggested retail prices of approximately $550, $800 and $1,400,
respectively, incorporate much of the high-performance technology of the higher-
end Lynnfield Series. The Lynnfield VR Series also includes the VR12 center
channel, the VRS dipole surround speaker and the VR500 powered subwoofer, with
suggested retail prices of $400, $350 and $600, respectively. The VR series
replaced the Company's Tower Series of floor-standing home
4
speaker systems. During mid-December, the Company introduced the new Compact
Reference (CR) Series of speaker systems. The CR series, which replaced the
HD series, consists of one center channel model at $130 and four bookshelf
models ranging in price from $200 to $420 per pair. CR Series speakers
provide audiophile performance at moderate prices and are magnetically
shielded so they can be used in home theater and multimedia systems.
Increased automotive speaker sales were primarily due to the CX series of
coaxial speakers first introduced in March 1994, as well as the successful
ProSeries .4 and the Rally RC Series of component speakers, both introduced
during the third quarter of fiscal 1994.
The Company's gross margin increased from 42.7% in fiscal 1994 to 43.9%
primarily due to a shift in the sales mix to loudspeaker models with higher
margins, relatively stable raw material prices, and continued efforts to
control overhead expenses.
Income from operations increased as a percentage of net sales from 19.2% in
fiscal 1994 to 20.5% in fiscal 1995. Despite an increase in absolute dollars,
operating expenses remained relatively stable as a percentage of net sales.
Selling and marketing expenses decreased slightly as a percentage of net
sales but increased in absolute dollars due to increased advertising
expenditures, as well as salaries and related expenses associated with
additional personnel. General and administrative expenses increased during
the year due primarily to increased personnel and related expenses, as well
as expenses relating to enhancements made to the Company's in-house computer
systems and the search for new manufacturing and office facilities.
Engineering and development expenses have increased primarily due to
increased salaries and benefits relating to additional personnel, as well as
increased consulting fees and materials and supplies relating to new product
development.
Interest income remained relatively stable during fiscal 1995 due to funds
generated by operations and invested in tax-free municipal bonds and money
market instruments.
The Company's effective income tax rate decreased from 36.0% in fiscal 1994
to 35.3% in fiscal 1995 due primarily to the state effective tax rate
resulting from the favorable tax treatment afforded the Company's foreign
sales corporations and Massachusetts securities corporation.
Net income increased 27%, from approximately $4.7 million to $5.9 million,
while earnings per share increased 25% from $1.10 to $1.38 per share.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal years 1994, 1995, and 1996, the Company financed its growth
with cash generated by operations. As of March 30, 1996, the Company's
working capital was approximately $26,083,000. The Company's cash and cash
equivalents were approximately $4,702,000, short-term investments were
approximately $6,679,000, and long-term investments were approximately
$2,306,000. The Company has a $1,500,000 unsecured bank line of credit. The
Company has had no line of credit borrowings since December 1985.
During fiscal 1995 and 1996 the Company purchased three parcels of land for
approximately $1.4 million. This land was used to construct the Company's new
manufacturing and office facilities. Construction of these facilities began
in June 1995 with occupancy taking place in February 1996. Approximately $6.8
million of cash and investments were used to construct these facilities. As a
result of the new facility construction, the Company expects to realize
certain cost savings, primarily the difference between rent and depreciation,
in future fiscal periods.
On March 28, 1996 the Company signed a letter of intent to acquire Snell
Acoustics, Inc. The closing of the purchase is currently scheduled to occur
in June 1996. Snell Acoustics, Inc. manufactures home entertainment
loudspeaker systems.
On May 17, 1996, the Company announced that its Board of Directors approved a
stock repurchase program under which the Company may repurchase up to 300,000
of its outstanding shares of common stock (4,408,701 shares at May 17, 1996)
for general corporate purposes. The Company may repurchase the stock in open
market transactions, from time to time, depending on the price of its stock.
The funds for the repurchase program will come from internally generated cash
and available working capital. As of June 14, 1996, the Company has
repurchased 44,400 shares under this program at a cost of approximately
$934,000.
The Company believes that its resources are adequate to meet its requirements
for working capital and capital expenditures through fiscal 1997.
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers, or
employees may contain "forward-looking" information which involve risk and
uncertainties. Any statements in this report that are not statements of
historical fact are forward-looking statements (including, but not limited
to, statements concerning the characteristics and growth of the Company's
market and customers, the Company's objectives and plans for future
operations, possible acquisitions, and the Company's expected liquidity and
capital resources). Such forward-looking statements are based on a number of
assumptions and involve a number of risks and uncertainties, and accordingly,
actual results could differ materially. Factors that may cause such
differences include, but are not limited to: the continued and future
acceptance of the Company's products, the rate of growth in the audio
industry; the presence of competitors with greater technical marketing and
financial resources; the Company's ability to promptly and effectively
respond to technological change to meet evolving consumer demands; capacity
and supply constraints or difficulties; and the Company's ability to
successfully integrate new operations. For a further discussion of these and
other significant factors to consider in connection with forward-looking
statements concerning the Company, reference is made to Exhibit 99 of the
Company's Annual Report on Form 10-K for fiscal year March 30, 1996.
5
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
ASSETS MARCH 30, 1996 March 25, 1995
- ------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,702,299 $ 3,570,790
Short-term investments 6,678,735 8,132,145
Accounts receivable, net of reserve of
approximately $307,000 and $207,000,
respectively 8,401,038 7,759,876
Inventories 8,458,593 8,726,944
Deferred income taxes 730,000 585,000
Prepaid expenses 343,066 474,092
- ------------------------------------------------------------------------------
Total current assets 29,313,731 29,248,847
- ------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Land 1,433,365 1,164,800
Building 6,762,323 --
Machinery and equipment 6,344,220 4,740,328
Office equipment and furniture 1,448,950 1,392,176
Leasehold improvements -- 440,413
Motor vehicles 373,177 345,454
- ------------------------------------------------------------------------------
16,362,035 8,083,171
Less--Accumulated depreciation and
amortization 5,665,178 5,252,728
- ------------------------------------------------------------------------------
10,696,857 2,830,443
OTHER ASSETS:
Long-term investments 2,305,992 5,308,601
Other assets 807,012 991,129
- ------------------------------------------------------------------------------
Total other assets 3,113,004 6,299,730
- ------------------------------------------------------------------------------
$43,123,592 $38,379,020
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,167,933 $ 876,031
Accrued payroll and payroll-related expenses 1,078,186 941,319
Dividends payable 551,088 540,550
Other accrued expenses 350,031 325,594
Accrued income taxes 83,617 641,558
- ------------------------------------------------------------------------------
Total current liabilities 3,230,855 3,325,052
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 Par value--
authorized -- 6,000,000 shares
issued -- 4,602,621 shares at March 30, 1996
and 4,518,324 shares at march 25, 1995 46,026 45,183
Additional paid-in capital 4,966,918 3,739,101
Retained earnings 34,963,583 31,353,474
- ------------------------------------------------------------------------------
39,976,527 35,137,758
Less--Treasury stock, 193,920 shares, at
cost 83,790 83,790
- ------------------------------------------------------------------------------
Total shareholders' equity 39,892,737 35,053,968
- ------------------------------------------------------------------------------
$43,123,592 $38,379,020
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
For the Years Ended
-------------------------------------------------
MARCH 30, 1996 March 25, 1995 March 26, 1994
- -------------------------------------------------------------------------------
NET SALES $46,324,791 $41,045,703 $34,488,132
COST OF GOODS SOLD 26,468,207 23,015,685 19,775,049
- -------------------------------------------------------------------------------
Gross profit 19,856,584 18,030,018 14,713,083
- -------------------------------------------------------------------------------
SELLING AND MARKETING EXPENSES 5,833,300 5,080,559 4,397,594
GENERAL AND ADMINISTRATIVE
EXPENSES 2,552,389 2,475,894 1,947,101
ENGINEERING AND DEVELOPMENT
EXPENSES 2,496,523 2,046,087 1,733,980
- -------------------------------------------------------------------------------
Total expenses 10,882,212 9,602,540 8,078,675
- -------------------------------------------------------------------------------
Income from operations 8,974,372 8,427,478 6,634,408
INTEREST INCOME 777,204 763,944 681,446
- -------------------------------------------------------------------------------
Income before provision
for income taxes 9,751,576 9,191,422 7,315,854
PROVISION FOR INCOME TAXES 3,121,000 3,242,000 2,634,000
- -------------------------------------------------------------------------------
Net income $6,630,576 $5,949,422 $4,681,854
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $1.52 $1.38 $1.10
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,353,032 4,299,196 4,249,652
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIVIDENDS PER SHARE $.50 $.425 $.40
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
------------------------
Additional Total
Number of $.01 par paid-in Retained Treasury Shareholders'
Shares Value Capital Earnings Stock Equity
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 27, 1993 4,430,290 44,303 3,065,785 24,254,011 (83,790) 27,280,309
Exercise of stock options 51,334 513 365,220 -- -- 365,733
Dividends -- -- -- (1,702,661) -- (1,702,661)
Net income -- -- -- 4,681,854 -- 4,681,854
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 26, 1994 4,481,624 44,816 3,431,005 27,233,204 (83,790) 30,625,235
Exercise of stock options 36,700 367 308,096 -- -- 308,463
Dividends -- -- -- (1,829,152) -- (1,829,152)
Net income -- -- -- 5,949,422 -- 5,949,422
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 25, 1995 4,518,324 $45,183 $3,739,101 $31,353,474 (83,790) $35,053,968
Exercise of stock options 124,400 1,244 1,189,819 -- -- 1,191,063
Purchase and retirement of
treasury stock (40,103) (401) (60,818) (840,485) -- (901,704)
Income tax benefits of
stock options -- -- 98,816 -- -- 98,816
Dividends -- -- -- (2,179,982) -- (2,179,982)
Net income -- -- -- 6,630,576 -- 6,630,576
BALANCE, MARCH 30, 1996 4,602,621 $46,026 $4,966,918 $34,963,583 $(83,790) $39,892,737
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
7
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended
-------------------------------------------------
MARCH 30, 1996 March 25, 1995 March 26, 1994
- --------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $6,630,576 $5,949,422 $4,681,854
Adjustments to reconcile net
income to net cash provided
by operating activities--
Depreciation and amortization 1,195,993 899,681 803,900
Changes in assets and liabilities--
Accounts receivable (641,162) (1,191,431) (887,711)
Inventories 268,351 (2,754,323) 893,992
Deferred tax asset 18,000 (290,000) (68,000)
Prepaid expenses 131,026 (169,854) (56,481)
Accounts payable 291,902 196,722 7,499
Accrued expenses 161,304 341,924 13,298
Accrued income taxes (557,941) 400,400 98,303
- --------------------------------------------------------------------------------------
Net cash provided by operating
activities 7,498,049 3,382,541 5,486,654
- --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (9,062,407) (2,302,217) (1,030,079)
Purchase of investments (4,193,876) (7,180,359) (7,597,195)
Proceeds from sale and maturity of
investments 8,649,895 6,138,712 4,236,745
Decrease (increase) in other assets 21,117 (159,029) (192,018)
- --------------------------------------------------------------------------------------
Net cash used in investing
activities (4,585,271) (3,502,893) (4,582,547)
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 1,191,063 308,463 365,733
Income tax benefit from stock options 98,816 -- --
Purchase and retirement of treasury
stock (901,704) -- --
Dividends paid (2,169,444) (1,716,472) (1,698,428)
- --------------------------------------------------------------------------------------
Net cash used in financing
activities (1,781,269) (1,408,009) (1,332,695)
- --------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,131,509 (1,528,361) (428,588)
- --------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 3,570,790 5,099,151 5,527,739
- --------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $4,702,299 $3,570,790 $5,099,151
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
ITEMS NOT AFFECTING CASH FLOWS:
Dividends payable $ 551,088 $ 540,550 $ 427,870
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for income taxes $3,562,125 $3,198,600 $2,714,091
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 30,1996
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Boston Acoustics, Inc. (the Company) engineers, manufactures and markets
home loudspeakers and automotive speakers. The Company's products are
principally marketed in the United States, Canada, Europe and Asia through
selected audio and audio-video specialty dealers and through distributors.
The accompanying consolidated financial statements reflect the operations
of the Company and its wholly owned subsidiaries. All significant
intercompany amounts have been eliminated in consolidation.
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies.
A. REVENUE RECOGNITION
Revenue is recognized when products are shipped to customers.
B. CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with remaining maturities of three
months or less at the time of acquisition to be cash equivalents.
C. SHORT-TERM AND LONG-TERM INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Accordingly, at March 30, 1996,
the Company's
8
investments are classified as held-to-maturity (recorded at amortized cost)
and as available-for-sale (recorded at fair market value).
D. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
March 30, 1996 March 25, 1995
- -----------------------------------------------------------------------
Raw materials and work-in-process $4,518,656 $5,288,966
- -----------------------------------------------------------------------
Finished goods 3,939,937 3,437,978
- -----------------------------------------------------------------------
$8,458,593 $8,726,944
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Work-in-process and finished goods inventories consist of materials, labor
and manufacturing overhead.
E. DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization, using both
straight-line and accelerated methods, by charges to operations in amounts
estimated to allocate the cost of the assets over their estimated useful
lives as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- -----------------------------------------------------------------------
Building 39 Years
Machinery and equipment 3-5 Years
Office equipment and furniture 5 Years
Motor vehicles 3 Years
F. WARRANTY COSTS
Warranty costs are recorded when incurred by the Company. During the three
years in the period ended March 30, 1996, warranty costs were not
significant, and future warranty costs are not expected to be significant.
G. INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the financial reporting and tax bases of
assets and liabilities.
H. NET INCOME PER COMMON SHARE
Net income per common share is computed using the weighted average number
of shares of common stock and common stock equivalents (stock options)
outstanding during each year when dilutive. Fully diluted earnings per share
have not been presented, as the amounts would not differ significantly from
primary earnings per share.
I. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no obligation for postretirement or postemployment benefits.
J. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
K. CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit
risk concentrations. The Company has no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. The Company maintains the
majority of cash balances with three financial institutions. The Company's
accounts receivable credit risk is not concentrated within any geographic
area and does not represent a significant credit risk to the Company. During
fiscal 1996, one customer represented 11% of the Company's net sales. No
single customer accounted for 10% or more of the Company's net sales for
fiscal 1995 and 1994.
L. FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, marketable securities and accounts
receivable. The estimated fair value of these financial instruments
approximates their carrying value and, except for accounts receivable, is
based primarily on market quotes. The Company's cash equivalents and
marketable securities are generally obligations of the federal government or
investment-grade corporate or municipal issuers. The Company, by policy,
limits the amount of credit exposure to any one financial institution.
2. INVESTMENTS
The Company's portfolio of investments consists of marketable securities
classified as available-for-sale and held-to-maturity. Investments held at
March 30, 1996 and March 25, 1995 are presented below.
MARCH 30, 1996 March 25, 1995
-------------------------------------------------
AMORTIZED MARKET Amortized Market
COST VALUE Cost Value
- ------------------------------------------------------------------------------
Short-term investments:
Available-for-sale-
Money market and equity
securities $1,274,734 $1,274,734 $1,000,024 $1,000,024
Held-to-maturity-
U.S. Treasury Notes and
state and municipal
generalobligation and
revenue bonds 5,404,001 5,421,311 7,132,121 7,118,919
- -------------------------------------------------------------------------------
Total short-term
investments $6,678,735 $6,696,045 $8,132,145 $8,118,943
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Long-term investments
(one- to three-year
maturity):
Available-for-sale-
Mutual funds -- -- $1,477,175 $1,477,175
Held-to-maturity-
State and municipal
general obligation and
revenue bonds 2,305,992 2,311,928 3,831,426 3,835,944
- -------------------------------------------------------------------------------
Total long-term investments $2,305,992 $2,311,928 $5,308,601 $5,313,119
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9
Realized gains and losses on sales of marketable securities for each of
the three years in the period ended March 30, 1996 were not material to the
Company's results of operations.
3. INCOME TAXES
The components of deferred tax assets consist of temporary differences
between the financial reporting and tax bases of assets and liabilities. A
valuation allowance has not been provided, as the Company expects to realize
all deferred tax amounts.
The approximate tax effect of each temporary difference is as follows:
MARCH 30, 1996 March 25, 1995
- --------------------------------------------------------------------------
Current deferred tax assets-
Nondeductible accruals $262,000 $221,000
Receivable reserves 228,000 185,000
Inventory reserves 240,000 179,000
- --------------------------------------------------------------------------
730,000 585,000
Noncurrent deferred tax assets-
Depreciation 267,000 430,000
- --------------------------------------------------------------------------
Total deferred tax assets $997,000 $1,015,000
The noncurrent deferred income taxes are included in other assets in the
accompanying consolidated balance sheets.
The components of the provision for income taxes shown in the accompanying
consolidated statements of income consist of the following:
MARCH 30, March 25, March 26,
1996 1995 1994
- --------------------------------------------------------------------------
Current-
Federal $2,800,000 $2,796,000 $2,125,000
State 303,000 736,000 615,000
- --------------------------------------------------------------------------
3,103,000 3,532,000 2,740,000
- --------------------------------------------------------------------------
Deferred-
Federal 23,000 (231,000) (84,000)
State (5,000) (59,000) (22,000)
- --------------------------------------------------------------------------
18,000 (290,000) (106,000)
- --------------------------------------------------------------------------
Provision for
income taxes $3,121,000 $3,242,000 $2,634,000
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
The effective income tax rate varies from the amount computed using the
statutory U.S. income tax rate as follows:
MARCH 30, March 25, March 26,
1996 1995 1994
- --------------------------------------------------------------------------
Federal statutory rate 34.0% 34.0% 34.0%
Increase in taxes resulting
from state income taxes,
net of federal income tax
benefit 2.0 4.9 5.1
Municipal bond interest (1.7) (2.2) (2.4)
Foreign sales corporation (2.2) (1.7) (1.2)
Other (.1) .3 .5
- --------------------------------------------------------------------------
32.0% 35.3% 36.0%
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
4. EMPLOYEE STOCK OPTIONS
The Company maintains an incentive stock option plan (the Plan)
administered by the Board of Directors. Options are granted at not less than
the fair market value of the Company's common stock on the date of grant. At
March 30, 1996, the Company had 59,198 shares available for future grants
under the Plan. The Plan expires in October 1996. In February 1996, the Board
of Directors approved a new incentive stock option plan covering 200,000
shares subject to stockholder approval.
The following is a summary of stock option activity:
Number of
Options Price Range
- --------------------------------------------------------------------------
Outstanding at March 27, 1993 212,434 $6.50 - $9.90
Options exercised (51,334) 6.50 - 9.00
- --------------------------------------------------------------------------
Outstanding at March 26, 1994 161,100 8.125 - 9.90
Options granted 10,000 17.00
Options exercised (36,700) 8.125 - 9.00
- --------------------------------------------------------------------------
Outstanding at March 25, 1995 134,400 8.875 - 17.00
Options granted 62,000 18.50 - 19.50
Options exercised (124,400) 8.875 - 9.90
- --------------------------------------------------------------------------
Outstanding at March 30, 1996 72,000 $17.00 - $19.50
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Exercisable at March 30, 1996 3,322 $17.00
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
5. LINE OF CREDIT
The Company has a $1,500,000 unsecured line of credit with a bank
available for letters of credit, bankers' acceptances and direct advances.
Interest on letters of credit and bankers' acceptances is based on the
prevailing rate (1.5% at March 30, 1996). Direct advances accrue interest at
the bank's commercial base rate (8.25% at March 30, 1996). No amounts were
outstanding under the line of credit at March 30, 1996 and March 25, 1995.
6. EXPORT SALES
Export sales (primarily to Europe, Asia and Canada) accounted for
approximately 20% of net sales during fiscal 1996, and 22% during fiscal 1995
and 1994.
7. EMPLOYEE BENEFIT PLAN
On March 1, 1995, the Company established the Boston Acoustics, Inc.
401(k) Retirement Plan (the 401(k) Plan). The 401(k) Plan is a defined
contribution plan established under the provisions of Section 401(k) of the
Internal Revenue Code. The Company may make a matching contribution of 25% of
each participant's contribution, up to 5% of a participant's compensation for
the plan year. The Company contributed approximately $55,000 and $4,000 to
the 401(k) Plan for the year ended March 30, 1996 and March 25, 1995,
respectively.
8. SUBSEQUENT EVENT
On March 28, 1996 the Company signed a letter of intent to acquire Snell
Acoustics, Inc. Terms of the purchase are currently being negotiated. Snell
Acoustics manufactures home entertainment loudspeaker systems.
10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO BOSTON ACOUSTICS, INC.:
We have audited the accompanying consolidated balance sheets of Boston
Acoustics, Inc. (a Massachusetts corporation) and subsidiaries as of March
30, 1996 and March 25, 1995, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in
the period ended March 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Boston Acoustics, Inc.
and subsidiaries as of March 30, 1996 and March 25, 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended March 30, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 10, 1996
FIVE YEAR SELECTED FINANCIAL DATA (Amounts In Thousands Except Per Share Data)
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net Sales $46,325 $41,046 $34,488 $32,603 $32,583
Net Income 6,631 5,949 4,682 4,772 4,933
Net Income Per Common Share 1.52 1.38 1.10 1.10 1.14
Weighted Average Number of
Common Shares Outstanding 4,353 4,299 4,250 4,333 4,319
Dividends Per Share $ .50 $ .425 $ .40 $ .30 $ .20
BALANCE SHEET DATA
Working Capital $ 26,083 $25,924 $22,723 $19,532 $20,248
Total Assets $43,124 38,379 32,899 29,430 25,651
Total Debt -- -- -- -- --
Shareholders' Equity 39,893 35,054 30,625 27,280 23,589
QUARTERLY FINANCIAL DATA (Amounts In Thousands Except Per Share Data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------
YEAR ENDED MARCH 30, 1996
Net Sales $9,862 $11,648 $13,558 $11,257 $46,325
Gross Profit 4,373 5,048 5,807 4,629 19,857
Net Income 1,464 1,790 2,120 1,257 6,631
Net Income per Common Share .34 .41 .49 .28 1.52
- -----------------------------------------------------------------------------------------
Year Ended March 25, 1995
Net Sales $8,531 $9,507 $12,126 $10,882 $41,046
Gross Profit 3,795 4,240 5,385 4,610 18,030
Net Income 1,242 1,339 1,873 1,495 5,949
Net Income per Common Share .29 .31 .44 .34 1.38
11
SHAREHOLDER INFORMATION
Boston Acoustics, Inc. encourages investors to become informed about its
business. Additional information, copies of this report and the Company's
Form 10-K filed with the Securities and Exchange Commission may be obtained
by writing to Debra A. Ricker-Rosato, VICE PRESIDENT -- FINANCE.
DIVIDEND POLICY
In August of 1992 the Company authorized a 50% increase in its annual
dividend rate from $.20 to $.30 per share. In February 1993 the Company
authorized an increase to $.40 per share and a further increase to $.50 per
share was authorized in February 1995. Dividends are declared and paid
quarterly. Four quarterly dividends totaling $.50 were declared during fiscal
1996.
STOCK MARKET ACTIVITY
The common stock of Boston Acoustics, Inc. has been listed on the NASDAQ
National Market System under the symbol BOSA since its initial public
offering on December 12, 1986. The following table sets forth high and low
closing prices by quarter reported by NASDAQ:
Fiscal 1996 High Low
- -----------------------------------
First Quarter 19 1/4 17
Second Quarter 21 18 1/4
Third Quarter 24 3/4 19 3/4
Fourth Quarter 23 18 1/4
Fiscal 1995 High Low
- -----------------------------------
First Quarter 20 1/4 15 3/4
Second Quarter 16 1/4 13 3/4
Third Quarter 19 14 3/4
Fourth Quarter 20 1/4 17
There were 161 shareholders of record as of March 30, 1996. Shareholders
who beneficially own common stock held in nominee of street name are not
included in the number of shareholders of record.
BOARD OF DIRECTORS
FRANCIS L. REED
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND TREASURER
Boston Acoustics,Inc.
ANDREW G. KOTSATOS
PRESIDENT AND ASSISTANT CLERK
Boston Acoustics, Inc.
FRED E. FAULKNER, JR.
VICE PRESIDENT OF ENGINEERING
Millipore Products Division
Millipore Corporation
JOHN G. MARKOS
PRESIDENT
Yell-O-Glow Corporation
LISA M. REED
EXECUTIVE OFFICERS
FRANCIS L. REED
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND TREASURER
ANDREW G. KOTSATOS
PRESIDENT AND ASSISTANT CLERK
ROBERT A. CLARK
VICE PRESIDENT -- MANUFACTURING
IRA S. FRIEDMAN
VICE PRESIDENT -- MARKETING
MOSES A. GABBAY
VICE PRESIDENT -- ENGINEERING
PAUL F. REED
VICE PRESIDENT -- ADMINISTRATIVE SERVICES
DEBRA A. RICKER-ROSATO
VICE PRESIDENT -- FINANCE
ROBERT L. SPANER
VICE PRESIDENT -- SALES
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Boston Acoustics, Inc.
300 Jubilee Drive
Peabody, MA 01960
Telephone: (508) 538-5000
Fax: (508) 538-5091
AUDITORS
Arthur Andersen LLP
Boston, Massachusetts
LEGAL COUNSEL
Peabody & Arnold
Boston, Massachusetts
TRANSFER AGENT
The First National Bank of Boston
Boston, Massachusetts