- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1996 OR / / TRANSITION REPORT PURSUANT SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------ ------ COMMISSION FILE NO. 33-9875 -------------- BOSTON ACOUSTICS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2662473 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION) 300 JUBILEE DRIVE PEABODY, MASSACHUSETTS 01960 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (508) 538-5000 (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 / / There were 4,408,701 shares of Common Stock issued and outstanding as of August 5, 1996. - ------------------------------------------------------------------------------- Boston Acoustics, Inc. INDEX Page Part I: Financial Information Item 1. Financial Statements Consolidated Balance Sheets (Unaudited)- March 30, 1996 and June 29, 1996 4 Consolidated Statements of Income (Unaudited)- Three months ended June 24, 1995 and June 29, 1996 6 Consolidated Statements of Cash Flows (Unaudited)- Three months ended June 24, 1995 and June 29, 1996 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II: Other Information Items 1 through 6 11 Signatures 12 2 PART I: FINANCIAL INFORMATION Item 1: Financial Statements 3 Boston Acoustics, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) ASSETS March 30, 1996 June 29, 1996 -------------- ------------- Current Assets: Cash and cash equivalents $ 4,702,299 $ 3,170,091 Short-term investments 6,678,735 4,924,005 Accounts receivable, net of allowance for doubtful accounts of approximately $307,000 and $296,000 respectively 8,401,038 8,356,465 Inventories 8,458,593 9,282,797 Deferred income taxes 730,000 730,000 Prepaid expenses 343,066 451,002 ----------- ----------- Total current assets 29,313,731 26,914,360 ----------- ----------- Property and Equipment, at cost: Land 1,433,365 1,433,365 Building 6,762,323 6,855,456 Machinery and equipment 6,344,220 6,900,238 Office equipment and furniture 1,448,950 1,543,701 Motor vehicles 373,177 373,177 ----------- ----------- 16,362,035 17,105,937 Less-accumulated depreciation and amortization 5,665,178 6,010,210 ----------- ----------- 10,696,857 11,095,727 ----------- ----------- Other Assets: Long-term investment securities, at cost 2,305,992 3,146,827 Other assets 807,012 2,637,448 ----------- ----------- Total other assets 3,113,004 5,784,275 ----------- ----------- $43,123,592 $43,794,362 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 4 Boston Acoustics, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY March 30, 1996 June 29, 1996 -------------- ------------- Current Liabilities: Accounts payable $ 1,167,933 $ 1,483,842 Accrued payroll and payroll- related expenses 1,078,186 863,582 Dividends payable 551,088 545,538 Other accrued expenses 350,031 648,346 Accrued income taxes 83,617 520,060 ----------- ----------- Total current liabilities 3,230,855 4,061,368 ----------- ----------- Commitments Shareholders' Equity: Common stock, $.01 par value Authorized -- 6,000,000 shares Issued -- 4,602,621 at March 30, 1996 and June 29, 1996 46,026 46,026 Additional paid-in capital 4,966,918 4,966,918 Retained earnings 34,963,583 35,737,390 ----------- ----------- 39,976,527 40,750,334 Less--Treasury stock, 193,920 shares at March 30, 1996 and 238,320 shares at June 29, 1996 83,790 1,017,340 ----------- ----------- Total shareholders' equity 39,892,737 39,732,994 ----------- ----------- $43,123,592 $43,794,362 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated financial statement. 5 Boston Acoustics, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended ------------------ June 24, 1995 June 29, 1996 -------------- ------------- Net sales $ 9,861,841 $ 11,051,857 Cost of goods sold 5,488,406 6,276,741 ----------- ----------- Gross profit 4,373,435 4,775,116 ----------- ----------- Selling and marketing expenses 1,307,659 1,570,072 General and administrative expenses 541,270 584,217 Engineering and development expenses 578,094 732,092 ----------- ----------- Total expenses 2,427,023 2,886,381 ----------- ----------- Income from operations 1,946,412 1,888,735 Interest income, net 206,581 141,610 ----------- ----------- Income before provision for income taxes 2,152,993 2,030,345 Provision for income taxes 689,000 711,000 ----------- ----------- Net income $ 1,463,993 $ 1,319,345 ----------- ----------- ----------- ----------- Net income per common share $ .34 $ .30 ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding 4,325,061 4,398,481 ----------- ----------- ----------- ----------- Dividends per share $ .125 $ .125 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 6 Boston Acoustics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended ------------------ June 24, 1995 June 29, 1996 -------------- ------------- Cash flows from operating activities: Net income $ 1,463,993 $ 1,319,345 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 237,304 345,032 Changes in assets and liabilities, net of acquisition of Snell Acoustics- Accounts receivable (56,303) 397,527 Inventories (678,774) (282,087) Prepaid expenses (245,672) 4,364 Accounts payable 148,401 90,236 Accrued expenses 50,989 (180,921) Accrued income taxes 98,875 436,443 ------------ ------------ Net cash provided by operating activities 1,018,813 2,129,939 ------------ ------------ Cash flows from investing activities: Acquisition of Snell Acoustics --- (2,564,749) Purchases of property and equipment, net (618,293) (515,636) Purchase of investments (1,968,679) (1,445,684) Proceeds from sale and maturity of investments 1,980,229 2,359,579 Decrease (increase) in other assets 74 (11,019) ------------ ------------ Net cash used in investing activities (606,669) (2,177,509) ------------ ------------ Cash flows from financing activities: Dividends paid (540,550) (551,088) Purchase of common stock for treasury --- (933,550) Exercise of stock options 20,413 --- ------------ ------------ Net cash used in financing activities (520,137) (1,484,638) ------------ ------------ Decrease in cash and cash equivalents (107,993) (1,532,208) Cash and cash equivalents, beginning of period 3,570,790 4,702,299 ------------ ------------ Cash and cash equivalents, end of period $ 3,462,797 $ 3,170,091 ------------ ------------ ------------ ------------ Items not affecting cash flows: Dividends payable $ 540,838 $ 545,538 ------------ ------------ ------------ ------------ Supplemental Disclosure: Cash paid for income taxes $ 590,125 $ 250,733 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these consolidated financial statements. 7 Boston Acoustics, Inc. and Subsidiaries Notes to Unaudited Consolidated Financial Statements (1) Basis of Presentation The unaudited consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. The results for the three-month period ended June 29, 1996 are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company's Annual Report included in its Form 10-K filed on June 28, 1996. (2) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following: March 30, 1996 June 29,1996 -------------- ------------ Raw materials and work-in process $ 4,518,656 $ 4,916,127 Finished goods 3,939,937 4,366,670 ----------- ---------- $ 8,458,593 $ 9,282,797 ----------- ---------- ----------- ---------- Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. (3) Net Income Per Common Share Net income per common share is computed using the weighted average number of shares of common stock outstanding during each period. Common equivalent shares (stock options) have not been considered in the calculation of earnings per share as their effect would not be significant. Fully diluted earnings per share have not been presented as the amounts would not differ significantly from primary earnings per share. (4) Acquisition of Snell Acoustics, Inc. Effective June 1, 1996, the Company acquired all of the assets and the business and assumed certain liabilities of Snell Acoustics, Inc. (Snell). Snell manufactures high-end home loudspeaker systems for the audiophile market at its factory in Haverhill, Massachusetts. The acquisition, which was financed with available cash, was accounted for as a purchase, and the results of operations of Snell have been included in the consolidated operating results since June 1, 1996. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill and will be charged to operations over fifteen years. Unaudited pro forma results of operations to reflect the Snell acquisition have not been presented as they are not material. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth the results of operations for the three-month period ended June 24, 1995 and June 29, 1996 expressed as percentages of net sales. Three Months Ended ------------------ June 24, 1995 June 29, 1996 ------------- ------------- Net sales 100.0% 100.0% Cost of goods sold 55.7 56.8 ---- ---- Gross profit 44.3 43.2 ---- ---- Selling and marketing expenses 13.3 14.2 General & administrative expenses 5.5 5.3 Engineering & development expenses 5.8 6.6 ---- ---- 24.6 26.1 ---- ---- Income from operations 19.7 17.1 Interest income, net 2.1 1.2 ---- ---- Income before provision for income taxes 21.8 18.3 Provision for income taxes 7.0 6.4 ---- ---- Net income 14.8% 11.9% ---- ---- ---- ---- Operating results for the three-month period ended June 29, 1996 include the June 1, 1996 acquisition of the business of Snell Acoustics, Inc. a manufacturer of high-end loudspeaker systems. Net sales increased 12 percent, from approximately $9,862,000 during the first quarter of fiscal 1996 to approximately $11,052,000 during the first quarter of fiscal 1997. Sales increases in the home and automotive loudspeaker categories, both domestically and to international distributors, contributed to the overall sales increase during the three-month period ended June 29, 1996. The Company's gross margin for the three-month period ended June 29, 1996 decreased as a percentage of net sales from 44.3% to 43.2% due primarily to production inefficiencies as a result of the companies' move in late February 1996 to its new manufacturing facility. 9 Total operating expenses increased both in absolute dollars and as a percentage of net sales during the three-month period ended June 29, 1996 as compared to the corresponding period in fiscal 1996. Selling and marketing expenses have increased as a percentage of net sales primarily due to increased corporate advertising and literature expenditures as compared to the three-month period ended June 24, 1995. General and administrative expenses have remained relatively stable in absolute dollars and as a result have decreased as a percentage of net sales for the three-month period ended June 29, 1996. Engineering and development expenses as a percentage of net sales and in absolute dollars have increased primarily due to increased salaries and benefits relating to additional engineering personnel, as well as increases in the cost of materials and supplies relating to new product development. Interest income has decreased both in absolute dollars and as a percentage of net sales for the three-month period ended June 29, 1996 due primarily to the utilization of certain investments for the construction of the Company's new facility during fiscal 1996. The Company's effective income tax rate increased from 32% for the three-month period ended June 24, 1995 to 35% for the three-month period ended June 29, 1996, primarily as a result of non-recurring tax credits realized in fiscal 1996 in connection with capital expenditures. Net income for the first quarter of fiscal 1997 decreased 10% from approximately $1,464,000 in fiscal 1996 to $1,319,000 in fiscal 1997 while earnings per share decreased 12% from $.34 to $.30 per share. This decrease was primarily the result of the increase in operating expenses, decrease in interest income and an operating loss of Snell Acoustics which is included in the consolidated results of operations. Liquidity and Capital Resources During the first three months of fiscal 1997, the Company financed its growth with cash generated by operations. As of June 29, 1996 the Company's working capital was approximately $22,853,000. The Company's cash and cash equivalents were approximately $3,170,000, short-term investments were approximately $4,924,000, and long-term investments were approximately $3,147,000. The Company's cash and cash equivalents decreased by approximately $3,290,000 as compared to the three-month period ended March 30, 1996 primarily as a result of the acquisition of the business of Snell Acoustics and the purchase of common stock for treasury during the quarter ended June 29, 1996. The Company also has a $1,500,000 unsecured bank line of credit. The Company has had no borrowings under any line of credit since December 1985. The Company believes that its resources are adequate to meet its requirements for working capital and capital expenditures through the next twelve months. 10 PART II: OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None Item 2. CHANGES IN SECURITIES None Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits required by Item 601 of Regulation S-K Exhibit 27. - Financial Data Schedule b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 29, 1996. Subsequent to the end of the quarter for which this report is filed, the Company filed a report on Form 8-K which reported under Item 5 of Form 8-K the acquisition of the business of Snell Acoustics, Inc. No financial statements were filed in connection with such report on Form 8-K. 11 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. Boston Acoustics, Inc. ---------------------- Registrant Date: August 5, 1996 By: /s/Francis L. Reed ------------------- Francis L. Reed Director, Chief Executive Officer and Treasurer (Principal Financial Officer) Date: August 5, 1996 By: /s/Andrew G. Kotsatos ----------------------------- Andrew G. Kotsatos Director, President and Assistant Clerk 12