Exhibit 13
CAMBRIDGE SOUNDWORKS, INC. ANNUAL REPORT 1996
To Our Stockholders:
Fiscal 1996 was a year of record sales for Cambridge SoundWorks. Our sales
increase of 62% was in part the result of the fact that we added new stores and
a new warehouse facility which should continue to contribute to future sales
growth. Other initiatives in our ongoing program to expand sales include
completion of the first year in our relationships with Best Buy Company and AEI
Music, development of a new promotional product distribution program, and new
foreign distributors. Marketing relationships with IBM and Cyrix Computer also
added to 1996 sales and, more importantly, further established the Cambridge
SoundWorks brand on the national and international level. 1996 was also a record
year for new product introductions, with seven new speaker models introduced at
a New York press conference in May. With these new models, in conjunction with
our existing lines, Cambridge SoundWorks now covers all the major segments of
the home hi fi speaker market.
RECORD SALES.
Net sales for fiscal 1996 increased 62% to $43.585 million compared to $26.928
million for the same twelve month period last year. Net income for the year was
$250,835, or $.09 per share, compared to a net loss of $771,418, or $.27 per
share a year ago.
NEW STORES.
In fiscal 1996, we opened six new Factory-Direct stores, located in Harvard
Square, Cambridge, MA; the Emerald Square Mall in North Attleboro, MA; the
Square One Mall in Saugus, MA; the Mall of New Hampshire in Manchester, NH; the
Mall at Rockingham Park, Salem, NH; and the Stonestown Galleria in San
Francisco, CA. At the close of fiscal 1996 we had a total of 23 locations.
In addition, we have recently opened new Factory-Direct stores in the West Farms
Mall in Hartford, CT; the Solomon Pond Mall in Marlboro, MA; the Maine Mall in
South Portland, ME; the Stoneridge Mall in Pleasanton, CA; and the Great Mall in
Milpitas, CA. We have also moved four stores to better locations. Stores being
relocated include the Concord, CA stand-alone store moving to the Sun Valley
Mall in Concord, CA; the downtown San Francisco store on Van Ness moving one
block to a much larger (4,000 sq. ft.), more visible location; the Danvers, MA
stand-alone store moving to the North Shore Mall in Peabody, MA; and the
Burlington, MA stand-alone store moving to the Burlington Mall, Burlington, MA.
Our store strategy is based on the success of Cambridge SoundWorks' current mall
and high-traffic locations. These stores focus on home stereo and home theater
products, presenting them in a simple, uncluttered layout that emphasizes both
the quality of the products as well as factory-direct savings.
NEW WAREHOUSE FACILITY.
To keep pace with the growth of our sales, in early fiscal 1996, we moved our
main warehouse to a 99,000 sq. ft. facility in Westwood, MA.
NEW PRODUCTS.
At a May press conference in New York, we introduced more new products in 1996
than in any other year in our history.
[PHOTO]
Our new TOWER, TOWER II, TOWER III and CENTERSTAGE speakers.
Our TOWER-TM- ($1,499 pr.), TOWER II ($999 pr.) and TOWER III ($599 pr.) floor-
standing speakers expand our marketing efforts into a very significant price
cat-egory previously unexplored by the company. Our CENTERSTAGE-TM- speaker
($349) is a high-output model designed to match our TOWER series speakers.
CENTER CHANNEL II ($159) is a new low-profile speaker similar to our popular
CENTER CHANNEL PLUS. Both of these center speakers broaden our presence in the
burgeoning home theater field. MICROWORKS-TM- ($349) is a high-power, high-
output amplified subwoofer/satellite speaker system for use with multimedia
computers or in stand-alone music systems. And POWERED SUBWOOFER III ($249)
rounds out our highly acclaimed line of amplified subwoofers. These products
will appear on our store shelves and in our catalog starting in mid September.
We expect significant revenue contributions from them in fiscal 1997.
BEST BUY COMPANY.
We completed the first year of our relationship with Best Buy
CAMBRIDGE SOUNDWORKS, INC.
Company in fiscal 1996. Most Cambridge SoundWorks products are now displayed and
sold in over 260 Best Buy stores nationwide. Best Buy is the country's largest
consumer electronics retailer.
AEI MUSIC.
Fiscal 1996 was also the first full year of our relationship with AEI Music,
Inc., the country's leading music service company. We developed a special series
of heavy-duty speakers for the retail/restaurant/hotel market called Cambridge
SoundWorks PROLINE-TM-. These speakers have begun to appear in retail stores,
restaurants and hotels nationally.
PROMOTIONAL PRODUCT DISTRIBUTION.
Cambridge SoundWorks ventured into the promotional products arena in fiscal 1996
through our partnership with CYRK, Inc. As a result, our SOUNDWORKS-Registered
Trademark- system was placed as a premium in the "Marlboro Gear" catalog.
THE MULTIMEDIA MARKET.
In fiscal 1996 we began to develop important relationships with computer
manufacturers. Our first appearance in the multimedia area of the January 1996
Consumer Electronics Show in Las Vegas led to bundling agreements for our
SOUNDWORKS amplified speaker system with IBM and Cyrix. We are pleased with the
recognition we gained from associating our products with these companies and
consider such relationships a promising area of future growth for Cambridge
SOUNDWORKS.
NEW FOREIGN DISTRIBUTORS.
The company has now established relationships with distributors in France,
Germany, Italy, Mexico, Thailand, China, Singapore and the United Arab Emirates.
Foreign distribution is seen as a major new area of growth for Cambridge
SOUNDWORKS.
CRITICAL REVIEWS.
The company's products continue to attract the favorable attention
of the industry's critics. A small sampling:
- PC magazine says about our SOUNDWORKS system "The best
buy in new PC sound systems has to be SOUNDWORKS...you
may have to listen to a high-quality CD to appreciate just how good
SOUNDWORKS is." They say our MODEL TWELVE, "is unquestionably the finest
computer-related sound system we have yet heard, and its portability makes
this Editors' Choice winner that much more attractive."
- THE NEW YORK TIMES says, "SOUNDWORKS has the most natural musical
timbre."
- STEREO REVIEW magazine says our ENSEMBLE-TM- IV speaker system, "is one
of the top bargains in today's market." They also said our POWERED
SUBWOOFER is, "clearly the best subwoofer of the pack...
it blew them away."
- MACUSER magazine gave our SOUNDWORKS system their Four-Mouse Award, and
said, "In a side-by-side comparison, it's hard to tell the difference
between the SOUNDWORKS system and a set of full-sized speakers...except for
the former's superior bass."
- HOME THEATER magazine gave our ENSEMBLE IV HOME THEATER speaker system
its top "Hot Ticket" rating, saying, "Ensemble IV sounds much better than
the other sub/sat systems we've tested - at half the price of many."
- PC COMPUTING magazine gave our SOUNDWORKS speaker system their Editors'
Choice Award, and called it "the best multimedia speaker system over $100."
- BOOT magazine says our new MICROWORKS system, "delivers chest-thumpin'
bass, crystal-clear highs and almost no distortion at any level."
MORE NEW PRODUCTS ON THE WAY.
In addition to the products mentioned, the company intends to continue to
introduce new products and new product categories. In fiscal 1997 we plan to
market our first automotive sound products. Also, in fiscal 1996 we acquired the
RDL Acoustics brand, and established an agreement with the firm's principle
designer, Roy Allison, to create a new series of "Room Designed Loudspeakers" to
be marketed by the company. We plan to introduce speakers under the RDL
Acoustics brand in fiscal 1997. As we enter fiscal 1997, we are looking forward
to continued growth.
Best regards,
/s/ Tom De Vesto
Thomas J. DeVesto
President, CEO
- - -REGISTERED TRADEMARK- ENSEMBLE, SOUNDWORKS AND CAMBRIDGE SOUNDWORKS ARE
REGISTERED TRADEMARKS OF CAMBRIDGE SOUNDWORKS, INC. TOWER, MICROWORKS AND
CENTERSTAGE ARE TRADEMARKS OF CAMBRIDGE SOUNDWORKS, INC.
CAMBRIDGE SOUNDWORKS, INC.
SELECTED FINANCIAL DATA
The following information, except for the year ended July 2, 1995, has been
derived from financial statements which have been audited by Arthur Andersen
LLP, independent public accountants and their report is included elsewhere
herein. The following data, insofar as it relates to the year ended July 2,
1995, has been derived from unaudited financial data, which in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the year.
The data set forth below should be read in conjunction with the audited
financial statements and notes thereto included herein and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Six Months
Year Ended Year Ended Ended Year Ended Year Ended
Income Statement Data: 12/31/93 12/31/94 7/2/95 7/2/95 6/30/96
(IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
Net sales $14,267 $19,432 $15,015 $26,928 $43,585
Cost of goods sold 7,281 10,133 8,697 15,043 25,872
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 6,986 9,299 6,318 11,885 17,713
- --------------------------------------------------------------------------------------------------------------------------
Sales and marketing expenses 4,296 6,890 5,830 10,406 14,254
General and administrative expenses 1,041 1,617 1,182 2,197 2,062
Engineering and development expenses 557 669 404 761 679
Total expenses 5,894 9,176 7,416 13,364 16,995
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,092 123 (1,098) (1,479) 718
Interest income (expense), net (18) 182 10 150 (301)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision
(benefit) for taxes 1,074 305 (1,088) (1,329) 417
Provision (benefit) for income taxes 421 98 (435) (558) 167
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 653 $ 207 $ (653) $ (771) $ 250
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common and
common equivalent share $ .44 $ .08 $ (.23) $ (.27) $ .09
- --------------------------------------------------------------------------------------------------------------------------
Weighed average number of common and
common equivalent shares outstanding 1,478 2,461 2,873 2,870 2,922
Dividends per common share - - - - -
Balance Sheet Data:
Working capital $ 1,323 $ 9,539 $8,363 $ 8,363 $7,912
Total Assets 3,272 15,947 15,029 15,029 18,130
Total Stockholders' Equity 1,544 11,703 11,108 11,108 11,361
2
CAMBRIDGE SOUNDWORKS, INC.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System under
the symbol HIFI. The following table sets forth the range of high and low
selling prices for the Common Stock of the Company from April 13, 1994 (the date
the Company's Common Stock commenced trading on Nasdaq) for the fiscal periods
indicated, as reported on the Nasdaq National Market. This information reflects
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not necessarily reflect actual transactions.
FISCAL 1994 HIGH LOW
- --------------------------------------------------------------------------------
Second Quarter (from April 13, 1994) $8.50 $7.125
Third Quarter $8.750 $5.875
Fourth Quarter $9.875 $4.875
FISCAL 1995 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $6.75 $3.375
Second Quarter $7.625 $4.875
FISCAL 1996 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $7.75 $4.75
Second Quarter $6.00 $4.25
Third Quarter $6.375 $3.625
Fourth Quarter $4.625 $3.25
On August 30, 1996, there were 67 record holders of the Company's Common Stock.
The Company believes the actual number of beneficial owners of the Common Stock
is greater than the stated number of holders of record because a large number of
the shares of the Company's Common Stock is held in custodial or nominee
accounts for the benefit of persons other than the record holder.
The Company has never paid a dividend on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future.
3
CAMBRIDGE SOUNDWORKS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected income
statement data expressed as percentages of net sales.
YEAR ENDED YEAR ENDED SIX MONTHS YEAR YEAR
DECEMBER 31, DECEMBER 31, ENDED ENDED ENDED
1993 1994 7/2/95 7/2/95 6/30/96
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 51.0 52.1 57.9 55.9 59.4
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 49.0 47.9 42.1 44.1 40.6
- ----------------------------------------------------------------------------------------------------------------------------
Sales and marketing expenses 30.1 35.5 38.8 38.6 32.7
General and administrative expenses 7.3 8.3 7.9 8.2 4.7
Engineering and development expenses 3.9 3.5 2.7 2.8 1.6
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 41.3 47.3 49.4 49.6 39.0
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 7.7 .6 (7.3) (5.5) 1.6
Interest income (expense), net (.1) 1.0 0.0 .6 .6
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes 7.6 1.6 (7.3) (4.9) 1.0
Provision (benefit) for income taxes 3.0 .5 (2.9) ( 2.1) .4
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4.6% 1.1% (4.4%) (2.8)% .6%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JULY 2, 1995
Net sales for the twelve month period increased from $26.9 million in 1995 to
$43.6 million in 1996, an increase of 62%. The increase in net sales was due
primarily to the Company's continuing strategy of retail and wholesale
expansion, which included shipments in connection with an exclusive reseller
agreement with Best Buy, Co., Inc. (Best Buy) a national chain of more than 260
specialty retail stores. The Company opened six retail stores, including five
stores in New England and one in Northern California, bringing the total number
of retail stores to 23 at the year ended June 30, 1996. Catalog sales
decreased, due in part to shifts in sales to the Company's
retail stores.
Retail, catalog and wholesale sales accounted for 55%, 16% and 29% of net sales
for the year ended June 30, 1996, respectively. For the year ended July 2,
1995, retail, catalog and wholesale sales accounted for 55%, 32% and 13% of net
sales, respectively. Sales of products manufactured by the Company accounted
for 72%, and sales of stereo components manufactured by other companies
accounted for 28% of net sales for the year ended June 30, 1996. For the year
ended July 2, 1995, sales of products manufactured by the Company accounted for
69%, and sales of stereo components manufactured by other companies accounted
for 31% of net sales. The increase in products manufactured by the company as a
percentage of net sales results from the expansion of its wholesale channels of
distribution.
The Company's gross margin decreased from 44.1% for the year ended July 2, 1995,
to 40.6% for the year ended June 30, 1996. The increase in retail store sales,
which have lower overall margins than catalog sales, retail pricing competition
particularly with stereo components manufactured by other companies, and the
increased sales volume in the wholesale expansion had a negative impact on the
Company's gross margin. The Company does not expect a significant change in
gross margin as the Company adds retail stores and as wholesale sales increase
at their projected levels.
Sales and marketing expenses increased from $10.4 million for the year ended
July 2, 1995 (38.6% of net sales) to $14.3 million (32.7% of net sales) for the
year ended June 30, 1996. The hiring of retail store personnel and retail store
operating costs, along with selling costs associated with the Company's
wholesale division accounted for a substantial portion of the increase. General
and administrative expenses for the twelve month period decreased from $2.2
million (8.2% of net sales) for 1995 to $2.1 million (4.7% of net sales) in
1996. Engineering and development expenses for the twelve month period decreased
from $761,000 (2.8% of net sales) in 1995 to $680,000 (1.6% of net sales) in
1996.
Interest income amounted to $165,000 in 1995 from investments in United States
Treasury Securities purchased with the net proceeds of the Company's initial
public offering, which was completed in April 1994. Interest expense of
$301,000 for the year ended June 30, 1996 results from the Company's use of its
line of credit.
The Company's effective income tax rate for the year ended June 30, 1996 was
40.0% as compared to 41.9% for the year ended July 2, 1995.
The Company posted net income for the year ended June 30, 1996 of $251,000
(.6% of net sales), compared to a net loss of $771,000 (2.8% of net sales) for
the year ended July 2, 1995. The increase in net income resulted primarily from
the Company's ability to increase sales in its retail and wholesale divisions
with a minimal increase to operating expense.
YEAR ENDED JULY 2, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net sales for the twelve month period increased from $19.4 million for the year
ended December 31, 1994 to $26.9 million for the year ended July 2, 1995, an
increase of 39%. The increase in net sales was due primarily to the opening of
new retail stores and initial shipments in connection with an exclusive reseller
agreement with Best Buy. Catalog sales decreased due in part to shifts in sales
to the Company's retail stores.
In February 1995, the Company announced the signing of a definitive sales
agreement with Best Buy. The Company's products became available in more than
200 Best Buy stores by July 2, 1995. The gross margin on sales of the Company's
speakers to Best Buy is significantly lower than on sales of the Company's
speakers through its catalog or at its Company-owned retail stores. However,
operating expenses as a percentage of net sales are significantly lower on the
Company's sales to Best Buy than on its catalog and retail store sales.
Retail, catalog and wholesale sales accounted for 55%, 32%, and 13% of net
sales for the year ended July 2, 1995, respectivley. For the year ended
December 31, 1994, retail stores accounted for 52%, and catalog sales accounted
for 48% of net sales. Sales of products manufactured by the Company accounted
for 69%, and sales of stereo components manufactured by other companies
accounted for 31% of net sales for the year ended July 2, 1995. For the year
ended December 31, 1994, sales of products manufactured by the Company accounted
for 62%, and sales of stereo components manufactured by other companies
accounted for 38% of net sales. The increase in sales of products manufactured
by the Company as a percentage of net sales results from the initial shipments
under the exclusive reseller agreement with Best Buy.
4
CAMBRIDGE SOUNDWORKS, INC.
The Company's gross margin decreased from 47.9% for the year December 31, 1994,
to 44.1% for the year ended July 2, 1995, due to the increase in retail store
sales and the initial wholesale shipments, which have lower overall margins than
catalog sales.
Sales and marketing expenses increased from $6.9 million for the year ended
December 31, 1994 (35.5% of net sales) to $10.4 million (38.6% of net sales) for
the year ended July 2, 1995. The hiring of additional personnel, increased
advertising expenses, and amortization of pre-opening costs associated with the
Company's entrance into the West Coast region late in 1994 accounted for a
substantial portion of the increase. General and administrative expenses
increased from $1.6 million for the year ended December 31, 1994 (8.3% of net
sales) to $2.2 million (8.2% of net sales) for the year ended July 2, 1995.
Professional fees, insurance and overhead expenses associated with the Company's
retail expansion have resulted in a substantial portion of the increase in
general and administrative expenses. Engineering and development expenses
increased from $669,000 (3.5% of net sales) for the year ended December 31,
1994 to $761,000 (2.8% of net sales) for the year ended July 2, 1995.
Interest income of $182,000 for the year ended December 31, 1994 and $165,000
for the year ended July 2, 1995 resulted from investments in United States
Treasury Securities purchased with the net proceeds of the Company's initial
public offering, which was completed in April 1994.
The Company's effective income tax rate increased to 41.9% for the year ended
July 2, 1995 from 32.1% for the year ended December 31, 1994.
The Company reported net income for the year ended December 31, 1994 of $207,000
(1.1% of net sales), compared to a net loss of $771,000 (2.8% of net sales) for
the year ended July 2, 1995. The decrease in net income resulted primarily from
a decrease in the Company's gross margin as noted above, and the amortization of
pre-opening costs associated with the Company's entrance into the West Coast
region late in calendar 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Net sales for the twelve month period increased from $14.3 million in 1993 to
$19.4 million in 1994, an increase of 36%. The increase in net sales was due
primarily to the opening of 13 new retail stores, including seven stores in New
England and six in Northern California, bringing the total number of Company-
owned retail stores to 14 by the end of Fiscal 1994. The introduction of new
Cambridge SOUNDWORKS products, including ENSEMBLE II and SOUNDWORKS, also
contributed to the increase in net sales. Catalog sales decreased slightly by
3%.
Retail store sales accounted for 52%, and catalog sales accounted for 48%, of
net sales in 1994. In 1993, retail stores accounted for one-third, and catalog
sales accounted for two-thirds, of net sales. Sales of products manufactured by
the Company accounted for 62%, and sales of stereo components manufactured by
other companies accounted for 38%, of net sales in 1994. In 1993, sales of
products manufactured by the Company accounted for two-thirds, and sales of
stereo components manufactured by other companies accounted for one-third, of
net sales.
The Company's gross margin decreased from 49.0% in 1993 to 47.9% in 1994. In
1994, manufacturing overhead efficiencies were offset by shifts in the Company's
sales mix. Retail store sales, which have lower overall margins than catalog
sales, increased as a percentage of net sales. In addition, sales of stereo
components manufactured by other companies, which have significantly lower
margins than sales of speakers manufactured by the Company, increased as a
percentage of net sales. Retail pricing competition, particularly with stereo
components manufactured by other companies, also had a negative impact on the
Company's gross margin in 1994.
Sales and marketing expenses increased from $4.3 million in 1993 (30.1% of net
sales) to $6.9 million in 1994 (35.5% of net sales). Increase in advertising
expenses related to the Company's retail store expansion and increase in store
operating costs, including the hiring of additional retail sales personnel and
related support staff, accounted for a substantial portion of the increase in
sales and marketing expenses.
General and administrative expenses increased from $1.0 million in 1993 (7.3% of
net sales) to $1.6 million in 1994 (8.3% of net sales) reflecting increases in
professional fees and increases in overhead necessary to support the Company's
retail store expansion. Engineering and development expenses increased in total
dollars, from $557,000 in 1993 to $669,000 in 1994, but decreased as a
percentage of net sales, from 3.9% in 1993 to 3.5% in 1994.
Interest income amounted to $187,000 in 1994 from investments in United States
Treasury Securities purchased with the net proceeds of the Company's initial
public offering which was completed during April 1994.
The Company's effective income tax rate decreased from 39.2% in 1993 to 32.1% in
1994 because research and development credits increased as a percentage of
taxable income in 1994.
Net income decreased from $653,000 in 1993 (4.6% of net sales) to $207,000 in
1994 (1.1% of net sales) due primarily to increases in operating expenses.
During 1994, the Company's retail store expansion proceeded at a faster pace
than originally planned, and the Company made substantial investment in store
development, management infrastructure and marketing which had a short-term
negative impact on the Company's profits. Management believes that these
investments enhanced the ability of the Company to continue to expand
profitably.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1994, the Company financed its growth primarily from cash generated
from operations and seasonal bank borrowings. In April 1994, the Company
completed an initial public offering which generated net proceeds to the Company
of $9,935,000. A portion of the proceeds, $ 4,212,334 was used to purchase
fixed assets and leasehold improvements for the Company's new retail stores and
its new manufacturing, warehousing and administrative office facilities in
Newton, Massachusetts.
With the introduction of wholesale sales in March 1995, and the continued
expansion of retail stores, total inventories increased from $2.4 million at
April 1994 to $11.4 million at June 1996.
In April 1995, the Company obtained a demand discretionary line of credit with a
bank in order to finance its increased investment in inventories and support
continued sales growth. Advances are made against the line based on a lending
formula on receivables and inventory. The line of credit is secured by all the
Company's assets with interest payable at the bank's base rate (8.25% at June
30, 1996 ) plus 3/4%.
On June 30, 1996 an amendment to the Company's demand discretionary line of
credit increased the borrowing base to $7,400,000. The Company had $1,771,000
in excess availability on the line of credit at June 30, 1996. The Company
believes that its resources are adequate to fund its operations through the end
of 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
aquisitions, 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 and services;
the rate of growth in the industries of the Company's customers; the presence
of competitors with greater technical, marketing and financial resources; the
Company's ability to promptly and effectively respond to technological changes
which meet evolving customer needs; capacity and supply constraints or
difficulties; and the Company's ability to successfully integrate new
operations.
5
CAMBRIDGE SOUNDWORKS, INC.
BALANCE SHEETS
ASSETS July 2, 1995 June 30, 1996
- ----------------------------------------------------------------------------
CURRENT ASSETS:
Cash $ 16,885 $ 87,421
Accounts receivable, net 803,047 2,431,670
Income tax refund receivable 380,928 -
Inventories 10,523,627 11,405,352
Prepaid expenses 180,209 187,247
Deferred tax asset 223,000 570,000
Preopening costs 157,605 -
- ----------------------------------------------------------------------------
Total Current Assets 12,285,301 14,681,690
- ----------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Production equipment and tooling 451,791 407,925
Office equipment and furniture 955,818 1,148,610
Leasehold improvements 1,952,226 2,544,495
Motor vehicles 140,737 180,290
- ----------------------------------------------------------------------------
3,500,572 4,281,320
Less Accumulated depreciation and
amortization 835,370 1,135,478
- ----------------------------------------------------------------------------
2,665,202 3,145,842
- ----------------------------------------------------------------------------
OTHER ASSETS 78,957 302,880
- ----------------------------------------------------------------------------
Total Assets $ 15,029,460 $18,130,412
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------
CURRENT LIABILITIES:
Borrowings under line of credit $ - $ 3,395,557
Accounts payable 3,329,328 2,123,773
Accrued expenses 483,176 979,689
Customer prepayments and other
current liabilities 109,118 270,707
- ----------------------------------------------------------------------------
Total Current Liabilities 3,921,622 6,769,726
- ----------------------------------------------------------------------------
COMMITMENTS (Notes 5, 8 and 9) - -
STOCKHOLDERS' EQUITY:
Preferred stock, no par value-
Authorized - 2,000,000 shares - -
Common stock, no par value-
Authorized - 10,000,000 shares
Issued and outstanding 2,888,824
shares and 2,889,399 shares at July 2,
1995 and June 30, 1996, respectively 10,344,697 10,346,710
Retained earnings 763,141 1,013,976
- ----------------------------------------------------------------------------
Total Stockholders' Equity 11,107,838 11,360,686
- ----------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 15,029,460 $ 18,130,412
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF OPERATIONS
Year Ended Year Ended Six Months Year Ended Year Ended
December 31, December 31, Ended July 2, July 2, June 30,
1993 1994 1995 1995 1996
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
NET SALES $ 14,266,862 $ 19,431,892 $ 15,014,837 $ 26,927,699 $ 43,585,017
COST OF GOODS SOLD 7,280,636 10,133,001 8,696,852 15,043,196 25,871,582
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 6,986,226 9,298,891 6,317,985 11,884,503 17,713,435
- --------------------------------------------------------------------------------------------------------------------------
SALES AND MARKETING EXPENSES 4,296,496 6,890,254 5,829,589 10,406,100 14,253,742
GENERAL AND ADMINISTRATIVE EXPENSES 1,040,620 1,616,323 1,182,245 2,196,623 2,061,351
ENGINEERING AND DEVELOPMENT EXPENSES 556,997 669,179 403,773 760,590 679,637
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 5,894,113 9,175,756 7,415,607 13,363,313 16,994,730
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,092,113 123,135 (1,097,622) (1,478,810) 718,705
INTEREST INCOME 2,664 187,241 23,078 164,735 -
INTEREST EXPENSE (20,915) (5,225) (13,325) (15,343) (300,870)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes 1,073,862 305,151 (1,087,869) (1,329,418) 417,835
PROVISION (BENEFIT) FOR INCOME TAXES 421,000 98,000 (435,000) (558,000) 167,000
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 652,862 $ 207,151 $ (652,869) $ (771,418) $ 250,835
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ .44 $ .08 $ (.23) $ (.27) $ .09
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALLENT SHARES OUTSTANDING 1,478,107 2,461,169 2,872,617 2,869,626 2,922,323
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
Total
Common Stock Retained Stockholders'
Shares Amount Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 1,456,580 $ 334,750 $ 555,997 $ 890,747
Net income - - 652,862 652,862
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 1,456,580 334,750 1,208,859 1,543,609
Initial public offering of common
stock, net of issuance costs of $1,344,793 1,410,000 9,935,207 - 9,935,207
Exercise of stock options 5,000 16,800 - 16,800
Net income - - 207,151 207,151
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 2,871,580 10,286,757 1,416,010 11,702,767
Exercise of stock options 17,244 57,940 - 57,940
Net loss - - (652,869) (652,869)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 2, 1995 2,888,824 10,344,697 763,141 11,107,838
Exercise of stock options 575 2,013 - 2,013
Net income - - 250,835 250,835
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 2,889,399 $10,346,710 $ 1,013,976 $11,360,686
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF CASH FLOWS
Year Ended Year Ended Six Months Year Ended Year Ended
December 31, December 31, Ended July 2 , July 2, June 30,
1993 1994 1995 1995 1996
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 652,862 $ 207,151 $ (652,869) $ (771,418) $ 250,835
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities-
Depreciation and amortization 76,928 276,915 286,482 499,888 744,009
Deferred (prepaid) income taxes - 233,000 (308,000) 100,000 (284,000)
Changes in current assets and liabilities-
Accounts receivable, net 149,037 (312,583) (427,164) (692,644) (1,628,623)
Income tax refund receivable - (667,000) 286,072 (380,928) 380,928
Inventories (1,016,863) (5,761,353) (2,189,452) (7,165,942) (881,725)
Prepaid expenses (38,415) (148,824) 164,622 207,569 (70,038)
Preopening costs - (717,719) 560,114 (157,605) 157,605
Accounts payable 579,402 2,192,488 (6,161) 2,304,890 (1,205,555)
Accrued expenses 31,629 232,034 (131,269) 172,171 496,513
Accrued income taxes (294,663) (86,913) - - -
Customer prepayments and other
current liabilities (87,972) 59,575 (185,085) (13,943) 161,589
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 51,945 (4,493,229) (2,602,710) (5,897,962) (1,878,462)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (180,328) (2,136,742) (850,943) (2,698,048) (1,224,649)
Increase in other assets - (46,800) (15,830) (54,156) (223,923)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (180,328) (2,183,542) (866,773) (2,752,204) (1,448,572)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net - - - - 3,395,557
Repayment of capital lease obligation (10,280) (47,812) - (42,345) -
Sale of common stock, net of issuance costs - 9,935,207 - - -
Exercise of stock options - 16,800 57,940 74,740 2,013
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (10,280) 9,904,195 57,940 32,395 3,397,570
- ------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH (138,663) 3,227,424 (3,411,543) (8,617,771) 70,536
CASH, BEGINNING OF PERIOD 339,667 201,004 3,428,428 8,634,656 16,885
- ------------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 201,004 $ 3,428,428 $ 16,885 $ 16,885 $ 87,421
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Income taxes $ 715,463 $ 561,563 $ 77,500 $ 157,500 $ 145,500
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Interest $ 20,920 $ 5,225 $ 13,325 $ 14,490 $ 276,454
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
8
CAMBRIDGE SOUNDWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
N0TE 1 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Cambridge SoundWorks, Inc. (the Company) was organized in 1988. The Company
designs and manufactures speakers for stereo, home theater and multimedia
computing. The Company markets its products and sells other audio and video
components through a mail-order catalog, Company-owned retail stores and other
methods of distribution, including large retail chains throughout the United
States.
The accompanying financial statements reflect the application of certain
accounting policies described in this note and elsewhere in the accompanying
notes to financial statements. The preparation of these 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 disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(a) CHANGE IN FISCAL YEAR
On March 14, 1995, the Company's Board of Directors approved a change in the
Company's fiscal year. The Company's fiscal year ends on the Sunday nearest the
end of June. Included in the accompanying financial statements are unaudited
statements of income and cash flows for the year ended July 2, 1995. These
financial statements have been prepared on a basis consistent with those of
audited periods.
(b) INITIAL PUBLIC OFFERING
A registration statement relating to the Company's initial public offering of
common stock was declared effective on April 13, 1994. In connection with this
offering, 1,610,000 shares of common stock were sold to the public (including
210,000 shares sold pursuant to an overallotment option exercised by the
underwriters), of which 1,410,000 shares were sold by the Company and 200,000
shares were sold by selling stockholders. Net proceeds to the Company were
approximately $9,935,000.
(c) CREDIT CARD POLICY
The Company generally does not extend credit to catalog and Company-owned retail
store customers, except through third-party credit cards, including its branded
Cambridge SoundWorks credit card. Credit under these accounts is extended by
third parties, and accordingly, the Company bears no financial risk under these
agreements except in the case of fraud. The Company's agreements with third-
party credit companies provide for the electronic processing of credit approvals
and the electronic submission of transactions. Upon the submission of these
transactions to the credit card companies, payment is transmitted to the
Company's bank account. Accordingly, the Company records these amounts as cash
upon the electronic submission of the transaction to the appropriate processing
agency.
The Company pays fees to third-party credit card companies. These fees range
from .75% to 2.9% of the amount financed. These fees were approximately
$317,000, $371,000, $198,000, $423,000 and $597,000 for the years ended December
31, 1993 and 1994, for the six-month period ended July 2, 1995, and for the
years ended July 2, 1995 and June 30, 1996, respectively, and are included in
selling and marketing expenses in the accompanying statements of operations.
(d) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
July 2, June 30,
1995 1996
- --------------------------------------------------------------------------------
Raw materials and work-in-process $ 3,906,025 $ 3,823,302
Finished goods 6,617,602 7,582,050
- --------------------------------------------------------------------------------
$ 10,523,627 $ 11,405,352
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Inventories consist of materials, labor and manufacturing overhead.
(e) PREPAID EXPENSES
The Company sells its products and those of others directly to consumers through
a mail-order catalog. Direct mail costs related to catalog mailings, including
printing and postage, which constitute direct-response advertising, are
classified as prepaid expenses and are expensed over the estimated useful life
of each catalog, typically two to four months, commencing on the date of the
mailing.
(f) PREOPENING COSTS
Throughout fiscal 1995 and during the first half of fiscal 1996, the Company
opened numerous retail stores. The Company incurs direct costs prior to the
opening of new stores. These preopening costs are amortized over periods of up
to nine months.
(g) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using the straight-line
method 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
-------------------------------------------------------------
Production equipment and tooling 3-5 Years
Office equipment and furniture 5 Years
Leasehold improvements Life of lease
Motor vehicles 3 Years
(h) CUSTOMER PREPAYMENTS
Advance payments received from customers are classified as customer prepayments
and recognized as revenue when the products are shipped.
(i) REVENUE RECOGNITION AND WARRANTY COSTS
The Company recognizes revenue from product sales, net of estimated future sales
returns, at the time of shipment. The Company has not provided for any warranty
reserves, as warranty costs incurred by the Company have not been significant.
(J) NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per share data are computed using the weighted average number
of shares of common stock outstanding during each period. Common equivalent
shares from stock options have been included in the computation using the
treasury stock method only when their effect would be dilutive. Fully diluted
net income (loss) per share data have not been separately presented, as the
difference from primary net income (loss) per share data is insignificant.
(k) ENGINEERING AND DEVELOPMENT EXPENSES
Engineering and development expenses are charged to operations as incurred.
(l) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk are principally accounts receivable. This credit risk with respect
to accounts receivable is primarily limited to one large retail customer to whom
the Company makes substantial sales. To reduce the credit risk, the Company
routinely assesses the financial strength of this and other customers and, as a
consequence, believes that its accounts receivable credit risk exposure is
limited. The Company maintains an allowance for potential credit losses but
historically has not experienced any significant credit losses related to an
individual customer or groups of customers in any particular industry or
geographic area.
The estimated fair value of the Company's financial instruments, which include
cash, accounts receivable and borrowings under the line of credit, approximates
their carrying value.
NOTE 2 SIGNIFICANT CUSTOMERS
During the six-month period and year ended July 2, 1995 and the year ended June
30, 1996, one customer accounted for approximately 23%, 13% and 22% of net
sales, respectively. This customer accounted for substantially all of the
Company's accounts receivable at July 2, 1995 and June 30, 1996. During the
years ended December 31, 1993 and 1994, there were no customers that accounted
for greater than 10% of net sales.
NOTE 3 LINE OF CREDIT
In April 1995, the Company entered into a $5 million demand discretionary line
of credit (line of credit) with The First National Bank of Boston. As of June
30, 1996, the agreement was amended to increase the borrowings under the line of
credit up to $7.4 million based upon certain percentages of eligible accounts
receivable and inventory, as defined. The line of credit is secured by all
assets of the Company. Borrowings under the line of credit accrue interest at
the bank's prime rate (8.25% at June 30, 1996) plus .75%. Based on the line of
credit lending formula, as defined, the Company had available for borrowing,
approximately $ 1.8 million at June 30, 1996.
NOTE 4 INCOME TAXES
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under SFAS No. 109, the Company recognizes a
current tax liability or asset for current taxes payable or refundable and a
deferred tax liability or asset for the estimated future tax effects of
temporary differences to the extent they are realizable.
9
CAMBRIDGE SOUNDWORKS, INC.
NOTE 4 INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following:
Year Ended Year Ended Six Months Year Ended Year Ended
December 31, December 31, Ended July 2, July 2, June 30,
1993 1994 1995 1995 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Current-
Federal $ 318,000 $ (104,000) $ (107,000) $ (508,000) $ 345,000
State 103,000 (31,000) (20,000) (150,000) 106,000
- --------------------------------------------------------------------------------------------------------------------
421,000 (135,000) (127,000) (658,000) 451,000
- --------------------------------------------------------------------------------------------------------------------
Deferred-
Federal - 196,000 (266,000) 61,000 (216,000)
State - 37,000 (42,000) 39,000 (68,000)
- --------------------------------------------------------------------------------------------------------------------
- 233,000 (308,000) 100,000 (284,000)
- --------------------------------------------------------------------------------------------------------------------
Total provision (benefit) $ 421,000 $ 98,000 $ (435,000) $ (558,000) $ 167,000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Pursuant to the provisions of SFAS No. 109, as of July 2, 1995 and June 30,
1996, the Company recorded deferred tax assets of approximately $223,000 and
$570,000, respectively. These deferred tax assets primarily result from timing
differences in the recognition of revenues and expenses for tax and financial
reporting purposes. The sources of these differences and the approximate amount
of each are as follows:
July 2, June 30,
1995 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Inventory reserve $ 183,000 $ 244,000
Net operating loss carryforward and
other credit carryforwards 126,000 66,000
Other reserves 32,000 97,000
Depreciation 34,000 175,000
Store preopening costs (63,000) -
Valuation allowance (89,000) (12,000)
- --------------------------------------------------------------------------------
$ 223,000 $ 570,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
Six
Year Year Months Year Year
Ended Ended Ended Ended Ended
December 31, December 31, July 2, July 2, June 30,
1993 1994 1995 1995 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Statutory tax rate 34.0% 34.0% (34.0)% (34.0)% 34.0%
State taxes, net of
federal benefit 6.3 6.3 (6.3) (6.3) 6.3
Research and
development
credits (1.1) (8.2) - (1.7) -
Other - - 0.3 - (0.3)
- --------------------------------------------------------------------------------------------------------------------
Effective tax rate 39.2% 32.1% (40.0)% (42.0)% 40.0%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
NOTE 5 COMMITMENTS
The Company conducts its operations in leased facilities and leases certain
equipment under operating lease agreements. These operating leases expire
through January 2006. Future minimum lease payments under these operating
leases are approximately as follows:
FISCAL YEAR AMOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1997 $ 2,537,000
1998 2,677,000
1999 2,697,000
2000 2,193,000
2001 1,973,000
Thereafter 8,555,000
- --------------------------------------------------------------------------------
$ 20,632,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company is also obligated to pay for certain operating and other expenses in
accordance with the terms of its various leases.
Total rent expense under these leases for the years ended December 31, 1993 and
1994, the six-month period ended July 2, 1995 and the years ended July 2, 1995
and June 30, 1996 was approximately $153,000, $320,000, $576,000, $799,000 and
$1,929,000, respectively.
NOTE 6 STOCKHOLDERS' EQUITY
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The company will be
required to disclose the pro forma net income or loss and per share amounts in
the notes to the financial statements using the fair-value-based method
beginning in the year ending June 30, 1997, with comparable disclosures for the
year ended June 30, 1996. The Company has not determined the impact of these
pro forma adjustments.
(a) PREFERRED STOCK
The Company has authorized 2,000,000 shares of no par preferred stock. The
Board of Directors has full authority to issue this stock and to fix the voting
powers, preferences, rights, qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, redemption privileges and
liquidation preferences, and the number of shares constituting any series or
designation of such series. With regard to dividends, redemption privileges and
liquidation preferences, any particular series of preferred stock may rank
junior to, on parity with, or senior to any other series of preferred stock or
the common stock.
(b) STOCK OPTION PLANS
The Company's 1993 Stock Option Plan (the 1993 Plan) is administered by the
Board of Directors and authorizes the Company to issue options to purchase up to
470,000 shares that have been reserved by the Company. Under the terms of the
1993 Plan, the Company may grant employees either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock, at
a price not less than the fair market value at the date of grant, which vest
over periods determined by the Board of Directors. In addition, the Company may
grant nonqualified options to nonemployees.
Under a separate plan, on February 1, 1993, the Board of Directors and
stockholders granted a former officer an option to purchase 22,244 shares of
common stock at an exercise price of $3.36 per share, the fair market value of
the common stock at the date of grant as determined by the Board of Directors,
pursuant to an Incentive Stock Option Plan and Agreement. As of July 2, 1995,
the former officer had exercised all options under this plan.
The following table summarizes stock option activity under the stock option
plans for the years ended December 31, 1993 and 1994, the six-month period ended
July 2, 1995 and the year ended June 30, 1996:
10
CAMBRIDGE SOUNDWORKS,INC.
NOTE 6 STOCKHOLDERS' EQUITY (Continued)
Number Exercise Price
of Shares per Share
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Outstanding, December 31, 1992 - $ -
Granted 22,244 3.36
Outstanding, December 31, 1993 22,244 3.36
Granted 101,120 8.00 - 8.02
Terminated (21,440) 6.25 - 8.00
Exercised (5,000) 3.36
- ------------------------------------------------------------------------
Outstanding, December 31, 1994 96,924 3.36 - 8.02
Granted 169,200 3.50 - 6.25
Terminated (18,320) 3.50 - 8.02
Exercised (17,244) 3.36
- ------------------------------------------------------------------------
Outstanding, July 2, 1995 230,560 3.50 - 8.02
Granted 356,780 4.00 - 6.00
Terminated (142,190) 3.50 - 8.02
Exercised (575) 3.50
- ------------------------------------------------------------------------
Outstanding June 30, 1996 444,575 $3.50 - $8.02
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Exercisable, June 30, 1996 58,135 $3.50 - $8.02
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NOTE 7 RELATED PARTIES
During fiscal 1993, the Company paid approximately $154,000 to certain
stockholders of the Company and to companies controlled by those stockholders
for consulting and other services. Management believes these services were
obtained by the Company at terms no less favorable than could have been obtained
from nonrelated parties.
NOTE 8 EMPLOYMENT AGREEMENTS
In February 1994, the Company entered into three-year employment agreements with
Henry Kloss and Thomas J. DeVesto, officers of the Company. Pursuant to the
employment agreements, Messrs. Kloss and DeVesto receive annual salaries as
determined by the Board of Directors, subject to a specified minimum amount in
the first year of the three-year period. If either agreement is terminated by
either party for any reason, the Company is required to pay to Mr. Kloss or Mr.
DeVesto a payment equal to his then annual salary, subject to a one-year
agreement not to compete. The employment agreement with Mr. Kloss was
terminated in April 1996 (see Note 9).
NOTE 9 LICENSE AND CONSULTING AGREEMENT
In February 1994, the Company entered into a license agreement with Henry Kloss,
a stockholder of the Company, whereby the Company has the right to use Mr.
Kloss's name on its products. The license agreement between the Company and Mr.
Kloss provides that the Company has the perpetual right to use his name on
products that Mr. Kloss designed or had a substantial role in designing, subject
to termination, as to any products whose appearance or performance
specifications are materially changed by the Company without Mr. Kloss's
consent. Upon the termination of Mr. Kloss's employment, the Company may not
use his name generically or in connection with a product unless the Company had
previously done so, even if Mr. Kloss designed the product while employed by the
Company. Under this agreement, the Company is not required to make any payments
to Mr. Kloss for the right to use his name.
In April 1996, the Company entered into a consulting agreement with Henry Kloss,
with respect to the selection and design by the Company of current and future
products, expiring in September 1999. Pursuant to the consulting agreement, the
employment agreement between the Company and Mr. Kloss (see Note 8) was
effectively terminated, with no additional payments due. The consulting
agreement calls for annual payments to Mr. Kloss of $330,000 plus certain fringe
benefits, as described therein, through September 1996 with annual payments
thereafter of $110,000, plus certain fringe benefits, as described therein from
September 1996 through September 1999. Mr. Kloss is also subject to certain
noncompete restrictions, as described therein.
NOTE 10 BENEFIT PLAN
During fiscal 1996, the Company adopted the Cambridge SoundWorks 401(k) Plan
(the Plan), a voluntary savings plan for all eligible employees, as defined.
The Plan is a qualified benefit plan in accordance with Section 401(k) of the
Internal Revenue Code. Under the terms of the Plan, participants may contribute
a certain percentage of their annual compensation, up to a defined maximum. The
Company may, but is not obligated to, make a matching contribution up to a
certain percentage of each participant's contribution. For the year ended June
30, 1996, the Company did not make a matching contribution to the Plan.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cambridge SoundWorks, Inc.:
We have audited the accompanying balance sheets of Cambridge SoundWorks, Inc. (a
Massachusetts corporation) as of July 2, 1995 and June 30, 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1993 and 1994, the six-month period ended July 2, 1995 and
the year ended June 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 Cambridge SoundWorks, Inc. as
of July 2, 1995 and June 30, 1996, and the results of its operations and its
cash flows for the years ended December 31, 1993 and 1994, the six-month period
ended July 2, 1995 and the year ended June 30, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 9, 1996
11
BOARD OF DIRECTORS
Thomas J. DeVesto President, Chief Executive Cambridge
Officer SoundWorks, Inc.
Thomas E. Brew, Jr. President, Chief Executive Kurzweil Applied
Officer Intelligence, Inc.
Leo Kahn Partner United Properties
Henry E. Kloss Product Development Cambridge
Consultant SoundWorks, Inc.
Peter B. Seamans Partner Peabody & Arnold
EXECUTIVE OFFICERS
Thomas J. DeVesto President, Chief Executive Officer
Wayne P. Garrett Vice President - Finance, Chief Financial Officer
Thomas J. Hannaher Vice President - Marketing
Robert S. Mainiero Vice President - Business Development
Sandy Ruby Vice President - Retail
CORPORATE INFORMATION
CORPORATE OFFICES
Cambridge SoundWorks, Inc.
311 Needham Street
Newton, MA 02164
(617) 332-5936
(617) 332-9229 Fax
LEGAL COUNSEL
Peabody & Arnold
Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
Boston, Massachusetts
TRANSFER AGENT
State Street Bank and Trust Company
Corporate Stock Department
4th Floor
2 Heritage Drive
N. Quincy, MA 02171
(617) 328-5000
INVESTOR RELATIONS
John H. Swanson
Swanson Communications, Inc.
234 5th Avenue
New York, NY 10001
(212) 683-4890
(212) 679-1184 Fax
STOCK DATA
Cambridge SoundWorks, Inc., is traded on the NASDAQ National
Market System under the symbol HIFI.
ANNUAL MEETING
The annual meeting of shareholders will be held on October 22, 1996
at 11:00 a.m. at the Company's headquarters, 311 Needham Street, Newton, MA
02164
PRESS RELEASES AND QUARTERLY RESULTS
Beginning in fiscal 1997 the Company will not be printing and mailing quarterly
reports to shareholders. Press releases including quarterly financial results
are available by fax to all shareholders immediately upon its release, free of
charge, by calling PR Newswire's Company News On Call at 1-800-758-5804 (ext.
114553) or through access on the Internet at http://www.prnewswire.com.
FORM 10-Q AND 10-K
The Company's quarterly and annual reports to the Security and Exchange
Commission are filed electronically on Form 10-Q and 10-K, respectively. These
reports can be accessed on the Internet at http://www.sec.gov or can be
obtained, free of charge, by phoning or writing to the Company or its Investor
Relations counsel .
INTERNET SITE
The Company's Internet site may be accessed at the following address:
http://www.hifi.com.
12