SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended September 28, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the transition period from ______ to _______
Commission File No. 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 November 10, 1997, there were issued and outstanding 3,804,824 shares
of the Company's Common Stock.
CAMBRIDGE SOUNDWORKS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets
June 29, 1997 and September 28, 1997 3
Statements of Operations
Three Months Ended September 29, 1996
and September 28, 1997 4
Statements of Cash Flows
Three Months Ended September 29, 1996 and
September 28, 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
CAMBRIDGE SOUNDWORKS, INC.
BALANCE SHEETS
(Unaudited)
ASSETS JUNE 29, 1997 SEPTEMBER 28, 1997
------------- ------------------
CURRENT ASSETS:
Cash $ 58,043 $ 65,946
Accounts receivable, net 719,855 4,019,882
Income tax refund receivable 404,434 404,434
Inventories 14,816,618 15,664,771
Prepaid expenses 794,803 1,134,721
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Total Current Assets 16,793,753 21,289,754
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PROPERTY AND EQUIPMENT, AT COST:
Production equipment and tooling 580,192 548,305
Office equipment and furniture 1,367,080 1,403,888
Leasehold improvements 3,938,224 4,233,843
Motor vehicles 250,252 204,389
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6,135,748 6,390,425
Less-Accumulated depreciation and
amortization 1,995,287 2,026,534
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4,140,461 4,363,891
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OTHER ASSETS 163,990 375,865
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Total Assets $ 21,098,204 $ 26,029,510
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------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under line of credit $ 1,915,713 $ 4,748,732
Accounts payable 2,148,399 4,659,978
Accrued expenses 914,978 1,058,146
Customer prepayments and other
current liabilities 735,279 378,414
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Total Current Liabilities 5,714,369 10,845,270
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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--3,803,027 at
June 29, 1997 and 3,804,824 at
September 28, 1997 14,984,557 15,026,139
Retained earnings 399,278 158,101
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Total Stockholders' Equity 15,383,835 15,184,240
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Total Liabilities and Stockholders'
Equity $ 21,098,204 $ 26,029,510
------------- ------------------
------------- ------------------
The accompanying notes are an integral part of these financial statements.
3
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
-----------------------------------------
SEPTEMBER 29, 1996 SEPTEMBER 28, 1997
-------------------- ------------------
NET SALES $ 11,130,289 $ 13,175,453
COST OF GOODS SOLD 6,493,392 7,991,654
-------------------- -------------------
Gross profit 4,636,897 5,183,799
-------------------- ------------------
SALES AND MARKETING EXPENSES 3,740,516 4,635,486
GENERAL AND ADMINISTRATIVE EXPENSES 565,754 652,058
ENGINEERING AND DEVELOPMENT EXPENSES 199,868 218,112
-------------------- ------------------
Total expenses 4,506,138 5,505,656
-------------------- ------------------
Income (loss) from operations 130,759 (321,857)
INTEREST INCOME (EXPENSE), net (76,692) (80,320)
-------------------- ------------------
Income (loss) before provision (benefit)
for income taxes 54,067 (402,177)
PROVISION (BENEFIT) FOR INCOME TAXES 22,000 (161,000)
-------------------- ------------------
Net income (loss) $ 32,067 $ (241,177)
-------------------- ------------------
-------------------- ------------------
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ .01 $ (.06)
-------------------- ------------------
-------------------- ------------------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 2,892,523 3,803,086
-------------------- ------------------
-------------------- ------------------
The accompanying notes are an integral part of these financial statements.
4
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
------------------------------------------
SEPTEMBER 29, 1996 SEPTEMBER 28, 1997
--------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $32,067 $ (241,177)
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 305,208 239,636
Amortization of warrant -- 36,096
Changes in current assets and liabilities:
Accounts receivable (1,357,921) (3,300,027)
Inventories (723,225) (848,153)
Prepaid expenses (101,611) (339,918)
Accounts payable 2,462,145 2,511,579
Accrued expenses (54,964) 143,168
Customer prepayments and other current
liabilities 794,436 (356,865)
--------------------- -------------------
Net cash provided by (used in)
operating activities 1,356,135 (2,155,661)
--------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,358,535) (463,069)
Increase in other assets (91,430) (211,875)
--------------------- -------------------
Net cash used in investing activities (1,449,965) (674,944)
--------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit--bank, net 219,402 2,833,019
Exercise of stock options -- 5,489
--------------------- --------------------
Net cash provided by financing
activities 219,402 2,838,508
--------------------- --------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 125,572 7,903
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 87,421 58,043
--------------------- ---------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $212,993 $ 65,946
--------------------- ---------------------
--------------------- ---------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $195,000 $ --
--------------------- ----------------------
--------------------- ----------------------
Interest $78,089 $ 66,201
--------------------- ----------------------
--------------------- ----------------------
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 only of normal
recurring adjustments) necessary for a fair presentation of interim period
results. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. The Company believes, however, that its disclosures are
adequate to make the information presented not misleading. The results for
the three months ended September 28, 1997 are not necessarily indicative of
results to be expected for the full fiscal year.
On October 30, 1997, the Company entered into an Agreement and Plan Merger
with Creative Technology Ltd., a Singapore company and CSW Acquisition
Corporation, a Massachusetts corporation and wholly-owned subsidiary of
Parent. Pursuant to the Merger Agreement, Parent, through Purchaser, commenced
a tender offer for any and all shares of the Company's common stock, no par
value per share for a purchase price of $10.68 per share, net to the seller
in cash, for a total consideration of approximately $31 million for all
currently outstanding shares of the Company's Common Stock. The Merger
Agreement provides that as soon as practicable after the purchase of shares of
Common Stock pursuant to the tender offer and the satisfaction of the other
conditions set forth in the Merger Agreement and in accordance with the
relevant provisions of the Massachusetts Business Corporation Law, the
Purchaser will be merged with and into the Company. See Part II, Item 5
Other information.
(2) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
JUNE 29, 1997 SEPTEMBER 28, 1997
----------------- --------------------
Raw materials and work-in-process $ 3,010,897 $ 2,257,142
Finished goods 11,805,721 13,407,629
---------------- --------------------
$ 14,816,618 $ 15,664,771
---------------- --------------------
Inventories consists of materials, labor and manufacturing overhead.
(3) Line of Credit
On September 30, 1997, an amendment to the Company's demand discretionary
line of credit increased the borrowing under the line of credit to
$11,000,000 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 (8.50% at
September 28, 1997), plus 1/4%. The amounts outstanding at June 29, 1997 and
September 28, 1997 were $1,916,000 and $4,749,000, respectively.
(4) Significant Customer
During the three months ended September 28, 1997, the Company had one
customer that accounted for approximately 36% of net sales. The Company had
no sales to this customer during the three months ended September 29, 1996.
During the three months ended September 29, 1996, the Company had another
customer which accounted for approximately 27% of net sales. The Company had
no sales to this customer during the three months ended September 29, 1997.
6
(5) Stock Options
During the three months ended September 28, 1997, the Company granted
incentive stock options, under the Company's 1993 Stock Option Plan, to
certain employees to purchase 6,600 shares of common stock at exercise
prices ranging from $4.38 to $5.00 per share. These options vest over a
period of two years. At September 28, 1997, 620,000 share have been
authorized for grant, 576,853 are issued and outstanding and 3,706 have been
exercised.
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
month periods ended September 29, 1996 and September 28,1997 expressed as
percentages of net sales.
THREE MONTHS ENDED
--------------------------------
SEPTEMBER 29, SEPTEMBER 28
1996 1997
--------------- ---------------
NET SALES 100.0% 100.0%
COST OF GOODS SOLD 58.3 60.7
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Gross profit 41.7 39.3
--------------- ---------------
SALES AND MARKETING EXPENSES 33.6 35.2
GENERAL AND ADMINISTRATIVE EXPENSES 5.1 4.9
ENGINEERING AND DEVELOPMENT EXPENSES 1.8 1.7
--------------- ---------------
Total expenses 40.5 41.8
--------------- ---------------
Income (loss) from operations 1.2 (2.5)
INTEREST INCOME (EXPENSE), net (0.7) (0.6)
--------------- ---------------
Income (loss) before provision
(benefit) for income taxes 0.5 (3.1)
PROVISION (BENEFIT) FOR INCOME
TAXES 0.2 (1.3)
--------------- ---------------
Net income (loss) 0.3% (1.8)%
--------------- ---------------
--------------- ---------------
8
Net Sales
Net sales increased from approximately $11.1 million for the three months
ended September 29, 1996, to $13.2 million for the three months ended
September 28, 1997. The increase in net sales was primarily attributable to
the 20% overall increase retail sales over the same period in 1996. Same
store sales increased 6.4% over last years first quarter. The Company had
twenty-seven retail stores open during the three months ended September 28,
1997, compared to twenty-eight retail stores during the three months ended
September 29, 1996. Catalog sales for the three months ended September 28,
1997 decreased due, in part, to shifts in sales to the Company's new retail
stores and through the Company's wholesale expansion. Wholesale sales, which
increased 20% for the three months ended September 29, 1997 compared to the
same period last year, was primarily due to sales to Creative Labs, Inc.
(Significant Customer). In February 1997, the Company entered into an
agreement with Creative Labs, Inc., the world's largest manufacture 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.
Gross Profit
Gross profit as a percentage of net sales decreased from 41.7% during the
three months ended September 29, 1996 to 39.3% during the three months ended
September 28, 1997. The decrease in gross margin for the three month period
was due primarily to the continued increase in retail store sales and
wholesale sales which have lower overall margins than the Company's catalog
sales.
Expenses
Sales and marketing expenses increased from $3.7 million during the three
months ended September 29, 1996 to $4.6 million for the three months ended
September 28, 1997. The hiring of retail store personnel, increased
advertising expenses and retail store operating costs accounted for a
substantial portion of the increase in sales and marketing expense.
General and administrative expenses increased from $566,000 (5.1%) during the
three months ended September 29, 1996 to $652,000 (4.9%) for the three months
ended September 28, 1997.
Interest Expense/Interest Income
Interest expense of $77,000 for the three months ended September 29, 1996 and
$80,000 for the three months ended September 28, 1997 results from the
Company's use of its line of credit.
Provision (Benefit) for Income Taxes
The Company's effective income tax rate was 40.7% during the three months
ended September 29, 1996 compared to 40% for the three months ended September
28, 1997. The Company expects that the benefit will be realized in future
periods.
9
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 1997, the Company's working capital was approximately
$10,444,000 compared to $11,079,000 as of June 29, 1997. Cash and cash
equivalents amounted to $66,000 as of September 28, 1997 compared to $58,000
as of June 29, 1997.
On September 30, 1997, an amendment to the Company's demand discretionary
line of credit increased the borrowing under the line of credit to
$11,000,000 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 (8.50% at
September 28, 1997), plus 1/4%. The amounts outstanding at June 29, 1997 and
September 28, 1997 were $1,916,000 and $4,749,000, respectively. The Company
has approximately $3,230,000 in excess availability on the line of credit at
September 28, 1997. The Company believes that its resources are adequate to
fund its operations through the end of fiscal 1998.
10
PART II. OTHER INFORMATION
Item 5. Other Information
On October 30, 1997, the Company entered into an Agreement and Plan
Merger (the "Merger Agreement") with Creative Technology Ltd., a Singapore
company ("Parent") and CSW Acquisition Corporation, a Massachusetts
corporation and wholly-owned subsidiary of Parent ("Purchaser"). Pursuant to
the Merger Agreement, Parent, through Purchaser, commenced a tender offer for
any and all shares of the Company's common stock, no par value per share (the
"Common Stock"), (other than shares currently owned by Parent or shares held
in treasury of the Company) for a purchase price of $10.68 per share, net to
the seller in cash, for a total consideration of approximately $31 million
for all currently outstanding shares of the Company's Common Stock ( other
than shares held by Parent or shares held in treasury of the Company). The
Merger Agreement provides that as soon as practicable after the purchase of
shares of Common stock pursuant to the tender offer and the satisfaction of
the other conditions set forth in the Merger Agreement and in accordance with
the relevant provisions of the Massachusetts Business Corporation Law (the
"MBCL"), the Purchaser will be merged with and into the Company ( the
"Merger").
As a result of the Merger, the separate corporate existence of the
Purchaser will cease and the Company will continue as the surviving
corporation and become a wholly-owned subsidiary of Parent. At the Effective
Time (as defined in the Merger Agreement) each share of Common Stock issued
and outstanding immediately prior to the Effective Time (other than shares of
Common Stock held in treasury of the Company, shares of Common Stock owned by
the parent, the Purchaser or any subsidiary of Parent or the Company or share
of Common Stock held by stockholders who will have properly demanded and
perfected appraisal rights under the MBCL) will be canceled and converted
automatically into the right to receive the offer price of $10.68 per share
of Common Stock.
Pursuant to the Merger Agreement, the obligation of Purchaser to
purchase the shares of the Company is subject to a valid tender of the shares
of the Company such that they would constitute two-thirds of the issued and
outstanding shares of the Company, when added to the shares already owned by
the Parent or any of Parent's subsidiaries. The Merger is conditioned upon,
inter alia, earlier termination, or the expiration, of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
and certain other conditions as identified in the Merger Agreement.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
10.1 Letter Agreement, dated September 30, 1997, between
BankBoston, N.A. and the Company.
11
10.2 Agreement and Plan Merger dated as of October 30,
1997 by and among Creative Technology Ltd., CSW Acquisition Corporation and
the Company (incorporated herein by reference to Exhibit (c) (1) to the
schedule 14D-1 filed by Creative Technology Ltd. and CSW Acquisition
Corporation with the SEC on November 3, 1997).
27 Financial Data Schedule
b.) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 28, 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: November 12, 1997 By: /s/ Wayne P. Garrett
---------------------------
Wayne P. Garrett
Vice President-Finance and
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
13