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 December 28, 1996 or [] Transition Report pursuant to 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 (of which 222,800 are treasury stock shares) as of February 7, 1997. - ------------------------------------------------------------------------------ Boston Acoustics, Inc. Index Page ---- Part I: Financial Information Item 1. Financial Statements Consolidated Balance Sheets (Unaudited)- March 30, 1996 and December 28, 1996 4 Consolidated Statements of Income (Unaudited)- Three months and Nine months ended December 30, 1995 and December 28, 1996 6 Consolidated Statements of Cash Flows (Unaudited)- Nine months ended December 30, 1995 and December 28, 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 December 28, 1996 -------------- ----------------- Current Assets: Cash and cash equivalents $ 4,702,299 $ 1,707,700 Short-term investments 6,678,735 3,243,480 Accounts receivable, net of allowance for doubtful accounts of approximately $307,000 and $435,000, respectively 8,401,038 11,076,157 Inventories 8,458,593 9,709,904 Deferred income taxes 730,000 730,000 Prepaid expenses 343,066 373,082 ----------- ----------- Total current assets 29,313,731 26,840,323 ----------- ----------- Property and Equipment, at cost: Land 1,433,365 1,433,365 Building and improvements 6,762,323 7,009,761 Machinery and equipment 6,344,220 7,386,522 Office equipment and furniture 1,448,950 1,626,472 Motor vehicles 373,177 373,177 ----------- ----------- 16,362,035 17,829,297 Less-accumulated depreciation and amortization 5,665,178 6,846,731 ----------- ----------- 10,696,857 10,982,566 ----------- ----------- Other Assets: Long-term investment securities, at cost 2,305,992 1,391,578 Other assets, net 807,012 2,650,288 ----------- ----------- Total other assets 3,113,004 4,041,866 ----------- ----------- $43,123,592 $41,864,755 ----------- ----------- 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 December 28, 1996 -------------- ----------------- Current Liabilities: Accounts payable $ 1,167,933 $ 1,607,850 Accrued payroll and payroll- related expenses 1,078,186 961,849 Dividend payable 551,088 523,238 Other accrued expenses 350,031 506,356 Accrued income taxes 83,617 7,474 ----------- ----------- Total current liabilities 3,230,855 3,606,767 ----------- ----------- Commitments Shareholders' Equity: Common stock, $.01 par value Authorized -- 6,000,000 shares Issued -- 4,602,621 at March 30, 1996 and December 28, 1996 46,026 46,026 Additional paid-in capital 4,966,918 4,966,918 Retained earnings 34,963,583 37,677,559 ----------- ----------- 39,976,527 42,690,503 Less-Treasury stock, 193,920 shares, at March 30, 1996 and 416,720 shares at December 28, 1996, at cost 83,790 4,432,515 ----------- ----------- Total shareholders' equity 39,892,737 38,257,988 ----------- ----------- $43,123,592 $41,864,755 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 5 Boston Acoustics, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended Nine Months Ended ------------------ ----------------- December 30, December 28, December 30, December 28, 1995 1996 1995 1996 (14 weeks) (13 weeks) (40 weeks) (39 weeks) ----------- ----------- ----------- ----------- Net sales $13,557,816 $14,778,732 $35,067,551 $38,029,777 Cost of goods sold 7,751,217 8,320,461 19,839,044 21,769,652 ----------- ----------- ----------- ----------- Gross profit 5,806,599 6,458,271 15,228,507 16,260,125 ----------- ----------- ----------- ----------- Selling and marketing expenses 1,558,890 2,078,761 4,281,533 5,438,066 General and administrative expenses 657,247 892,384 1,777,087 2,204,394 Engineering and development expenses 647,828 807,389 1,811,542 2,309,532 ----------- ----------- ----------- ----------- Total expenses 2,863,965 3,778,534 7,870,162 9,951,992 ----------- ----------- ----------- ----------- Income from operations 2,942,634 2,679,737 7,358,345 6,308,133 Interest income 207,449 82,984 604,199 335,155 ----------- ----------- ----------- ----------- Income before provision for income taxes 3,150,083 2,762,721 7,962,544 6,643,288 Provision for income taxes 1,030,000 968,000 2,588,000 2,326,000 ----------- ----------- ----------- ----------- Net income $ 2,120,083 $ 1,794,721 $ 5,374,544 $ 4,317,288 ----------- ----------- ----------- ----------- Net income per common share $ .49 $ .42 $ 1.24 $ 1.00 ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding 4,345,166 4,241,914 4,332,885 4,317,965 ----------- ----------- ----------- ----------- Dividends per share $ .125 $ .125 $ .375 $ .375 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 6 Boston Acoustics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended ----------------- December 30, 1995 December 28, 1996 ----------------- ----------------- Cash flows from operating activities: Net income $ 5,374,544 $ 4,317,288 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 745,820 1,263,622 Changes in assets and liabilities, net of acquisition of Snell Acoustics- Accounts receivable (1,281,866) (2,322,165) Inventories (193,391) (709,194) Prepaid expenses (48,498) 82,284 Accounts payable 292,299 214,244 Accrued expenses (21,863) (224,644) Accrued income taxes (270,125) (76,143) ----------- ----------- Net cash provided by operating activities 4,596,920 2,545,292 ----------- ----------- Cash flows from investing activities: Acquisition of Snell Acoustics --- (2,615,675) Purchase of property and equipment, net (6,257,852) (1,238,996) Purchase of investments (2,207,145) (2,013,980) Proceeds from sale and maturity of investments 6,118,821 6,363,649 Increase in other assets (26,371) (55,001) ----------- ----------- Net cash used in investing activities (2,372,547) 439,997 ----------- ----------- Cash flows from financing activities: Dividends paid (1,622,827) (1,631,163) Purchase of common stock for treasury --- (4,348,725) Exercise of stock options 234,426 --- ----------- ----------- Net cash used in financing activities (1,388,401) (5,979,888) ----------- ----------- Increase (decrease) in cash and cash equivalents 835,972 (2,994,599) Cash and cash equivalents, beginning of period 3,570,790 4,702,299 ----------- ----------- Cash and cash equivalents, end of period $ 4,406,762 $ 1,707,700 ----------- ----------- Items not affecting cash flows: Dividends payable $ 546,617 $ 523,238 ----------- ----------- Supplemental Disclosure: Cash paid for income taxes $ 2,858,125 $ 2,378,320 ----------- ----------- 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 and nine-month periods ended December 28, 1996 are not necessarily indicative of results to be expected for the full fiscal year. (2) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following: March 30, 1996 December 28, 1996 -------------- ----------------- Raw materials and work-in process $ 4,518,656 $ 7,017,153 Finished goods 3,939,937 2,692,751 ------------ ----------- $ 8,458,593 $ 9,709,904 ------------ ----------- 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 and nine-month periods ended December 30, 1995 and December 28, 1996 expressed as percentages of net sales. Three Months Ended Nine Months Ended ------------------ ----------------- December 30, December 28, December 30, December 28, 1995 1996 1995 1996 (14 weeks) (13 weeks) (40 weeks) (39 weeks) ----------- ----------- ------------ ------------ Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold 57.2 56.3 56.6 57.2 ----- ----- ----- ----- Gross profit 42.8 43.7 43.4 42.8 ----- ----- ----- ----- Selling and marketing expenses 11.5 14.1 12.2 14.3 General & administrative expenses 4.8 6.0 5.1 5.8 Engineering & development expenses 4.8 5.5 5.1 6.1 ----- ----- ----- ----- 21.1 25.6 22.4 26.2 ----- ----- ----- ----- Income from operations 21.7 18.1 21.0 16.6 Interest income 1.5 0.6 1.7 0.9 ----- ----- ----- ----- Income before provision for income taxes 23.2 18.7 22.7 17.5 Provision for income taxes 7.6 6.6 7.4 6.1 ----- ----- ----- ----- Net income 15.6 % 12.1 % 15.3 % 11.4 % ----- ----- ----- ----- Net sales increased 9 percent, from approximately $13,558,000 during the third quarter of fiscal 1996 to approximately $14,779,000 during the third quarter of fiscal 1997. For the nine months ended December 28, 1996 net sales increased 8% from approximately $35,068,000 to approximately $38,030,000. The results for the three-month period ended December 28, 1996 represents 13 weeks of sales and earnings compared to 14 weeks for the same period a year ago. During the quarter, the Company completed its introduction of the new Micro Reference (MR) category of products. The models include the MR80 and MR90 3-piece systems with suggested retails of $400 and $800, respectively and the MR90t 4-piece theater system with a suggested retail of $1,000. 9 The Company's gross margin for the three-month period ended December 28, 1996 increased as a percentage of net sales due primarily to a shift in the sales mix to loudspeaker models with slightly higher margins, as well as elimination of costs associated with additional offsite warehousing in fiscal 1996. The gross margin for the nine-month period ended December 28, 1996 decreased as a percentage of net sales due to production inefficiencies associated with new product introductions and increased freight costs associated with raw material purchases. Total operating expenses increased as a percentage of net sales during both the three-month and six-month periods ended December 28, 1996 as compared to the corresponding periods in fiscal 1996. Selling and marketing expenses have increased as a percentage of net sales primarily due to increased advertising and literature expenditures as compared to the corresponding three-month and nine-month periods in the preceding fiscal year. General and administrative expenses have increased as a percentage of net sales due primarily to costs associated with the acquisition of the business of Snell Acoustics, Inc. and related amortization of the goodwill recorded. Engineering and development expenses as a percentage of net sales have increased primarily due to increased salaries and benefits relating to additional 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 and nine-month periods ended December 28, 1996 because of the utilization of certain investments for the construction of the Company's new facility during fiscal 1996, the repurchase of 222,800 shares of the Company's common stock under its Common Stock Repurchase Program during fiscal 1997, and the acquisition of the business of Snell Acoustics. The Company's effective income tax rate increased from 32.7% for the three-month period ended December 30, 1995 and 32.5% for the nine-month period ended December 30, 1995 to approximately 35% for both the three-month and nine-month periods ended December 28, 1996, primarily as a result of non-recurring tax credits realized in fiscal 1996 in connection with capital expenditures. Net income for the third quarter decreased 15%, from approximately $2,120,000 in fiscal 1996 to $1,795,000 in fiscal 1997 while earnings per share decreased 14% from $.49 to $.42 per share. Net income for the nine-month period ended December 28, 1996 decreased 20% from approximately $5,375,000 in fiscal 1996 to approximately $4,317,000 in fiscal 1997, while earnings per share for the nine-month period decreased 19% from $1.24 per share to $1.00 per share. Liquidity and Capital Resources During the first nine months of fiscal 1997, the Company financed its growth with cash generated by operations. As of December 28, 1996 the Company's working capital was approximately $23,234,000. The Company's cash and cash equivalents were approximately $1,708,000, short-term investments were approximately $3,243,000, and long-term investments were approximately $1,392,000. 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 December 28, 1996. 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: February 7, 1997 By: s/Andrew G. Kotsatos -------------------- Andrew G. Kotsatos Director, Chief Executive Officer and Treasurer Date: February 7, 1997 By: s/Debra A. Ricker-Rosato ------------------------ Debra A. Ricker-Rosato Vice President, Chief Accounting Officer 12 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: February 7, 1997 By: ______________________________ Andrew G. Kotsatos Director, Chief Executive Officer and Treasurer Date: February 7, 1997 By: ___________________________ Debra A. Ricker-Rosato Vice President, Chief Accounting Officer 12