Exhibit 13
ANNUAL REPORT 1997
CAMBRIDGE SOUNDWORKS, INC.
To Our Stockholders:
Fiscal 1997 was a year of record sales for Cambridge SoundWorks. Our sales
increase of 18% came in part because we added new stores, relocated existing
stores and instituted an aggressive plan that resulted in significant "comp
store" sales increases. Other initiatives in our ongoing program to expand
sales included our sales of an OEM powered subwoofer to IBM. 1997 was also an
outstanding year for new product introductions, with seven new speaker models
introduced at a New York press conference in April 1997. With these new
models, in conjunction with our existing lines, Cambridge SoundWorks now
covers all the major segments of the home hi fi, multimedia and car stereo
speaker markets.
We also plan to greatly expand our production facilities by opening a
manufacturing factory in China. This high-volume factory will allow us to
deliver very large quantities of our multimedia speakers and other products.
1997 also marked the beginning of a very important new partnership with
Creative Technology Ltd., the creators of Sound Blaster-Registered Trademark-
sound cards and the world's leading manufacturer of multimedia computer
products.
Record Sales.
Net sales for Fiscal 1997 increased 18% to $51.3 million compared to $43.6
million for the same 12 month period last year.
New Stores, 15.3% "Comp Store" Sales Increase.
In Fiscal 1997, we opened five new Factory-Direct stores, and relocated four
stores. We opened new Factory-Direct stores in the Westfarms Mall in
Farmington, 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. Relocated stores 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
Shopping Center in Peabody, MA; and the Burlington, MA stand-alone store
moving to the Burlington Mall, Burlington, MA. These store relocations, and
an aggressive retail and direct response promotional program during the
holiday selling season, combined to result in a same-store sales increase of
15.3% for 1997 versus 1996. In addition, we recently opened a new store in
The Village at Corte Madera in Marin County, California.
Our store strategy is based on the success of Cambridge SoundWorks' current
mall and high-traffic locations. These stores focus on home stereo, car
stereo, home theater and multimedia products, presenting them in a simple,
uncluttered layout that emphasizes both the quality of the products as well
as Factory-Direct savings.
New Products.
At an April 1997 press conference in New York, we introduced seven new
products, including one that we feel will have a significant impact on the
Company, as well as the multimedia speaker industry -- PCWorksL. A compact,
amplified subwoofer/satellite speaker system, PCWorks is the most affordable
product we (or, we believe, any company) has ever offered that reproduces
true high-performance, wide-range sound, including outstanding bass response.
Priced at $99.99, complete with speaker stands and an in-line remote volume
control, PCWorks should open new markets to the Company, especially in light
of our new distribution agreement with Creative Technology Ltd.
[ART]
Our new MovieWorks 5.1 system with MultiPole surround speakers.
We also introduced new surround sound speaker products in April of '97. The
Surround-Registered Trademark- 5.1 and The Surround II 5.1 are the first
speakers using our new MultiPoleL technology that allows the user to switch
between "dipole" and "bipole" operation. This flexibility makes the two
speaker models the ideal choice for use in the surround channels of home
theater systems that employ Dolby Digital-Registered Trademark- 5.1
technology. MovieWorksL 5.1 is a complete high-performance surround sound
speaker package that includes shielded main speakers, a high-output center
speaker, a high-performance powered subwoofer, and The Surround 5.1 surround
speakers. We also introduced MovieWorks IV, an affordable surround sound
speaker system suitable for use in home theater systems or with multimedia
computers. Our first car stereo speaker models, the CS5 and FS502, were also
introduced. We expect significant revenue contributions from these new
products in Fiscal 1998.
CAMBRIDGE SOUNDWORKS, INC.
IBM Subwoofer.
In Fiscal 1997 we contracted with IBM to design and manufacture a powered
subwoofer for use with their Aptiva S series of multimedia computers. This
was the result of our ongoing program to pursue OEM business in the
multimedia computer field.
New Factory In China.
In order to meet the growing demand for our multimedia speakers and other
products, we plan to open a high-capacity production facility in the
Guangdong Province of China in January of 1998. This new facility will be
capable of high-volume, low-overhead production that will allow us to compete
in the field of multimedia computer products. They will also allow us to
reduce costs of certain of our existing home stereo, car stereo and home
theater products.
Partnership With Creative Technology Ltd.
In February 1997, Cambridge SoundWorks agreed to sell approximately 20% of
the Company to Creative Technology Ltd. of Singapore. As a result of Creative
Technology's investment, Cambridge SoundWorks is creating a complete line of
multimedia speakers, and they have become the exclusive worldwide distributor
of all Cambridge SoundWorks multimedia speakers.
Creative Technology is the world's leading producer of advanced multimedia
products and peripherals for personal computers. Its Sound Blaster-Registered
Trademark- audio card which allows a personal computer to generate sound, is
installed in nearly 30 million computers, or 75 percent of the PC audio
systems in the world, and is carried in more than 40,000 retail outlets
worldwide.
Cambridge SoundWorks has created two complete lines of speakers:
- - The Creative-Registered Trademark- line consists of affordable, high-value
desktop speakers.
- - The Cambridge SoundWorks line consists of high-performance bi-amplified
subwoofer/satellite speaker systems, including PCWorks, SoundWorks and
MicroWorks.
The two companies will also work together to create other innovative products
for multimedia, to be manufactured by Cambridge SoundWorks.
American Express Catalog.
In Fiscal 1997, the Company entered into an agreement with the American
Express company, wherein Cambridge SoundWorks speakers and systems would be
included in catalogs mailed to American Express card holders. The first
catalogs were mailed in early Fiscal 1998.
Critical Reviews.
The Company's products continue to attract the favorable attention of the
industry's critics. A small sampling:
- - Boot magazine described our PCWorks speaker system, "...pure acoustic
heaven...delivering some of the cleanest sounds you can get for less than 100
bucks. You'll be hard pressed to find a better set of speakers for twice the
price."
- - Computer Gaming World magazine describes PCWorks saying, "...a speaker
system for $100 that should make some $250 systems nervous...Cambridge has
created what may be the shape of things to come. A set of speakers for your
PC that will more than fill the bill, and not crimp your budget."
- - PC magazine says about our MicroWorks system, "The only speakers you'll
ever need. The line between quality sound-system speakers and PC multimedia
speakers is about to vanish thanks to the MicroWorks system from Cambridge
SoundWorks. These speakers are equally at home as high-end PC speakers or as
room-filling stereo speakers....If you're looking for excellent sound at a
good price, the MicroWorks is worth looking at and listening to."
- - PC World says about MicroWorks, "The first time I heard the heavy- duty
sounds pumped out by the MicroWorks speakers, I assumed they were powered by
testosterone rather than electricity...I haven't heard better speakers at
this price."
- - Stereo Review magazine describes our Tower II speaker system by saying,
"Excellent...first-rate...gut-wrenching bass...the price is right."
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. As we enter Fiscal 1998,
we are looking forward to continued growth.
BEST REGARDS,
Thomas J. DeVesto
President, CEO
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
INCOME STATEMENT DATA: YEAR ENDED ENDED 7/2/95 YEAR ENDED YEAR ENDED
(IN THOUSANDS EXCEPT PER SHARE DATA) 12/31/94 7/2/95 (UNAUDITED) 6/30/96 6/29/97
- ------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net sales........................................ $ 19,432 $ 15,015 $ 26,928 $ 43,585 $ 51,285
Cost of goods sold............................... 10,133 8,697 15,043 25,872 30,965
----------- ----------- ----------- ----------- -----------
Gross profit................................... 9,299 6,318 11,885 17,713 20,320
----------- ----------- ----------- ----------- -----------
Sales and marketing expenses..................... 6,890 5,830 10,406 14,254 18,320
General and administrative expenses.............. 1,617 1,182 2,197 2,062 2,218
Engineering and development expenses............. 669 404 761 679 587
Total expenses................................. 9,176 7,416 13,364 16,995 21,125
----------- ----------- ----------- ----------- -----------
Income (loss) from operations.................. 123 (1,098) (1,479) 718 (805)
Interest income (expense), net................... 182 10 150 (301) (220)
----------- ----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for
taxes........................................ 305 (1,088) (1,329) 417 (1,025)
Provision (benefit) for income taxes............. 98 (435) (558) 167 (410)
----------- ----------- ----------- ----------- -----------
Net income (loss).............................. $ 207 $ (653) $ (771) $ 250 (615)
----------- ----------- ----------- ----------- -----------
Net income (loss) per common and common
equivalent share............................. $ .08 $ (.23) $ (.27) $ .09 $ (.19)
----------- ----------- ----------- ----------- -----------
Weighed average number of common and common
equivalent shares outstanding.................. 2,461 2,873 2,870 2,922 3,194
Dividends per common share....................... -- -- -- -- --
Balance Sheet Data:
Working capital................................ $ 9,539 $ 8,363 $ 8,363 $ 7,912 $ 11,079
Total Assets................................... 15,947 15,029 15,029 18,130 21,098
Total Stockholders' Equity..................... 11,703 11,108 11,108 11,361 15,384
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
Fiscal 1997 High Low
- ---------------------------------------------------------------------------------------------------
First Quarter............................................................. $ 4.75 $ 3.25
Second Quarter............................................................ $ 7.125 $ 3.375
Third Quarter............................................................. $ 5.875 $ 3.375
Fourth Quarter............................................................ $ 5.50 $ 4.625
On September 12, 1997, there were 73 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 SIX MONTHS YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED ENDED
1994 7/2/95 7/2/95 6/30/96 6/29/97
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 52.1 57.9 55.9 59.4 60.4
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit.............................................. 47.9 42.1 44.1 40.6 39.6
- ----------------------------------------------------------------------------------------------------------------------------------
Sales and marketing expenses................................ 35.5 38.8 38.6 32.7 35.7
General and administrative expenses......................... 8.3 7.9 8.2 4.7 4.3
Engineering and development expenses........................ 3.5 2.7 2.8 1.6 1.2
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses............................................ 47.3 49.4 49.6 39.0 41.2
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations............................. .6 (7.3) (5.5) 1.6 (1.6)
Interest income (expense), net.............................. 1.0 0.0 .6 (.6) (.4)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income taxes. 1.6 (7.3) (4.9) 1.0 (2.0)
Provision (benefit) for income taxes........................ .5 (2.9) (2.1) .4 (.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss)......................................... 1.1% (4.4)% (2.8% .6% (1.2)%
Year Ended June 29, 1997 Compared with Year Ended June 30, 1996
Net sales for the twelve month period increased from $43.6 million in 1996 to
$51.3 million in 1997, an increase of 18%. The increase in net sales was due
primarily to the 45% increase in retail store sales. The Company continued
its strategy of retail expansion by adding five new stores during 1997, three
in New England and two in Northern California. The Company relocated four
other retail stores to high traffic mall locations and closed two retail
stores in Northern California in 1997. The Company had 26 retail stores at
June 29, 1997, 18 in New England and eight in Northern California. Wholesale
sales decreased 23% due to sales inactivity with Best Buy Co. Inc. (Best
Buy). During 1997, the Company entered into an agreement with Creative
Technology, Ltd. and began shipments under this agreement late in the fourth
quarter of 1997. Catalog sales decreased, due in part to shifts in sales to
the Company's retail stores.
Retail, catalog and wholesale sales accounted for 69%, 12% and 19% of net
sales for the year ended June 29, 1997, respectively. For the year ended June
30, 1996, retail, catalog and wholesale sales accounted for 55%, 16% and 29%
of net sales, respectively. Sales of products manufactured by the Company
accounted for 61%, and sales of stereo components manufactured by other
companies accounted for 39% of net sales for the year ended June 29, 1997.
For the year ended June 30, 1996, 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. The increase in sales of
stereo components manufactured by other companies increased as a percentage
of sales due primarily to the decrease in wholesale sales during 1997.
The Company's gross margin decreased from 40.6% for the year ended June 30,
1996, to 39.6% for the year ended June 29, 1997. The increase in retail store
sales, which have lower overall margins than catalog sales, and retail
pricing competition particularly with stereo components manufactured by other
companies, 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 $14.3 million for the year ended
June 30, 1996 (32.7% of net sales) to $18.3 million (35.7% of net sales) for
the year ended June 29, 1997. The hiring of additional retail store
personnel, and increased advertising and retail store operating costs,
accounted for a substantial portion of the increase. General and
administrative expenses for the year increased from $2.1 million (4.7% of net
sales) in 1996 to $2.2 million (4.3% of net sales) in 1997. Engineering and
development expenses for the year decreased from $680,000 (1.6% of net sales)
in 1996 to $587,000 (1.2% of net sales) in 1997.
Interest expense of $220,000 and $301,000 for the years ended June 29, 1997
and June 30, 1996 results from the Company's use of its line of credit.
The Company's effective income tax rate for the years ended June 29, 1997 and
June 30, 1996 was 40.0%.
The Company incurred a net loss of $615,000 for the year ended June 29, 1997
compared to net income for the year ended June 30, 1996 of $251,000. The
decrease in net income resulted primarily from sales inactivity in the fourth
quarter with Best Buy and, due to the timing of orders, from Creative
Technology, Ltd., the Company's new multimedia partner.
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. 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.
4
CAMBRIDGE SOUNDWORKS, INC.
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 additional 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.
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.
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 $14.8 million at June 1997.
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
(8.5% at June 29, 1997) plus 1/4%.
As of June 29, 1997 subsequent amendments to the agreement increased the
maximum borrowings under the line of credit to $8 million. The Company had
$3.7 million in excess availability on the line of credit at June 29, 1997.
The Company believes that its resources are adequate to fund its operations
through the end of fiscal 1998.
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 JUNE 30, 1996 JUNE, 29 1997
- -------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash............................................................................. $ 87,421 $ 58,043
Accounts receivable, net......................................................... 2,431,670 719,855
Income tax refund receivable..................................................... -- 404,434
Inventories...................................................................... 11,405,352 14,816,618
Prepaid expenses................................................................. 187,247 181,150
Deferred tax asset............................................................... 570,000 613,653
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets............................................................. 14,681,690 16,793,753
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Production equipment and tooling................................................. 407,925 580,192
Office equipment and furniture................................................... 1,148,610 1,367,080
Leasehold improvements........................................................... 2,544,495 3,938,224
Motor vehicles................................................................... 180,290 250,252
- -------------------------------------------------------------------------------------------------------------------
4,281,320 6,135,748
Less Accumulated depreciation and amortization................................... 1,135,478 1,995,287
- -------------------------------------------------------------------------------------------------------------------
Net Property and Equipment..................................................... 3,145,842 4,140,461
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS....................................................................... 302,880 163,990
- -------------------------------------------------------------------------------------------------------------------
Total Assets..................................................................... $ 18,130,412 $ 21,098,204
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Borrowings under line of credit.................................................. $ 3,395,557 $ 1,915,713
Accounts payable................................................................. 2,123,773 2,148,399
Accrued expenses................................................................. 979,689 914,978
Customer prepayments and other current liabilities............................... 270,707 735,279
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities...................................................... 6,769,726 5,714,369
- -------------------------------------------------------------------------------------------------------------------
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 2,889,399 shares and 3,803,027 shares at
June 30, 1996 and June 29, 1997, respectively.................................. 10,346,710 14,984,557
Retained earnings................................................................ 1,013,976 399,278
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Total Stockholders' Equity..................................................... 11,360,686 15,383,835
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity......................................... $ 18,130,412 $ 21,098,204
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, ENDED JULY 2, JULY 2, JUNE 30, JUNE 29,
1994 1995 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
NET SALES............................ $ 19,431,892 $ 15,014,837 $ 26,927,699 $ 43,585,017 $ 51,285,380
COST OF GOODS SOLD................... 10,133,001 8,696,852 15,043,196 25,871,582 30,965,293
- -------------------------------------------------------------------------------------------------------------------
Gross profit....................... 9,298,891 6,317,985 11,884,503 17,713,435 20,320,087
- -------------------------------------------------------------------------------------------------------------------
SALES AND MARKETING EXPENSES......... 6,890,254 5,829,589 10,406,100 14,253,742 18,320,541
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,616,323 1,182,245 2,196,623 2,061,351 2,217,765
ENGINEERING AND DEVELOPMENT
EXPENSES........................... 669,179 403,773 760,590 679,637 586,901
- -------------------------------------------------------------------------------------------------------------------
Total expenses..................... 9,175,756 7,415,607 13,363,313 16,994,730 21,125,207
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations...... 123,135 (1,097,622) (1,478,810) 718,705 (805,120)
INTEREST INCOME...................... 187,241 23,078 164,735 -- --
INTEREST EXPENSE..................... (5,225) (13,325) (15,343) (300,870) (219,578)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes........ 305,151 (1,087,869) (1,329,418) 417,835 (1,024,698)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 98,000 (435,000) (558,000) 167,000 $ (410,000)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss).................. $ 207,151 $ (652,869) $ (771,418) $ 250,835 $ (614,698)
- -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) per Common and
Common Equivalent Share............ $ .08 $ (.23) $ (.27) $ .09 $ (.19)
- -------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common and
Common Equivallent Shares
outstanding........................ 2,461,169 2,872,617 2,869,626 2,922,323 3,193,692
- -------------------------------------------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL
--------------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------
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
Issuance of common stock, net of issuance
costs of $156,649...................... 912,294 4,632,895 -- 4,632,895
Exercise of stock options............... 1,334 4,952 -- 4,952
Net loss................................ -- -- (614,698) (614,698)
- -----------------------------------------------------------------------------------------------------
Balance, June 29, 1997.................... $ 3,803,027 $ 14,984,557 $ 399,278 $ 15,383,835
The accompanying notes are an integral part of these financial statements.
7
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, ENDED JULY 2, JULY 2, JUNE 30, JUNE 29,
1994 1995 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 207,151 $ (652,869) $ (771,418) $ 250,835 $ (614,698)
Adjustments to reconcile net income (loss)
to net cash used in operating
activities--
Depreciation and amortization.......... 276,915 286,482 499,888 744,009 1,096,147
Deferred (prepaid) income taxes........ 233,000 (308,000) 100,000 (284,000) (43,653)
Changes in current assets and
liabilities--
Accounts receivable, net.............. (312,583) (427,164) (692,644) (1,628,623) 1,711,815
Income tax refund receivable.......... (667,000) 286,072 (380,928) 380,928 (404,434)
Inventories........................... (5,761,353) (2,189,452) (7,165,942) (881,725) (3,411,266)
Prepaid expenses...................... (148,824) 164,622 207,569 (70,038) 6,097
Preopening costs...................... (717,719) 560,114 (157,605) 157,605 --
Accounts payable...................... 2,192,488 (6,161) 2,304,890 (1,205,555) 24,626
Accrued expenses...................... 145,121 (131,269) 172,171 496,513 (64,711)
Customer prepayments and other current
liabilities.......................... 59,575 (185,085) (13,943) 161,589 464,572
- ---------------------------------------------------------------------------------------------------------------
Net cash used in operating
activities........................ (4,493,229) (2,602,710) (5,897,962) (1,878,462) (1,235,505)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...... (2,136,742) (850,943) (2,698,048) (1,224,649) (2,090,766)
Increase in other assets................. (46,800) (15,830) (54,156) (223,923) 138,890
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities........................ (2,183,542) (866,773) (2,752,204) (1,448,572) (1,951,876)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net..... -- -- -- 3,395,557 (1,479,844)
Repayment of capital lease obligation.... (47,812) -- (42,345) -- --
Sale of common stock, net of issuance
costs................................... 9,935,207 -- -- -- 4,632,895
Exercise of stock options................ 16,800 57,940 74,740 2,013 4,952
Net cash provided by financing
activities............................ 9,904,195 57,940 32,395 3,397,570 3,158,003
NET (DECREASE) INCREASE IN CASH............ 3,227,424 (3,411,543) (8,617,771) 70,536 (29,378)
CASH, BEGINNING OF PERIOD.................. 201,004 3,428,428 8,634,656 16,885 87,421
CASH, END OF PERIOD........................ $3,428,428 $ 16,885 $ 16,885 $ 87,421 $ 58,043
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for--
Income taxes............................ $ 561,563 $ 77,500 $ 157,500 $ 145,500 $ 66,100
- ----------------------------------------------------------------------------------------------------------------
Interest................................ $ 5,225 $ 13,325 $ 14,490 $ 276,454 $ 233,257
- ----------------------------------------------------------------------------------------------------------------
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)
Note 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
computers. The Company markets its products and sells other audio and video
components through its 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) 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 3.75% of the amount financed. These fees were approximately
$371,000, $198,000, $423,000, $597,000 and $963,000 for the years ended
December 31, 1994, for the six-month period ended July 2, 1995, and for the
years ended July 2, 1995, June 30, 1996 and June 29, 1997 respectively, and
are included in selling and marketing expenses in the accompanying statements
of operations.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
JUNE 30, JUNE 29,
1996 1997
- ------------------------------------------------------------------------------------------------------------------
Raw materials and work-in-process.................................................. $ 3,823,302 $ 3,010,897
Finished goods..................................................................... 7,582,050 11,805,721
- ------------------------------------------------------------------------------------------------------------------
$ 11,405,352 $ 14,816,618
- ------------------------------------------------------------------------------------------------------------------
------------- -------------
Inventories consist of materials, labor and overhead.
(d) Prepaid Expenses
The Company offers its products and those of others directly to consumers
through its 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 six months,
commencing on the date of the mailing.
(e) Preopening Costs
Throughout fiscal 1995 and during the first half of fiscal 1996, the Company
opened numerous retail stores. The Company incurred direct costs prior to the
opening of these new stores and amortized the preopening costs over periods
of up to nine months.
(f) 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:
ESTIMATED USEFUL
ASSET CLASSIFICATION LIFE
- ------------------------------------------------------------------------------------------------------------------
Production equipment and tooling............................................................ 3--5 Years
Office equipment and furniture.............................................................. 5 Years
Leasehold improvements...................................................................... Life of lease
Motor vehicles.............................................................................. 3 Years
(g) Customer Prepayments
Advance payments received from customers are classified as customer
prepayments and recognized as revenue when the products are shipped.
(h) 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.
(i) 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.
On March 3, 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This statement is effective for
fiscal years ending after December 15, 1997 and early adoption is not
permitted. When adopted, the statement will require restatement of prior
years' earnings per share. The Company will adopt this statement for its
fiscal year ended June 28, 1998. The Company believes that the adoption of
SFAS No. 128 will not have a material effect on its financial statements.
(j) Engineering and Development Expenses
Engineering and development expenses are charged to operations as incurred.
(k) 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 relates primarily to the following customers
to whom the Company has substantial sales.
PERCENTAGE OF ACCOUNTS
RECEIVEABLE CUSTOMERS
A B C
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1996.......................................................................... 85% -- --
Year Ended June 29, 1997.......................................................................... 3% 13% 36%
- -----------------------------------------------------------------------------------------------------------------------------------
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 years ended July 2, 1995 and 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 June 30, 1996. During the years ended December 31,
1994 and June 29,1997, there were no customers that accounted for greater
than 10% of net sales.
9
CAMBRIDGE SOUNDWORKS, INC.
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 29, 1997, subsequent amendments to the agreement increased the maximum
borrowings under the line of credit to $8 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 (8.5% at June 29,
1997) plus .25%. Based on the line of credit lending formula, as defined, the
Company had available for borrowing, approximately $3.7 million at June 29,
1997.
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.
The provision (benefit) for income taxes consists of the following:
SIX-MONTH
YEAR PERIOD YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DEC. 31, JULY 2, JULY 2, JUNE 30, JUNE 29,
IN THOUSANDS 1994 1995 1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Current--
Federal...................................................... $ (104) $ (107) $ (508) $ 345 $ (281)
State........................................................ (31) (20) (150) 106 (85)
- --------------------------------------------------------------------------------------------------------------------------------
(135) (127) (658) 451 (366)
- --------------------------------------------------------------------------------------------------------------------------------
Deferred--
Federal...................................................... 196 (266) 61 (216) (33)
State........................................................ 37 (42) 39 (68) (11)
- --------------------------------------------------------------------------------------------------------------------------------
233 (308) 100 (284) (44)
- --------------------------------------------------------------------------------------------------------------------------------
Total
provision (benefit)............................................ $ 98 $ (435) $ (558) $ 167 $ (410)
- --------------------------------------------------------------------------------------------------------------------------------
Pursuant to the provisions of SFAS No. 109, as of June 30, 1996 and June 29,
1997, the Company recorded deferred tax assets of approximately $570,000 and
$614,000, 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:
JUNE 30, JUNE 29,
1996 1997
- --------------------------------------------------------------------------------------------------------------------
Inventory reserve......................................................................... $ 244,000 $ 216,000
Net operating loss carryforward and other credit carryforwards............................ 66,000 45,000
Other reserves............................................................................ 97,000 103,000
Depreciation.............................................................................. 175,000 350,000
Valuation allowance....................................................................... (12,000) (100,000)
- --------------------------------------------------------------------------------------------------------------------
$ 570,000 $ 614,000
- --------------------------------------------------------------------------------------------------------------------
---------- ----------
At June 29, 1997, the Company had available net operating loss carry forwards
of approximately $96,000. These Net operating loss carry forwards may be used
to reduce future taxable income, if any. These carry forwards expire through
2012 and are subject to review and possible adjustment by the appropriate
taxing authorities.
Due to the uncertainty of the realization of certain of these potential tax
benefits, the Company has recorded a valuation allowance against a portion of
its deffered tax assets.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
SIX-MONTH
YEAR PERIOD YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 2, JULY 2, JUNE 30, JUNE 29,
1994 1995 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(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.......................... (8.2) -- (1.7) -- --
Other..................................................... -- 0.3 -- (0.3) 0.3
- ----------------------------------------------------------------------------------------------------------------------------------
Effective tax rate........................................ 32.1% (40.0)% (42.0)% 40.0% (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 December 2011. Future minimum lease payments under these operating
leases are approximately as follows:
FISCAL YEAR AMOUNT
- -----------------------------------------------------------------------------------------------------
1998................................................................................. $ 3,083,000
1999................................................................................. 3,063,000
2000................................................................................. 2,554,000
2001................................................................................. 2,435,000
2002................................................................................. 2,466,000
Thereafter........................................................................... 8,919,000
- ------------------------------------------------------------------------------------------------------
$ 22,520,000
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, 1994,
the six-month period ended July 2, 1995 and the years ended July 2, 1995,
June 30, 1996 and June 29, 1997 was approximately $320,000, $576,000,
$799,000, $1,929,000 and $2,886,000 respectively.
Note 6 Stockholders' Equity
(a) Issuance of Common Stock
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 of the terms of the Purchase
Agreement, the Company sold and issued to Creative Technology, Ltd. (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 Compnay at an exercise price of $6.00 per share at a purchase price of
$1,000 in the aggregate.
(b) 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.
(c) Stock Option Plans
The Company's 1993 Stock Option Plan as amended (the 1993 Plan) is
administered by the Board of Directors and authorizes the Company to issue
options to purchase up to 620,000 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.
10
CAMBRIDGE SOUNDWORKS, INC.
Note 6 Stockholders' Equity (Continued)
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, 1994 the six-month period ended July
2, 1995 and the years ended June 30, 1996 and June 29, 1997:
NUMBER WEIGHTED AVERAGE
OF SHARES OPTION PRICE
- --------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1993...................................................... 22,244 $ 3.36
Granted........................................................................... 101,120 8.01
Terminated........................................................................ (21,440) 8.00
Exercised......................................................................... (5,000) 3.36
- --------------------------------------------------------------------------------------------------------------------
Outstanding, December 31,1994....................................................... 96,924 7.19
Granted........................................................................... 169,200 4.12
Terminated........................................................................ (18,320) 6.14
Exercised......................................................................... (17,244) 3.36
- --------------------------------------------------------------------------------------------------------------------
Outstanding, July 2, 1995........................................................... 230,560 5.42
Granted........................................................................... 356,780 4.86
Terminated........................................................................ (142,190) 5.40
Exercised......................................................................... (575) 3.50
- --------------------------------------------------------------------------------------------------------------------
Outstanding June 30, 1996........................................................... 444,575 5.01
Granted........................................................................... 187,820 4.01
Terminated........................................................................ (50,795) 5.82
Exercised......................................................................... (1,334) 3.71
- --------------------------------------------------------------------------------------------------------------------
Outstanding June 29, 1997........................................................... 580,266 $ 3.92
- --------------------------------------------------------------------------------------------------------------------
Exercisable, June 29, 1997.......................................................... 230,235 $ 4.81
- --------------------------------------------------------------------------------------------------------------------
The range of actual exercise prices for options outstanding and options
excercisable as of June 29, 1997 was $3.50 to $8.02.
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 its employees under the Accounting Principles
Board Option No. 25 and elect the disclosure-only alternative under SFAS No.
123 for stock-based compensation awarded in 1996 and 1997 using the
Black-Scholes option pricing model prescribed by SFAS No. 123. The underlying
assumptions used are as follows:
YEARS ENDED
------------------------
JUNE 30, JUNE 29,
1996 1997
- ------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate....................................................................... 6.13% 6.51%
Expected dividend yield....................................................................... -- --
Expected lives................................................................................ 7 7
Expected volatility........................................................................... 60.1% 60.1%
Weighted average remaining contractual life of options outstanding (years).................... 8.5 8.6
The weighted average grant date fair value of options granted during the
years ended June 29, 1997 and June 30, 1996 under these plans is $3.15 and
$2.68, respectively. Had compensation cost for the Company's stock option
plans been determined consistent with SFAS No. 123, pro forma net loss and
net loss per share would have been:
JUNE 30, JUNE 29,
1996 1997
- ------------------------------------------------------------------------------------------
Net income (loss)--
As reported...................................... $250,835 $ (614,698)
Pro forma........................................ (21,011) (1,137,701)
Net income (loss) per share--
As reported...................................... .09 (.19)
Pro forma........................................ (.01) (.36)
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
Simultaneous with the Common Stock and Warrant Purchase Agreement, the
Company entered into an exclusive distribution agreement with Creative
Technologies Ltd. which has a life of three years.
The Warrant has been valued at approximately $385,000 using the fair value
method approach as prescribed in SFAS 123. The Warrant value will be
amortized over the life of the relevant distribution agreement.
Note 7 Accrued expenses
Accrued expenses consist of the following:
JUNE 30, JUNE 29,
1996 1997
- -------------------------------------------------------------------------------------------------------------------
Marketing Expenses........................................................................ $ 192,294 $ 400,296
Other..................................................................................... 787,395 514,682
- -------------------------------------------------------------------------------------------------------------------
$ 979,689 $ 914,978
- -------------------------------------------------------------------------------------------------------------------
Note 8 Related Parties
In February 1994, the Company entered into a License Agreement with Henry
Kloss, a stockholder of the Company, whereby the Company and Mr. Kloss's name
on its products. The License Agreement between the Company and Mr. Kloss
provided 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 product whose appearance or performance specifications
are materially changed by the Company without Mr. Kloss's consent. Upon
termination of Mr. Kloss's employment, as described above, the Company could
not thereafter use his name generically or in connection with a product
unless the Company had previously done so, unless Mr. Kloss consents to such
use. Under this agreement, the Company was 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 for current
and future products, expiring in September 1999. Pursuant to the Consulting
Agreement, the Employment Agreement between the Company and Mr. Kloss was
effectively terminated, with no additional payments due. The Consulting
Agreement called for annual payments to Mr. Kloss of $330,000 plus certain
fringe benefits, such 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.
Effective September 30, 1996, Henry Kloss terminated the Consulting Agreement
dated April 24, 1996 which he had entered into with the Company to provide
general and specific advice, counsel and assistance to the Company with
respect to the selection and design by the Company of its current and future
products. At the same time, Mr. Kloss notified the Company of his intention
not to stand for reelection as a Director. Mr. Kloss continues on an informal
basais to act as a consultant to the Company for which he is paid $10,565 per
month but for which there is no formanl written agreement. This arrangement
can be terminated by either party at will. Mr. Kloss, former Chairman of the
Board of Directors of the Company and former Director of Product Development
provided consulting services to the Company during year ended June 29, 1997
for which he has received $179,000 from the company.
11
CAMBRIDGE SOUNDWORKS, INC.
Note 9 Employment Agreements
On February 14, 1997 the Company entered into a three year agreement with
Thomas J. DeVesto (the Employment Agreement) employing him in the capacity as
President and Chief Executive Officer. Pursuant to the Employment Agreement,
which provides for an initial salary of no less than $385,000, with such
adjustments thereto after the first year which the Board of Directors may
approve. Mr. DeVesto is also entitled to certain fringe benefits, including
the right to participate in all bonus and benefit programs that the Company
makes available to its employees and an annual $8,000 car allowance. The
Employment Agreement may be terminated by any party on six month's prior
notice for any reason in which event Mr. DeVesto is entitled to a payment
equal to his then annual salary in consideration for an agreement not to
compete for one year following the termination of employment.
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 and June 29, 1997, 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 June 30, 1996 and June 29, 1997, and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1994, the six-month period ended July 2, 1995 and
the years ended June 30, 1996 and June 29, 1997. 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 June 30, 1996 and June 29, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1994, for the six-month period
ended July 2, 1995 and for the years ended June 30, 1996 and June 29, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 28, 1997
12
BOARD OF DIRECTORS
Thomas J. DeVesto President, Chief Executive Cambridge SoundWorks, Inc.
Officer
Thomas E. Brew, Jr. President, Chief Executive Kurzweil Applied
Officer Intelligence, Inc.
Franklin S. Browing, Jr. Business Consultant
Leo Kahn Partner United Properties
Craig L. McHugh Vice President, General Creative Labs, Inc.
Manager
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
Stock Data
CORPORATE INFORMATION
Corporate Offices
Cambridge SoundWorks, Inc., is traded on the NASDAQ
Cambridge SoundWorks, Inc. National Market System under the symbol HIFI.
311 Needham Street
Newton, MA 02164 Annual Meeting
(617) 332-5936
(617) 332-9229 Fax The annual meeting of shareholders will be held on November 4, 1997
at 11:00 a.m. at the Company's headquarters, 311 Needham Street,
Legal Counsel Newton, MA 02164
Peabody & Arnold Press Releases and Quarterly Results
Boston, Massachusetts
Press releases including quarterly financial results are available by fax to
Independent Accountants all shareholders immediately upon their release, free of charge, by calling
PR Newswire's Company News On Call at 1-800-758-5804 (ext. 114553)
Arthur Andersen LLP or through access on the Internet at http://www.prnewswire.com.
Boston, Massachusetts
Transfer Agent Form 10-Q and 10-K
State Street Bank and Trust Company The Company's quarterly and annual reports to the Security and
c/o Boston EquiServe Exchange Commission are filed electronically on Form 10-Q and 10-K,
P. O. Box 8200 respectively. These reports can be accessed on the Internet at
Canton, MA 02021 http://www.sec.gov or can be obtained, free of charge, by phoning or
(617) 575-2000 writing to the Company or its Investor Relations counsel.
Investor Relations Internet Site
John H. Swanson The Company's Internet site may be accessed at the following address:
Swanson Communications, Inc. http:// www.hifi.com.
234 5th Avenue
New York, NY 10001
(212) 683-4890
(212) 679-1184 Fax
CAMBRIDGE
SoundWorks
CAMBRIDGE SOUNDWORKS, INC.
311 NEEDHAM STREET
NEWTON, MA 02164