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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the transition period from to
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COMMISSION FILE NO. 0-23456
CAMBRIDGE SOUNDWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2998824
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
311 NEEDHAM STREET
NEWTON, MASSACHUSETTS 02164
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 332-5936
(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 [ ]
As of May 12, 1997 there were issued and outstanding 3,803,027 shares of the
Company's Common Stock.
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CAMBRIDGE SOUNDWORKS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets
June 30, 1996 and March 30, 1997 3
Statements of Operations
Three and Nine Months Ended March 31, 1996
and March 30, 1997 4
Statements of Cash Flows
Nine Months Ended March 31, 1996 and March 30, 1997 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 13
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CAMBRIDGE SOUNDWORKS, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
June 30, 1996 March 30, 1997
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CURRENT ASSETS:
Cash $ 87,421 $ 660,284
Accounts receivable, net 2,431,670 2,251,238
Inventories 11,405,352 13,792,619
Prepaid expenses 757,247 1,167,265
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Total Current Assets 14,681,690 17,871,406
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PROPERTY AND EQUIPMENT, AT COST:
Production equipment and tooling 407,925 578,964
Office equipment and furniture 1,148,610 1,319,934
Leasehold improvements 2,544,495 4,174,560
Motor vehicles 180,290 232,748
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4,281,320 6,306,206
Less-Accumulated depreciation and amortization 1,135,478 1,951,162
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3,145,842 4,355,044
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OTHER ASSETS 302,880 121,856
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Total Assets $ 18,130,412 $ 22,348,306
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under line of credit $ 3,395,557 $ -
Accounts payable 2,123,773 3,473,172
Accrued expenses 979,689 1,126,728
Customer prepayments and other current liabilities 270,707 1,292,672
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Total Current Liabilities 6,769,726 5,892,572
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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 - 2,889,399 at June 30, 1996
and 3,801,693 at March 30, 1997 10,346,710 14,979,604
Retained earnings 1,013,976 1,476,130
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Total Stockholders' Equity 11,360,686 16,455,734
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Total Liabilities and Stockholders' Equity $18,130,412 $22,348,306
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The accompanying notes are an integral part of these financial statements.
3
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF OPERATIONS
(Unauditied)
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 30, March 31, March 30,
--------- --------- --------- ---------
1996 1997 1996 1997
---- ---- ---- ----
NET SALES $10,939,693 $13,328,197 $33,303,958 $42,533,140
COST OF GOODS SOLD 6,579,081 8,071,544 19,600,745 25,408,904
----------- ----------- ----------- -----------
Gross profit 4,360,612 5,256,653 13,703,213 17,124,236
----------- ----------- ----------- -----------
SALES AND MARKETING EXPENSES 3,583,358 4,571,932 11,060,312 14,057,154
GENERAL AND ADMINISTRATIVE EXPENSES 491,252 517,297 1,472,097 1,660,480
ENGINEERING AND DEVELOPMENT EXPENSES 186,573 106,111 500,062 444,431
----------- ----------- ----------- -----------
Total expenses 4,261,183 5,195,340 13,032,471 16,162,065
----------- ----------- ----------- -----------
Income from operations 99,429 61,313 670,742 962,171
INTEREST EXPENSE, net -72,962 -25,877 -230,892 -192,017
----------- ----------- ----------- -----------
Income before provision for income taxes 26,467 35,436 439,850 770,154
PROVISION FOR INCOME TAXES 10,500 14,000 175,500 308,000
----------- ----------- ----------- -----------
Net income $ 15,967 $ 21,436 $ 264,350 $ 462,154
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NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .01 $ .01 $ .09 $ .15
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 2,913,322 3,259,422 2,932,790 3,043,496
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
4
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------
March 31, 1996 March 30, 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 264,350 $ 462,154
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 511,864 815,684
Changes in current assets and liabilities:
Accounts receivable (897,272) 180,432
Income tax refund receivable 380,928 -
Inventories (1,692,355) (2,387,267)
Prepaid expenses (90,222) (410,018)
Preopening expenses 157,605 -
Accounts payable (1,093,916) 1,349,399
Accrued expenses 481,062 147,039
Customer prepayments and other current liabilities 175,385 1,021,965
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Net cash (used in) provided by operating activities (1,802,571) 1,179,388
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,034,319) (2,024,886)
Increase in other assets (33,508) 181,024
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Net cash used in investing activities (1,067,827) (1,843,862)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit - bank, net 2,995,604 (3,395,557)
Proceeds from issuance of debt, net 15,184 -
Exercise of stock options 2,013 -
Proceeds from equity issuance, net - 4,632,894
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Net cash provided by financing activities 3,012,801 1,237,337
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NET INCREASE IN CASH 142,403 572,863
CASH, BEGINNING OF PERIOD 16,885 87,421
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CASH, END OF PERIOD $ 159,288 $ 660,284
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 4,000 $ 66,100
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Interest $ 204,821 $ 216,453
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The accompanying notes are an integral part of these financial statements.
5
CAMBRIDGE SOUNDWORKS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared by
Cambridge SoundWorks, Inc. (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 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 months
ended March 30, 1997 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:
JUNE 30, 1996 MARCH 30, 1997
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Raw materials and work-in-process $ 3,823,302 $ 4,276,360
Finished goods 7,582,050 9,516,259
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$11,405,352 $13,792,619
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Inventories consists of materials, labor and manufacturing overhead.
(3) LINE OF CREDIT
On March 1, 1997, an amendment to the Company's demand discretionary line of
credit decreased the interest rate to the bank's base rate plus one-quarter of
one percent. Borrowings under the demand discretionary line of credit are based
upon certain percentages of eligible account receivable and inventory, as
defined. The line of credit is secured by all assets of the company, with
interest payable at the bank's base rate (8.5% at March 30, 1997), plus 1/4%.
The amounts outstanding at June 30, 1996 was $3,396,000 and there were no
amounts outstanding at March 30, 1997.
(4) SIGNIFICANT CUSTOMER
During the nine months ended March 30, 1997, the Company had one customer that
accounted for approximately 11% of net sales. No customer accounted for more
than 10% of net sales during the three months ended March 30, 1997. Sales to
one customer during the three and nine months ended March 31, 1996 accounted
for 16% and 21% , respectively.
(5) STOCK OPTIONS
On January 14, 1997, the Company granted incentive stock options, under the
Company's 1993 Stock Option Plan, to certain employees to purchase 164,720 share
of common stock at an exercise price of $3.75 per share. These options vest
over a period of two years. At March 30, 1997, 620,000 shares have been
authorized for grant, 581,166 are issued and outstanding, and 1,909 have been
exercised.
6
(6) ACCOUNTING PRONOUNCEMENTS
In October 1995, the Final Accounting Standards Board 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 the financial statements. The
Company is required to adopt SFAS No. 123 in fiscal 1997 and 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 financial
statements using the fair-value based method beginning in the year ending June
29, 1997 with comparable disclosures for the year ended June 30, 1996. The
Company has not determined the impact of these pro forma adjustments.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share" which establishes new standards for calculating and
presenting earning per share. The standard is effective for financial
statements for periods ending after December 15, 1997, with earlier application
not permitted. The Company will adopt this new standard in its 1998 financial
statements, which will require the reporting of diluted earnings per share and
basic earnings per share. For the three months and nine months ended March 31,
1997 and March 31, 1996, diluted earnings per share would have been $.01, $.15,
$.01 and $.09, respectively. Basic earnings per share would have been $.01,
$.15, $.01, $.09 respectively, for the same periods.
(7) COMMON STOCK
The Company entered into a Common Stock and Warrant Purchase Agreement dated
February 20, 1997 with Creative Technology Ltd., a Singapore corporation.
Pursuant to the terms of the agreement, the Company sold and issued to Creative
Technology Ltd., 912,294 shares of Common Stock of the Company at a purchase
price of $5.25 per share and a warrant to purchase 257,314 shares of common
stock of the Company at an exercise price of $6.00 per share. The warrants vest
over certain periods as defined and expire on February 28, 2001. Net proceeds
to the Company were $4,632,894.
7
ITEM 2. 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 and nine
month periods ended March 31, 1996 and March 30, 1997 expressed as percentages
of net sales.
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 30, March 31, March 30,
--------- --------- --------- ---------
1996 1997 1996 1997
---- ---- ---- ----
NET SALES 100.0 % 100.0 % 100.0 % 100.0 %
COST OF GOODS SOLD 60.1 60.5 58.9 59.7
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Gross profit 39.9 39.5 41.1 40.3
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SALES AND MARKETING EXPENSES 32.8 34.3 33.2 33.0
GENERAL AND ADMINISTRATIVE EXPENSES 4.5 3.9 4.4 3.9
ENGINEERING AND DEVELOPMENT EXPENSES 1.7 0.8 1.5 1.1
------ ------ ------ ------
Total expenses 39.0 39.0 39.1 38.0
------ ------ ------ ------
Income from operations 0.9 0.5 2.0 2.3
INTEREST EXPENSE, net (0.7) (0.2) (0.7) (0.5)
------ ------ ------ ------
Income before provision for income taxes 0.2 0.3 1.3 1.8
PROVISION FOR INCOME TAXES 0.1 0.1 0.5 0.7
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Net income 0.0 % 0.2 % 0.8 % 1.1 %
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8
NET SALES
Net sales for the third quarter of 1996 increased from approximately $11.0
million to $13.3 million for the three months ended March 30, 1997. Net sales
for the nine months ended March 30, 1997 increased to $42.5 million from $33.3
million during the same period in 1996. The increase in net sales was primarily
attributable to the 47% increase in retail sales over the same period in 1996.
Same store sales increased 17% over last year's third quarter. The Company had
twenty-seven retail stores open during the three months ended March 30, 1997
compared to twenty three during the three months ended March 31, 1996. Catalog
sales for both the three and nine month periods ended March 30, 1997 decreased
due, in part, to shifts in sales to the Company's new retail stores and through
the Company's wholesale customers. Wholesale sales decreased, due largely to a
decrease in shipments to the Company's largest customer. The Company expects
continued decreases in its sales to its largest wholesale customer. In February
1997, the Company entered into an agreement with Creative Labs, Inc., the
world's largest manufacturer of soundcards, whereby Creative Technologies Ltd.,
(Creative Lab's Parent Company) acquired an approximate 20% interest in
Cambridge SoundWorks, Inc. and Creative Labs was appointed as the exclusive
distributor of the Company's multi-media products. The decrease in wholesale
sales was significantly offset by initial sales to one of the world's largest
personal computer manufacturers and to Creative Labs, Inc.
GROSS PROFIT
Gross profit as a percentage of net sales decreased from 39.9% during the three
months ended March 31, 1996 to 39.5% during the three months ended March 30,
1997. Gross profit for the nine month period ended March 31, 1996 was 41.1%
compared to 40.3% in for the same nine month period in 1997. The decrease in
gross margin for both the three and nine month period was due primarily to
increases in retail store sales which have lower overall margins than the
Company's catalog sales.
EXPENSES
Sales and marketing expenses for the three months ended March 31, 1996 increased
from $3.6 million (32.8% of net sales) to $4.6 million (34.3% of net sales) for
the three months ended March 30, 1997. Sales and marketing expenses for the
nine months ended March 30, 1997 increased from $11.0 million (33.2% of net
sales) to $14.1 million (33.0% of net sales) for the nine months ended March 30,
1997. The hiring of retail store personnel, increased advertising expense, and
retail store operating costs accounted for a substantial portion of the increase
in sales and marketing expense.
General and administrative expenses for the three months ended March 31, 1996
increased from $491,000 (4.5% of net sales) to $517,000 (3.9% of net sales)
for the three months ended March 30, 1997. General and administrative expenses
for the nine months ended March 30, 1997 increased from $1,472,000 (4.4% of net
sales) to $1,660,000 (3.9% of net sales) during the nine months ended March 30,
1997. General and administrative expenses have remained relatively consistent
in absolute dollars during both the three and nine month periods due to the
Company's ability to increase sales with a minimal increase to expenses.
INTEREST EXPENSE, NET
Interest expense of $73,000 and $26,000 for the three months ended in 1996 and
1997, respectively, and $231,000 and $192,000 for the nine months ended 1996
and 1997, respectively, results from the Company's use of its line of credit.
9
PROVISION FOR INCOME TAXES
The Company's effective income tax rate for the three and nine months ended was
March 31, 1996 and March 30, 1997 was 40%.
LIQUIDITY AND CAPITAL RESOURCES
As of March 30, 1997, the Company's working capital was approximately
$11,979,000 compared to $7,912,000 as of June 30, 1996. Cash amounted to
$660,000 as of March 30, 1997 compared to $87,000 as of June 30, 1996.
The Company entered into a common stock and warrant agreement dated February 20,
1997 with Creative Technology Ltd. Pursuant to the terms of this agreement, the
Company sold 912,294 shares of common stock at a purchase price of $5.25 per
share which resulted in $4,632,894 of net proceeds to the Company.
On March 1, 1997, an amendment to the Company's demand discretionary line of
credit decreased the interest rate to the bank's base rate plus one quarter of
one percent. Borrowings under the demand discretionary line of credit are based
upon certain percentages of eligible accounts receivable and inventory, as
defined. The line of credit is secured by all assets of the company, with
interest payable at the bank's base rate (8.5% at March 30, 1997), plus 1/4%.
The amount outstanding at June 30, 1996 was $3,396,000 and there were no
amounts outstanding at March 30, 1997. The Company has approximately $6,179,000
in excess availability on the line of credit at March 30, 1997. The Company
believes that its resources are adequate to fund its operations through the end
of 1997.
10
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION
The Company entered into a Common Stock and Warrant Purchase Agreement
dated as of February 20, 1997 (the "Purchase Agreement") with Creative
Technology Ltd., a Singapore corporation. Pursuant to the terms of the
"Purchase Agreement", the Company sold and issued to Creative Technology Ltd and
Creative Technology Ltd. purchased from the Company (I) 912,294 shares of Common
Stock of the Company at a purchase price of $5.25 per share, and (ii) a warrant
to purchase 257,314 shares of Common Stock of the Company at a purchase price of
$1,000 in the aggregate.
In connection with the Closing under the Purchase Agreement, the Company
and Creative Technology Ltd. entered into an Exclusive Distribution Agreement
dated as of February 20, 1997 (the "Distribution Agreement"). Under the terms
of the Distribution Agreement, the Company granted to Creative Technology Ltd.
and its Affiliates (as defined in the Distribution Agreement) an exclusive,
worldwide royalty-free right and license, with a right to sublicense (solely as
necessary to exercise its rights under the Distribution Agreement) to use, sell,
distribute, market, import, export, perform, transmit, and have used, sold,
distributed, marketed, imported, exported, performed and transmitted all current
and future speakers and speaker systems developed by or for the Company,
including, but not limited to, those products currently marketed by the Company
as MicroWorks-TM-, and PCWorks-TM- together with user manuals, training manuals
and other documentation provided by the Company in support of such products in
the Distribution Markets. Distribution Markets shall mean all distribution
channels, consumer markets, retail markets and all other markets, except: (I)
existing or future Company wholly owned or franchised Company retail
storefronts; (ii) Company wholly owned catalog sales distribution channels; and
(iii) existing or future Company wholly owned and operated Internet sites,
provided, however, the Company cannot distribute to users accessing the
Company's Internet site via any third party Internet site.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
10.39* Common Stock and Warrant Purchase Agreement dated
as of February 20, 1997 by and between the Company
and Creative Technology Ltd.
10.40* Common Stock Purchase arrant dated February 28,
1997 naming Creative Technology Ltd. as Registered
Holder.
10.41 Investor Rights Agreement dated as of February 28,
1997 by and among the Company and Creative
Technology Ltd.
27 Financial data Schedule
10.42* Exclusive Distribution Agreement dated as of
February 28, 1997 by and between the Company and
Creative Technology Ltd.
*Indicates that portions of the exhibit have been omitted pursuant to a request
for confidential treatment.
b.) Reports on Form 8-K
The Company did not file any reports on Form 8-K
during the quarter ended March 30, 1997.
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 as both Vice President - Finance and Chief
Financial Officer (Principal Financial Officer and Principal Accounting Officer)
of the Registrant.
CAMBRIDGE SOUNDWORKS, INC.
--------------------------
(Registrant)
DATE: MAY 12, 1997 BY:
----------------------------------
Wayne P. Garrett
Vice President-Finance and
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)