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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee Required)
for the fiscal year ended June 30, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934 (No Fee Required)
for the transition period from to .
Commission File No. 0-23456
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CAMBRIDGE SOUNDWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2998824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
311 NEEDHAM STREET
NEWTON, MASSACHUSETTS 02164
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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(617) 332-5936
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (WITHOUT PAR VALUE)
(TITLE OF CLASS)
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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 ____
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of this Form 10-K or any amendments to this Form 10-K.
_________
The aggregate market value of the Registrants voting stock held by
non-affiliates of the Registrant as of September 18, 1996, was $8,632,281. As of
September 18, 1996, there were issued and outstanding 2,889,399 shares of
Registrant's Common Stock, without par value.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrants Annual Report to Stockholders for the fiscal
year ended June 30, 1996 (Items 5, 6, 7, and 14 (a) (1))
(2) Portions of the definitive Proxy Statement for Registrants Annual Meeting of
Stockholders to be held on October 22, 1996 (Items 11, 12, and 13)
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CAMBRIDGE SOUNDWORKS, INC.
TABLE OF CONTENTS
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SECURITIES AND EXCHANGE COMMISSION
ITEM NUMBERS AND DESCRIPTION PAGE
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PART I
ITEM 1. Business.................................................................................... 2
ITEM 2. Properties.................................................................................. 10
ITEM 3. Legal Proceedings........................................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 10
PART II
ITEM 5. Market for the Registrant's Common Equity
and Related Stockholder Matters............................................................. 10
ITEM 6. Selected Financial Data..................................................................... 10
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 10
ITEM 8. Financial Statements and Supplementary Data................................................. 10
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................................................... 10
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......................................... 11
ITEM 11. Executive Compensation...................................................................... 12
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management.............................................................................. 12
ITEM 13. Certain Relationships and Related Transactions.............................................. 13
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................................................. 13
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Inasmuch as the calculation of shares of Registrant's voting stock held by
non-affiliates requires a calculation of the number of shares held by
affiliates, such figure, as shown on the cover page hereof, represents the
Registrant's best good faith estimate for purposes of this Annual Report on Form
10-K, and the Registrant disclaims that such figure is binding for any other
purpose. The aggregate market value of Common Stock indicated is based upon the
closing sale price of the Common Stock as reported on the Nasdaq National Market
System on September 18, 1996. All outstanding shares beneficially owned by
executive officers and directors of the Registrant or by any shareholder
beneficially owning more than 5% of Registrant's Common Stock, as disclosed
herein, were considered solely for purposes of this disclosure to be held by
affiliates.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Cambridge SoundWorks, Inc. (the "Company" or "Cambridge SoundWorks") designs
and manufactures audio products for stereo, home theater and multimedia computer
audio under the brand name Cambridge SoundWorks. The Company sells its Cambridge
SoundWorks products and selected audio and video components manufactured by
other companies directly to consumers through its catalog and at its
Company-owned retail stores. The sale of these other products enables the
Company to offer all of the components necessary for complete stereo and home
theater systems. The Company also sells its Cambridge SoundWorks speakers on a
wholesale basis.
The Company was founded in 1988 to market the Company's proprietary ENSEMBLE
speaker system. The ENSEMBLE-Registered Trademark- was sold directly to
consumers rather than through audio dealers. As the Company grew, a factory
outlet was established at the production facility and opened for retail sales in
1990. In 1990, the Company began offering, in addition to the speaker systems
designed by the Company, a variety of high quality home audio products
manufactured by other companies, including receivers, VCR's, and cassette, laser
disc and compact disc players. In 1991, the Company developed a catalog to
supplement its direct advertising in national and local media. In 1994, the
Company began its retail expansion and opened 13 new Company-owned stores in New
England and Northern California. From January 1995 to June 1996, the Company
opened nine additional Company-owned stores. In June 1995, the Company began to
sell its products in more than 200 Best Buy Co., Inc. ("Best Buy") stores under
an exclusive arrangement.
INDUSTRY TRENDS
In recent years, the market for speakers has been affected by increased
consumer demand for "surround sound" home theater entertainment systems that use
additional audio channels and speakers to reproduce the sound experienced in
movie theaters. Home theater entertainment systems require a number of high
quality passive and electronically integrated or "active" (amplified) speakers,
and thus represent a growth trend in the industry.
Another significant trend in the speaker market is the development of
multimedia PC's and the creation of a large market for add-on speakers which
reproduce high fidelity sound for PC's with interactive CD-ROM's and sound
cards. The Company believes that the trend in sales of PC's equipped or upgraded
with CD-ROM drives and sound cards will create a large potential customer base
for high quality add-on speakers.
The Company anticipates the introduction of Digital Video Discs (DVD)
sometime early in 1997 and believes that this new ultra-high-density data
storage medium may have a large impact on both the home entertainment and the
computer industries. In both industries, DVD may result in more focus on the
movies and video, which may, in turn, increase demand for home theater sound
systems and multimedia speaker systems. Cambridge SoundWorks intends to offer
DVD players for sale to its home theatre customers.
COMPANY STRATEGY
The Company's strategy is to build the Cambridge SoundWorks brand name
through a combination of product quality, direct distribution to consumers, new
channels of distribution and service. Key elements of this strategy include:
- BRAND BUILDING. The Company believes that extensive advertising and
promotions of the Company and its products, have helped build the
Cambridge SoundWorks brand name and the Company's reputation for selling
high quality speakers at competitive prices.
- CONSUMER-DIRECT SALES. By selling directly to the consumer through its
catalog and Company-owned stores, the Company believes it is able to
offer value and service to its customers. The Company's factory-direct
selling eliminates the retail mark-up of the conventional dealer
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network and allows the Company to offer high quality products at
competitive prices. At the same time, the Company retains control over
all aspects of the sales effort, including presentation of merchandise,
demonstration of products and customer service. The Company's direct
relationship with the consumer results in feedback which enables it to
monitor advertising effectiveness and respond to changes in consumer
demands for new or improved audio products.
- NEW CHANNELS OF DISTRIBUTION. The Company believes that it can enhance
its brand image, while maintaining its commitment to bring high quality
products to the consumer at the lowest possible cost, by expanding into
certain new channels of distribution, including the following:
In February 1995, the Company announced the signing of an agreement
with Best Buy, Co., Inc. ("Best Buy"). Under the terms of the
agreement, Best Buy will be the exclusive reseller of certain
Cambridge SoundWorks products for three years. Best Buy is one of the
nation's fastest growing consumer electronics retailers. It offers a
wide selection of name brand consumer electronics, personal computers
and home office products, entertainment software, major appliances and
photographic equipment throughout the United States.
Cambridge SoundWorks products are currently displayed at more than 260
Best Buy stores, some in FACTORY DIRECT SPEAKER WALLS-TM- which are
specially designed, automated displays for all Cambridge SoundWorks
key products, allowing easy consumer self-demonstration.
Cambridge SoundWorks' amplified speakers system called
SOUNDWORKS-Registered Trademark- is being marketed nationally as a
premium in the current issue of Philip Morris' "Marlboro Gear"
catalog.
SOUNDWORKS is also being bundled with computer systems being packaged
by IBM and Cyrix Corporation.
- EMPHASIS ON CUSTOMER SERVICE. The Company strives to provide a high level
of personalized service and product information to its catalog and retail
customers. The Company's current full-color catalog contains information
on how to select and test speakers as well as a detailed introduction to
home theater and surround sound technology with little technical jargon.
The Company's audio experts are trained to avoid high-pressure sales
tactics and they take a consultative approach to selling. The audio
experts help consumers make an appropriate selection from the Company's
product offerings, provide follow-up technical assistance, keep abreast
of consumer preferences and monitor customer comments on the quality and
performance of the Company's products.
- GROWTH THROUGH GEOGRAPHIC EXPANSION. Based on the success of its original
retail store in Newton, Massachusetts, the Company has opened 27
additional stores to date, including the Company's first store in a major
urban shopping mall, the CambridgeSide Galleria, in Cambridge,
Massachusetts, and the Company's first store in a factory outlet center,
the Worcester Common Fashion Outlets Mall in Worcester, Massachusetts.
The Company currently has a total of 18 stores in New England and 10 in
Northern California.
The Company believes that by opening multiple stores in concentrated
geographic areas it may be able to achieve certain economies of scale
particularly with regard to advertising expenses. The Company is
currently evaluating other potential retail sites and plans to open more
Company-owned stores in fiscal 1997. Management estimates that the
capital cost to open a new retail store currently averages approximately
$180,000 (exclusive of start-up inventory and grand-opening advertising).
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- GROWTH THROUGH PRODUCT SUB-CATEGORY EXPANSION. The Company also has plans
to grow by adding new products and product sub-categories to its line-up
of branded goods. To date, the Company's home speakers line has focused
on the "subwoofer/satellite" category, a strong niche of the overall
loudspeaker market. In the fall of 1996, the Company plans to introduce
its first series of floor-standing "Tower" loudspeakers that use much
larger cabinets and are more costly ($599-$1,499 compared to $249-$599).
This category represents a significant portion of the overall market for
high quality speakers. The Company also plans to introduce a new,
higher-performance multimedia speaker system for the computer-user
market.
- GROWTH THROUGH NEW MARKET OPPORTUNITIES. The Company continues to develop
speakers for the growing home theater entertainment market. The
proliferation of VCR's and increased viewing of home movies is driving
consumer demand for surround sound home theater entertainment systems.
The Company has developed add-on speakers for the emerging PC/ multimedia
market.
The Company believes its position as a vertically integrated factory-direct
retailer gives it important competitive advantages by allowing it to provide
high quality products at competitive prices and to react early to new consumer
preferences and trends.
COMPANY PRODUCTS
The Company makes speakers for conventional stereo systems, home theater
entertainment systems and for multimedia computing. A typical home theater
speaker system configuration includes: the original (or upgraded) stereo
speakers (placed in front of the listener to the left and right of the TV
screen); a center channel speaker (placed directly in front of the listener near
the TV to keep dialogue firmly centered); and a pair of surround speakers
(placed behind the listener to complete the surround sound effect). In order to
convey the low bass energy of special effects, many home theaters are equipped
with supplemental subwoofers. The Company offers a number of speakers for all of
the above applications as well as many specialty speaker systems.
The Company manufactures and sells the following speakers:
ENSEMBLE SUBWOOFER-SATELLITE SPEAKER SYSTEMS. The heart of the Cambridge
SoundWorks product lineup consists of the ENSEMBLE, ENSEMBLE II, ENSEMBLE III,
ENSEMBLE IV, ENSEMBLE III HOME THEATRE and ENSEMBLE IV HOME THEATER speaker
systems. Subwoofer-satellite speaker systems allow listeners to place the
subwoofer in out-of-the-way places without adversely affecting performance. The
small satellite speakers convey high performance midrange and treble sound with
ease of placement. The original ENSEMBLE system uses two separate subwoofers
(which convey the bass notes) to maximize room placement flexibility. ENSEMBLE
II uses a single subwoofer cabinet that contains two separate bass drivers.
ENSEMBLE III is a more compact, more affordable three-piece system. ENSEMBLE IV
is the most compact, most affordable 3-piece system. ENSEMBLE IV HOME THEATER
adds three satellites to the ENSEMBLE IV for the most affordable,
high-performance surround speaker system.
ENSEMBLE III HOME THEATRE. Ensemble III Home Theatre adds three satellites
to the ENSEMBLE III to create a compact, affordable surround speaker system.
ENSEMBLE IV HOME THEATRE. Ensemble III Home Theatre adds three satellites to
the ENSEMBLE IV for the most affordable surround speaker system.
TOWER-TM- Series Speakers. The Company has introduced three new
floor-standing tower speakers. TOWER is a three-way, dual-woofer, bipolar design
with real hardwood veneer cabinets that appeals to "high end" audiophile
customers. TOWER II is very similar to TOWER, but does not use a bipolar design
(which involves rear-facing speakers that reflect off the wall), and uses
wood-simulating vinyl finishes. TOWER III is an affordable audiophile speaker
system using a two-way, single woofer design.
CENTER CHANNEL SPEAKERS. Cambridge SoundWorks manufactures five speakers for
use as center channel speakers in Dolby Pro Logic home theater systems which
incorporate separate channels for movie sound reproduction (the center channel
carries the dialogue). All five speakers are magnetically
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shielded so they can be placed near a TV or computer monitor. CENTER/SURROUND IV
and CENTER/ SURROUND III are small, affordable center speakers designed for use
with the Company's ENSEMBLE IV and ENSEMBLE III speaker systems. CENTER CHANNEL
II is a center speaker with a wide/low profile designed to be used with the
Company's ENSEMBLE II speaker system. CENTER CHANNEL PLUS is a center speaker
with a wide/low profile designed to be used with the Companys ENSEMBLE speaker
system. CENTERSTAGE-TM- is a high-output center speaker with a wide/low profile
designed to be used with the Company's TOWER series speaker systems.
SURROUND SPEAKERS. Cambridge SoundWorks makes five surround speakers.
CENTER/SURROUND IV and CENTER/SURROUND III are small affordable surround
speakers designed for use with the Company's ENSEMBLE IV and ENSEMBLE III
speaker systems. MODEL SEVENTEEN is a two-way, wide-range speaker suitable for
use as surround speakers in the new Dolby Digital surround sound systems. THE
SURROUND-Registered Trademark- and THE SURROUND II are "dipole radiator"
surround speakers which reproduce sound from both sides of the speaker, causing
the reflected sound to surround the listener with uniform sound. THE SURROUND
has a very high power handling capacity and is often selected for "high end"
surround sound systems, including the new Dolby Digital systems. THE SURROUND II
is smaller and more affordable than THE SURROUND.
POWERED SUBWOOFERS. The POWERED SUBWOOFER by Cambridge SoundWorks consists
of a heavy-duty 12" woofer housed in an acoustic-suspension cabinet with a
140-watt amplifier and a built-in electronic crossover. The POWERED SUBWOOFER II
uses a 120 watt amplifier with an 8" woofer. The POWERED SUBWOOFER III uses an
even smaller amplifier with a 6 1/2" woofer. Cambridge SoundWorks' SLAVE
SUBWOOFER, used in connection with the POWERED SUBWOOFER, uses the same woofer
driver and cabinet as the POWERED SUBWOOFER, but does not include the amplifier
or crossover.
MODEL SIX SPEAKERS. MODEL SIX is a two-way, acoustic-suspension speaker
available in three cabinet finishes.
MODEL SEVENTEEN SPEAKERS. MODEL SEVENTEEN is a two-way, acoustic-suspension
speaker available in four cabinet finishes.
AMBIANCE-REGISTERED TRADEMARK- IN-WALL SPEAKERS. AMBIANCE IN-WALL is a
compact two-way speaker designed to deliver high performance music reproduction
in rooms with limited space.
WEATHER-RESISTANT SPEAKERS. Cambridge SoundWorks makes two versions of its
all-weather speaker: THE OUTDOOR and THE OUTDOOR IN-WALL. These speakers perform
like the AMBIANCE speakers.
SOUNDWORKS. SOUNDWORKS is a compact, amplified speaker system designed for
use with multimedia computer systems or in home stereo systems. It consists of a
pair of satellite speakers and a compact, subwoofer cabinet that also encloses
the systems amplifier. An optional carry bag and rechargeable battery are also
available.
TRANSPORTABLE SPEAKER SYSTEM. The Company's MODEL TWELVE consists of two
satellite speakers, a three-channel amplifier with built-in electronic crossover
and a carrying case (the patented BASSCASE-TM-) that doubles as the system's
subwoofer. The MODEL TWELVE can work on 110, 220 and 12 volts, and is designed
for use in computer-audio presentations to groups of people.
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PRODUCTS OF OTHER MANUFACTURERS
The Company sells a variety of audio and home theater products manufactured
by Aiwa, Carver, Clarion, Harman Kardon, Marantz, Panasonic, Pioneer, RCA, JVC,
Sony, and others, including receivers, cassette decks, CD and laser disc
players, CD interactive players, VCR's, TVs, wide screen televisions and DSS
(digital satellite systems). These other products complement the Company's
branded speakers and enable the Company to offer all of the components necessary
for complete stereo and home theater systems. The Company has also recently
started to offer selected car stereo components and systems from brands such as
Pioneer and Clarion. In addition, the Company sells a variety of audio
accessories including audio and video tapes, cable, earphones, stands, mounting
brackets, cabinets, remote control systems, and other related equipment. Many of
the cable and connecting accessories are sold under the Cambridge SoundWorks
brand.
Consistent with its overall philosophy, the Company sells only products that
it believes will enhance the performance of the Company's speakers. The Company
sells a select range of competing products, those designed to be one of the best
values in its product category. By pre-selecting what it believes to be the best
audio components, the Company saves the consumer the time required to analyze
all the different brands and models currently on the market and focuses the
selling effort on the Company's speakers.
Through high-volume buying arrangements with the manufacturers of these
products, the Company believes it is able to offer these products at prices
which are, in most instances, comparable to, or lower than, those offered by
competitors. The Company currently matches advertised prices from authorized,
inventory-stocking dealers for the components featured in its retail stores and
in its catalog.
CUSTOMER SATISFACTION
The Company has a 30-day return policy intended to ensure customer
satisfaction. The Company's non-amplified speakers are also covered by a
seven-year limited parts and labor warranty covering repairs or replacements due
to manufacturing defects in its speakers. Historically, warranty costs are not
significant. The Company believes its return policy and warranty are consistent
with industry practices and essential to customer satisfaction.
The Company has a Cambridge SoundWorks charge card (with credit extended by
a bank) which permits qualified customers to make credit purchases without
finance charges for extended periods, provided payment is made when due. The
Company believes that its charge card facilitates customer purchases of the
Company's merchandise and reinforces customer loyalty to the Company's products
and brand name.
MARKETING AND CATALOG CIRCULATION
The Company engages in extensive national advertising in audio magazines,
general interest magazines and national and local newspapers targeted by the
Company. In certain circumstances, the Company uses its advertising in national
audio publications as a mini-catalog for the Company's key products, providing
information concerning the Company's products, stressing the Company's
reputation for value, the persona and experience of Henry Kloss, and the
availability of experienced audio experts. The mini-catalog includes the
Company's toll-free number and other information to assist the reader in
obtaining the full catalog and ordering products by phone. The Company also
advertises extensively on local radio stations in the Boston, Massachusetts, and
San Francisco, California, markets where its retail stores are located.
Television advertising is also used in the Boston, Massachusetts market.
The Company has developed and uses a customer database which is maintained
by its sales personnel. The Company uses this database to monitor inquiry and
sales productivity, demographic information and the overall effectiveness of its
advertising. The Company believes that its database provides a cost effective
means to target repeat customers. The database also provides supplemental
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information to focus advertising and marketing strategies and to develop new
product ideas. The Company creates most of its advertising and marketing
materials in-house in order to minimize costs, shorten lead times and control
the presentation of the Company's brand image.
The Company published three full-color catalogs in the period from July
3,1995, to June 30, 1996, depicting the Company's speakers as well as selected
other audio and video components that complement the Company's speakers. The
catalogs contain extracts from trade reviews of the Company's products as well
as information on speaker placement, surround sound and home theater technology,
and other items of topical interest. The catalogs contain minimal technical
jargon and are designed to increase sales through education of the consumer. The
Company generates names for its mailing list primarily through advertising and
customer referrals. The Company also tests, from time to time, other methods for
distributing its catalogs to potential customers, such as including free
catalogs with selected issues of specialty magazines and renting selected
mailing lists.
STORE OPERATIONS
As of September 1996, the Company had 18 stores in New England, and 10
stores in the San Francisco, California, Bay area. These stores contain
approximately 2,000 to 4,000 square feet of retail space, including listening
rooms. They are decorated with pictures of the Company's factory operations and
stock only quantities of inventory sufficient for immediate customer needs. Two
stores, one in Newton Upper Falls, Massachusetts and one on Van Ness Avenue in
San Francisco, California, are large "SuperStores" capable of doing high-volume
business. Three New England stores (Newton Upper Falls, Massachusetts, Harvard
Square in Cambridge, Massachusetts and Worcester, Massachusetts) and one Bay
Area store (South San Francisco, California) are "Outlet Centers" that include
large departments of open-box and refurbished goods at discounted prices.
As of September, 1996, Cambridge SoundWorks had 28 retail stores as
described in the summary below.
NEW ENGLAND AREA
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DATE OPENED LOCATION TYPE OF LOCATION
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1990 West Newton, Massachusetts Original factory store
September 1994 Newton Upper Falls, Massachusetts New factory "SuperStore"
February 1994 Hanover, Massachusetts Outdoor shopping center
March 1994 Danvers, Massachusetts Major suburban shopping mall
Relocated to North Shore Mall
Peabody,Massachusetts in August 1996
June 1994 Burlington, Massachusetts Major suburban shopping mall
Relocated to Burlington Mall
Burlington, Massachusetts in September 1996
October 1994 Nashua, New Hampshire Outdoor shopping center
November 1994 CambridgeSide Galleria, Major urban shopping mall
Cambridge, Massachusetts
December 1994 Worcester Common Fashion Outlets Mall, Enclosed factory outlet center
Worcester, Massachusetts
March 1995 Cape Cod Mall, Major suburban shopping center
Hyannis, Massachusetts
June 1995 Framingham, Massachusetts Outdoor shopping center
September 1995 Harvard Square, Urban "Main Street" location
Cambridge, Massachusetts
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DATE OPENED LOCATION TYPE OF LOCATION
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September 1995 Square One Mall, Major suburban shopping center
Saugus, Massachusetts
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September 1995 The Mall at Rockingham Park Major suburban shopping center
Salem, New Hampshire
September 1995 The Mall of New Hampshire Major suburban shopping center
Manchester, New Hampshire
October, 1995 The Emerald Square Mall Major suburban shopping center
N. Attleboro, Massachusetts
August, 1996 The Maine Mall Major suburban shopping center
S. Portland, Maine
August, 1996 Solomon Pond Mall Major suburban shopping center
Marlboro, Massachusetts
September, 1996 West Farms Mall Major suburban shopping center
W. Hartford, Connecticut
SAN FRANCISCO AREA
September 1994 San Francisco, California Urban "Main Street" location
October 1994 Berkeley, California Suburban "Main Street" location
October 1994 Hayward, California Outdoor shopping center
October 1994 Concord, California Major suburban shopping center
Relocated to SunValley Mall
Concord, California, September, 1996
October 1994 Walnut Creek, California Suburban "Main Street" location
December 1994 Palo Alto, California Suburban "Main Street" location
June 1995 South San Francisco, California Factory outlet store
November 1995 Stonestown Galleria Major suburban shopping center
San Francisco, California
September 1996 Stoneridge Mall Major suburban shopping center
Pleasanton, California
September 1996 The Great Mall Enclosed Factory Outlet center
Milpitas, California
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PRODUCT DEVELOPMENT
To maintain its competitive position in the audio products industry, the
Company introduces new products and features that address the demands and
preferences of consumers. The Company's research and development effort is
directed by the Company's President, Thomas J. DeVesto. The Company's research
and development team consists of Henry E. Kloss, product development consultant,
Tom Wethern, Engineering Manager, Fred Pinkerton, Product Manager, and Roy
Allison, product development consultant. Mr. DeVesto has over 15 years
experience working with Mr. Kloss developing a wide range of audio and video
products from big-screen TVs to multimedia speaker systems. Mr. Kloss is one of
the original founders of the Company, and has over 40 years of experience
designing speakers, including best-selling models at Acoustic Research, KLH and
Advent. Mr. Wethern was Chief Acoustician at a/d/s, a New England loudspeaker
and amplifier manufacturer. Prior to a/d/s,
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Mr. Wethern was Transducer Engineer for Boston Acoustics. Mr. Pinkerton was
formerly Product Manager at Boston Acoustics, Inc. and Advent. Roy Allison has
over 40 years of speaker design experience, including highly acclaimed models at
Acoustic Research, Allison Acoustics and RDL.
At an early date, the Company recognized the importance of home theater
(which involves integrating TV and video output with stereo or multi-channel
audio sound) and has designed a variety of products for this application. A
significant portion of the Company's fiscal 1996 speaker revenues were derived
from speaker sales related to the home theater concept. The Company also
recognized the emergence of opportunities in the PC/multimedia markets and
introduced SOUNDWORKS in 1994, its first speaker designed for use with
multimedia computer systems.
The Company's product development cycle is driven by ongoing market
analysis, by customer feedback and by its responsive manufacturing process. The
Company is quick to identify audio trends and brings new products to market that
are of high quality and offer good value to a wide range of consumers. The
Company also uses the services of outside consultants in industrial design and
the design of electronic circuitry as needed. In addition, the Company works
closely with selected audio component suppliers and other technology developers
to evaluate the latest developments in audio-related technology.
MANUFACTURING, VENDORS AND SUPPLIERS
The Company's manufacturing facilities are located in Newton Upper Falls,
Massachusetts. The products assembled by the Company include traditional
speakers, which require various semi-skilled light assembly operations, as well
as electronically integrated, powered speakers, which entail more complex
assembly and testing procedures. The Company currently employs 89 production
workers and manufacturing support personnel.
The Company's speakers are assembled from parts and sub-assemblies designed
or selected by its research and development team. Some of these parts and
sub-assemblies are purchased from, or specially fabricated for the Company by,
outside suppliers. The Company also manufactures parts and sub-assemblies
in-house, including some of the speaker cabinets, woofers, crossover networks
and electronic components used in the final assembly of many of its branded
speakers. The Company has a fully-integrated cabinet building operation
including woodworking and paint shops.
The Company sells a number of other audio and video components which it
purchases from selected manufacturers. The Company offers only those products of
selected manufacturers which it believes are of comparable quality to, and
compatible with, its own speaker products.
TRADEMARKS, LICENSES AND PATENTS
The following are trademarks of the Company: CAMBRIDGE
SOUNDWORKS-REGISTERED TRADEMARK-, CAMBRIDGE SOUNDWORKS LISTENING ROOM-TM-,
BASSCASE-REGISTERED TRADEMARK-, ENSEMBLE-REGISTERED TRADEMARK-, ENSEMBLE BY
HENRY KLOSS-REGISTERED TRADEMARK-, ENSEMBLE BY HENRY KLOSS AND
DESIGN-REGISTERED TRADEMARK-, MODEL SIX-TM-, MODEL SEVENTEEN-TM-,
AMBIANCE-REGISTERED TRADEMARK-, AMBIANCE BY HENRY KLOSS-REGISTERED TRADEMARK-,
AMBIANCE BY HENRY KLOSS AND DESIGN-REGISTERED TRADEMARK-, MODEL TEN-A-TM-, THE
SURROUND AND DESIGN-REGISTERED TRADEMARK-, THE SURROUND-REGISTERED TRADEMARK-,
THE SURROUND BY HENRY KLOSS-TM-, THE OUTDOOR-TM-, MODEL
ELEVEN-REGISTERED TRADEMARK-, MODEL TWELVE-TM-, POWERED SUBWOOFER-TM-, SLAVE
SUBWOOFER-TM-, SOUNDWORKS-REGISTERED TRADEMARK-, SOUNDWORKS BY HENRY
KLOSS-REGISTERED TRADEMARK-, FACTORY-DIRECT SPEAKER WALL-TM-, CAMBRIDGE
SOUNDWORKS PROLINE AND DESIGN-TM-, TOWER BY HENRY KLOSS-TM-, CENTER STAGE-TM-,
CENTER STAGE BY HENRY KLOSS-TM-, MOVIEWORKS-TM-, MICROWORKS-TM-, MICROWORKS BY
HENRY KLOSS-TM-, YOU JUST CAN'T GET IT ANYWHERE ELSE-TM-, AND A NEW KIND OF
AUDIO COMPANY-TM-. The Company also has a number of other unregistered
trademarks. The Company holds a United States patent relating to the design of
its BassCase, a component of the MODEL ELEVEN-A and MODEL TWELVE speaker
systems. The Company believes that the success of its business is more dependent
upon marketing and product innovations than patented technology.
CUSTOMERS
The Company had one customer, Best Buy, which accounted for 22% of net sales
for the year ended June 30, 1996, the loss of which would have a material
adverse effect on the Company's operations.
9
<PAGE>
EMPLOYEES
At September 18, 1996, the Company had 271 full-time and 13 part-time
employees, of whom 110 were engaged in manufacturing, 155 in sales, customer
service and marketing, four in engineering and product development and 15 in
administration. The Company considers its employee relations to be good. None of
the Company's employees is covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's administration, direct marketing/catalog fulfillment, audio
"SuperStore" and manufacturing operations are located in a 73,300 square foot
building in Newton Upper Falls, Massachusetts. The building is under a ten year
lease that commenced September 1994.
The Company signed a four-year lease for 99,000 square feet of warehouse
space in Westwood, Massachusetts, in June 1995. The Company also has a leased
warehouse, containing approximately 5,800 square feet, in South San Francisco,
California, which is used to service the Company's retail stores in Northern
California and fulfill West Coast catalog orders.
The Company's retail stores typically contain 2,000 to 4,000 square feet of
retail space under operating lease agreements with terms ranging from two to 15
years or tenancies-at-will. The Company plans to open additional retail stores
in fiscal 1997 using leased premises.
The Company's manufacturing facility generally operated moderately below
capacity for the year ended June 30, 1996.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to
the section entitled "Market for Registrant's Common Equity and Related
Stockholder Matters" on page 3 of the Company's 1996 Annual Report, which is
filed herewith as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
the section entitled "Selected Financial Data" on page 2 of the Company's 1996
Annual Report, which is filed herewith as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations", pages 4 and 5 of the Company's 1996 Annual
Report, which is filed herewith as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to
the consolidated financial statements of the Company (including the notes
thereto) and the independent public accountant's report thereon appearing on
pages 6 through 11 of the Company's 1996 Annual Report, which is filed herewith
as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ---------------------------------------------------------------------------
<S> <C> <C>
Thomas J. DeVesto 49 President, Chief Executive Officer and Director
Wayne P. Garrett 40 Vice President -- Finance, Chief Financial Officer, Treasurer and Clerk
Thomas J. Hannaher 44 Vice President -- Marketing
Robert S. Mainiero 40 Vice President -- Business Development
Sandy Ruby 55 Vice President -- Retail
Thomas E. Brew, Jr. (1)(2) 54 Director
Leo Kahn (1)(2) 79 Director
Henry E. Kloss 67 Director
Peter B. Seamans (1)(2) 72 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
THOMAS J. DEVESTO co-founded the Company. He has been a director, President
and Chief Executive Officer since 1988. From 1985 to 1988, he was a consultant
to ITT Corporation and represented ITT in connection with its relationship with
Kloss Video Corporation. From 1978 to 1985, he was Vice President of Sales and
Marketing of Kloss Video Corporation. From 1976 through 1978, Mr. DeVesto held
various sales management positions in the international and domestic divisions
of Advent.
WAYNE P. GARRETT has been Vice President -- Finance, Chief Financial
Officer, Treasurer and Clerk of the Company since June 1995. Mr. Garrett was
employed by Argus Management Corp. as a management consultant from 1983 to 1995.
From 1978 to 1981, he was employed as an auditor by Price Waterhouse. Mr.
Garrett has BS and MBA degrees from Boston College and is a Certified Public
Accountant.
THOMAS J. HANNAHER has been Vice President -- Marketing of the Company since
December 1993. From 1979 to 1993, he owned and operated an advertising and
marketing agency and provided consulting services to a number of companies,
including the Company, Boston Acoustics, NAD, Tweeter and Apple Computer.
ROBERT S. MAINIERO has been Vice President -- Business Development of the
Company since January 1996. Mr. Mainiero was Vice President - Sales for a/d/s
from October 1993 to December 1995. From 1985 to 1993 he served as Zone Manager
for Alpine Electronics of America and previously served as Assistant National
Sales Manager of Kloss Video Corporation.
SANDY RUBY has been Vice President -- Retail of the Company since July 1995.
From 1985 to 1995, Mr. Ruby was a systems consultant and Vice President of
Practicorp International. Mr. Ruby was a founder and Chief Executive Officer of
Tech HiFi, a 70-store consumer electronics retail chain from 1968 to 1984.
THOMAS E. BREW, JR., has been a director of the Company since June 1995. Mr.
Brew has been the President, Chief Executive Officer and a director of Kurzweil
Applied Intelligence, Inc., since November 1994. From 1979 to 1994 he was
co-founder and Executive Vice President of Argus Management Corp. Mr. Brew is a
Certified Public Accountant and an attorney.
11
<PAGE>
LEO KAHN has been a director of the Company since June 1995. Mr. Kahn has
been a partner of United Properties since 1985, and a director of Big V
Supermarkets and of Grossmans, Inc., since 1986. In 1948 Mr. Kahn was a founder,
President and Chief Executive Officer of Purity Supreme, Inc., and co-founder of
Staples, Inc., in 1986.
HENRY E. KLOSS co-founded the Company. He has been a director of the Company
since 1988. From 1988 to May 1996, Mr. Kloss served as the Company's Chairman of
the Board of Directors and Director of Product Development. Mr. Kloss also
served as Clerk and Treasurer of the Company from 1988 to February 1994. Prior
to 1988, Mr. Kloss co-founded and was General Manager of Acoustic Research and
was the founder and President of KLH, Advent and Kloss Video. Mr. Kloss was
responsible for product design and development at each of these companies.
PETER B. SEAMANS has been a director of the Company since March 1996. Mr.
Seamans has been a partner with the law firm of Peabody & Arnold since 1957. He
previously served as a director of Kloss Video Corporation and Advent
Corporation and currently serves on the board of the Peabody Essex Museum and
the USS Constitution Museum.
All directors hold office until the next annual meeting of the stockholders
and until their successors are elected and qualified. All officers of the
Company are elected annually by the Board of Directors and serve at the Board's
discretion. There are no family relationships among any of the directors, or
officers of the Company.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees of,
and consultants to, the Company, and an Audit Committee, which reviews the
results and scope of the audit and other services provided by the Company's
independent auditors.
DIRECTOR COMPENSATION
Outside directors are compensated for their service on the Board of
Directors at the rate of $1,000 per meeting plus expenses. Directors who are
employees of the Company are not paid any additional compensation for serving as
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has a Compensation Committee, consisting of Thomas E. Brew, Jr.,
Leo Kahn and Peter B. Seamans. The Compensation Committee is responsible for
establishing executive compensation.
The Company entered into a license agreement with Henry Kloss giving it the
right to use Mr. Kloss' name on its products. The license agreement between the
Company and Mr. Kloss provides that the Company has the perpetual right to use
his name on products which Mr. Kloss designed or had a substantial role in
designing, subject to termination as to any products whose appearance or
performance specifications are materially changed by the Company without Mr.
Kloss' consent. Upon the termination of Mr. Kloss' employment, the Company may
not use his name generically or in connection with a product unless the Company
had previously done so, even if Mr. Kloss designed the product while employed by
the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the information appearing in the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on October 22, 1996 under the heading
"Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the information appearing in the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on October 22, 1996 under the heading
"Principal and Management Stockholders."
12
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the information appearing in the Summary Compensation Table in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
October 22, 1996 under the heading "Executive Compensation" and the information
appearing therein under the heading "Certain Transactions and Relationships."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are included as part of the report:
(1) Financial Statements
The following financial statements of the Company and the report of
the independent certified public accountants are incorporated herein by
reference to the Company's 1996 Annual Report, which is filed herewith as
Exhibit 13.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules
None
(3) Exhibits
Certain of the exhibits listed hereunder have been previously filed
with the Commission as exhibits to certain registration statements and
periodic reports as indicated in the footnotes below and are incorporated
herein by reference pursuant to Rule 411 promulgated under the Securities
Act and Rule 24 of the Commission's Rules of Practice.
<TABLE>
<C> <S>
*3.1 Restated Articles of Organization
*3.2 Amended and Restated By-Laws
*4 Specimen Common Stock Certificate
*10.1 License Agreement with Henry E. Kloss
*10.2 Form of Noncompetition, Nondisclosure and Assignment of Inventions Agreement
*10.3 Cambridge SoundWorks, Inc., 1993 Stock Option Plan
*10.4 Form of Incentive Stock Option Agreement
*10.5 Form of Nondisclosure Agreement with Consultants
*10.6 Employment Agreement (Henry E. Kloss)
*10.7 Employment Agreement (Thomas J. DeVesto)
*10.8 Exclusive Retailer Agreement dated February 27, 1995 with Best Buy Co., Inc.
*10.9 Lease dated May 20, 1994 with Burlington Square Limited Partnership, as
amended by First Amendment to Lease dated May 20, 1994
*10.10 Lease dated February 10, 1994 with John C. Sanidas, Trustee of Amberwood
Development Trust, u/d/t dated July 17, 1984
*10.11 Lease dated January 1994 with Fred Ross, as Trustee of Sher-Zall Families
Trust, u/d/t dated November 15, 1976
*10.12 Retail Lease dated July 19, 1994 with Chestnuts Realty Trust
</TABLE>
13
<PAGE>
<TABLE>
<C> <S>
*10.13 Lease dated May 31, 1994 with L&CP Realty Corporation, as amended by Addendum
to Lease dated June 1, 1994, Agreement dated September 15, 1994, Amendment to
Lease dated December 28, 1994, and Agreement of Settlement and Release dated
December 28, 1994
*10.14 License and Indemnification Agreement dated November 23, 1994 with Worcester
Center Realty Trust u/d/t dated March 31, 1989
*10.15 Indenture of Lease dated September 26, 1994 with Trustees of CambridgeSide
Galleria Associates Trust, formerly known as Riverside Galleria Associates
Trust, u/d/t dated as of April 1, 1985
*10.17 License Agreement with Trustees under Trust Agreement dated February 1, 1967
*10.18 Commercial Lease and Deposit Receipt dated August 30, 1994 with The Victor
Family Trust
*10.19 Lease dated July 15, 1994 with M.K. Blake Estate Co.
*10.20 Shopping Center Lease dated as of July 8, 1994 with Keadjian Living Trust, a
Family Trust
*10.21 Lease dated August 25, 1994 with Richard E. Brenkwitz, Trustee of the Richard
E. Brenkwitz Living Trust dated February 12, 1987
*10.22 Retail Lease dated as of June 7, 1994 with John and Robert Isaacs
*10.23 Shopping Center Lease dated as of July 8, 1994 with Keadjian Living Trust, a
Family Trust
*10.24 Standard Industrial/Commercial Single-Tenant Lease dated November 11, 1994
with Janet Christiansen and Rod McDougall
*10.25 Lease Agreement dated June 26, 1995 with Granite Investment Corp.
*10.26 Loan and Security Agreement dated April 27, 1995 with The First National Bank
of Boston
*10.27 Letter Agreement dated October 18, 1995 from The First National Bank of
Boston to the Company
*10.28 Lease Agreement dated April 14, 1995 with Homart Development Co.
*10.29 Retail Lease Agreement dated April 6, 1995 with Project 101 Associates
*10.30 Lease Agreement dated April 6, 1995 with Project 101 Associates
*10.31 Indenture of Lease dated January 5, 1996 with Square One Mall Limited
Partnership
*10.32 Memorandum of Lease dated October 31, 1995 with Dorothy Waugh Wrightson
*10.33 Indenture of Lease dated January 5, 1996 with Rocksoe Mall L.L.C.
*10.34 Indenture of Lease dated January 5, 1996 with MNH Mall L.L.C.
*10.35 Indenture of Lease dated January 5, 1996 with N.A. Realty Trust, u/d/t dated
as of June 17, 1983
10.36 Letter Agreement dated February 27, 1996 from the First National Bank of
Boston to the Company
10.37 Letter Agreement dated June 30, 1996 from the First National Bank of Boston
to the Company
10.38 Letter Agreement dated August 5, 1996 from the First National Bank of Boston
to the Company
13 Cambridge SoundWorks, Inc. 1996 Annual Report
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
- ------------------------
*Previously filed
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the Town of Newton,
Commonwealth of Massachusetts, on the 25th day of September, 1996.
CAMBRIDGE SOUNDWORKS, INC.
BY: /s/ Thomas J. DeVesto
------------------------------
Thomas J. DeVesto
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- -------------------------------- ------------------------------------------------------ -----------------------
<S> <C> <C>
/s/ Thomas J. DeVesto President, Chief Executive September 25, 1996
- --------------------- Officer and Director
Thomas J. DeVesto (Principal
Executive Officer)
/s/ Wayne P. Garrett Vice President -- Finance, Chief September 25, 1996
- --------------------- Financial Officer, Treasurer
Wayne P. Garrett and Clerk (Principal Financial and
Accounting Officer)
/s/ Peter B. Seamans Director September 25, 1996
- ---------------------
Peter B. Seamans
/s/ Thomas E. Brew, Jr. Director September 25, 1996
- ---------------------
Thomas E. Brew, Jr.
</TABLE>
15
<PAGE>
Exhibit 10.36
February 27, 1996
Wayne P. Garrett
Vice President - Finance/CFO
Cambridge SoundWorks, Inc.
311 Needham Street
Newton, Massachusetts 02164
Re: Second Amendment to Loan and Security Agreement
dated as of April 27, 1995
Dear Wayne:
We refer to the loan and Security Agreement dated as of April 27, 1995,
between Cambridge SoundWorks, Inc. (the "Borrower") and the First National
Bank of Boston (the "Lender"), as amended by that certain Amendment to Loan
and Security Agreement, which amendment is dated October 18, 1995 (as so
amended, the "Loan Agreement").
This will confirm our understanding that, from and after the date
hereof:
(1) Section 3.5 of the Loan Agreement, entitled "REDUCTION OF LOAN
ACCOUNT" is hereby deleted in its entirety; and
(2) Section 1.2 of the Loan Agreement is hereby deleted in its entirety
and replaced with the following new Section 1.2:
"1.2 "Base Accounts" shall mean Account Receivable of the borrower
(a) which arise in the ordinary course of the business operations
of the Borrower, consistent with past practices, and which are due
from account debtors located in the United States, the Commonwealth
of Puerto Rico and the U.S. Virgin Islands, and (b) as to which the
Lender has a valid and perfected first-priority security interest
and the Borrower has furnished to the Lender information as
provided by Section 3.4 hereof (and without limiting the foregoing,
"Base Accounts" shall not include any Accounts Receivable of the
Borrower arising from the sale or other disposition of goods
subject to a security interest listed on Schedule 7.2 hereof)."
<PAGE>
Wayne P. Garrett
Vice President - Finance/CFO
February 27, 1996
Except to the extent specifically amended by the preceding
paragraphs (1) and (2), respectively, all of the terms, conditions and
provisions of the Loan Agreement remain unmodified, and the Loan Agreement,
as amended by this letter, is confirmed as being in full force and effect.
In addition, this letter does not constitute a waiver of any rights or
remedies which the Lender may have under the Laon Agreement or otherwise
arising.
Please sign this letter where indicated below to confirm your
agreement with the provisions hereof.
Very truly yours,
THE FIRST NATIONAL BANK OF BOSTON
By:/s/ Timothy G. Clifford
-------------------------------
Title: Vice President
ACCEPTED AND AGREED
as of the date of the above letter:
CAMBRIDGE SOUNDWORKS, INC.
By: /s/ Wayne P. Garrett
--------------------------------
Title: V.P. Finance - CF0
<PAGE>
Exhibit 10.37
As of June 30, 1996
Wayne P. Garrett
Vice President - Finance/CFO
Cambridge SoundWorks, Inc.
311 Needham Street
Newton, Massachusetts 02164
Re: Amendment to Loan and Security Agreement dated as of April 27, 1995
Dear Wayne:
We refer to the loan and Security Agreement dated as of April 27, 1995
(as amended, the "Agreement"), between Cambridge SoundWorks, Inc. (the
"Borrower") and the First National Bank of Boston (the "Lender").
This will confirm our understanding that, from and after the date
hereof: (a) the reference to the dollar amount "$5,800,000" in clause (i) of
the definition of "Borrowing Base," within Section 1.6 of the Agreement,
shall be deleted and replaced with a reference to the dollar amount
"$7,400,000;" and (b) the reference to "the Base Rate plus one-quarter of one
percent (.25%)" within Section 5.1 (b) of the Agreement shall be deleted and
replaced with a reference to "the Base Rate plus three-quarters of one
percent (.75%)."
In addition, this will confirm that, in addition to the security
interests already granted, you will also now grant to us a first-priority
security interest in your fixed assets, and accordingly, Section 7.1 of the
Agreement is amended to read in its entirety as net forth on ANNEX A hereto.
Except to the extent specifically amended by the preceding paragraph,
all of the terms, conditions and provisions of the Agreement (including
without limitation the definition of "Borrowing Base" apart from the dollar
reference as so amended) will remain unmodified, and the Agreement, as
amended by this letter, is confirmed as being in full force and effect. In
addition, this letter does not constitute a waiver of any rights or remedies
which the Lender may have under the Agreement or otherwise arising.
<PAGE>
Please sign the letter where indicated below to confirm your agreement
with the provisions hereof.
Very truly yours,
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Timothy G. Clifford
_______________________________
Title: Vice President
ACCEPTED AND AGREED
as of the date of the above letter:
CAMBRIDGE SOUNDWORKS, INC.
By: /s/ Wayne P. Garrett
_____________________________
Title: V.P. Finance - CFO
<PAGE>
ANNEX A
7.1 As security for the payment and performance of all Obligation
(including, without limitation, the Borrower's Obligations hereunder), the
Lender shall have and the Borrower hereby grants to the Lender a continuing
security interest in all personal property and fixtures of the Borrower of
every kind and description, tangible or tangible, whether now or hereafter
existing, whether now owned or hereafter acquired, and wherever located,
including but not limited to the following: all Inventory of the Borrower;
all furniture, fixtures and similar property of the Borrower: all Accounts of
the Borrower, all contract rights of the Borrower (including without
limitation all rights of the Borrower under the Best Buy Agreement); all
other rights of the Borrower to the payment of money, including without
limitation amounts due from franchises, affiliates, or Subsidiaries, tax
refunds, and insurance proceeds; all machinery and equipment of the Borrower;
those assets which are, or will be, classified as "gross fixed assets" within
the Borrower's audited financial statements delivered to the Lender pursuant
to Section 2.14 (a); all interests of the borrower in goods as to which an
Account shall have arisen; all files, records (including without limitation
computer programs, tapes and related electronic data processing software) and
writings of the Borrower or in which the Borrower has an interest, in any way
relating to the foregoing property (including without limitation customer
lists); all good, instruments, documents of title, policies and certificates
of insurance, securities, chattel paper, deposits, cash or other property
owned by the Borrower or in which the Borrower has an interest which are now
or hereafter be in the possession of the Lender or as to which the Lender may
now or may hereafter control possession by documents of tittle or otherwise;
all general intangibles of the Borrower; and any rights of the Borrower to
retrieval from third parties of electronically processed and recorded
information pertaining to any of the types of collateral referred to in this
Section 7.1; any other property of the Borrower, tangible or intangible, in
which the Lender now has or hereafter acquires a security interest or which
is now or may hereafter be in the possession of the Lender; any sums at any
time credited by or due from the Lender to the Borrower, including deposits;
and proceeds and products of all of the foregoing: PROVIDED THAT, the
foregoing security interest shall not extend to the patents, trademarks,
copyrights and customer lists of the Borrower (the "Intellectual Property");
PROVIDED FURTHER, however, that the foregoing proviso shall not apply, and
the foregoing security interest shall extend, to Intellectual Property which
constitutes the proceeds of property which itself does not constitute
Intellectual Property.
<PAGE>
Exhibit 10.38
As of August 5, 1996
Wayne P. Garrett
Vice President - Finance/CFO
Cambridge SoundWorks, Inc.
311 Needham Street
Newton, Massachusetts 02164
Re: Amendment to Loan and Security Agreement dated as of April 27, 1995
Dear Wayne:
We refer to each of: (i) the loan and Security Agreement dated as of
April 27, 1995 (as amended, the "Agreement"), between Cambridge SoundWorks,
Inc. (the "Borrower") and the First National Bank of Boston (the "Lender"),
and (ii) the Subordination Agreement, dated August 5, 1996, between Marantz
America, Inc. ("Marantz") and the Bank, and countersigned by the Borrower
(the "Subordination Agreement").
This will confirm our understanding that, upon the execution and
delivery of the Subordination Agreement, and notwithstandging the provisions
of Section 7.2 of the Agreement, you will be permitted to grant to Marantz a
security interest in the Marantz inventory upon the terms contained in, and
to the extent provided in, the Subordination Agreement. In addition, in
consideration of our consenting to the aforementioned security interest, this
will confirm that so long as such security interest in favor of Marantz
remains in effect, you agree that the amount of your Marantz Inventory at any
one time will not exceed 15% of your aggregate amount of so-called "branded"
Inventory at such time.
Except to the extent specifically amended by the preceding paragraph,
all of the terms, conditions and provisions of the Agreement will remain
unmodified, and the Agreement, as amended by this letter, is confirmed as
being in full force and effect. In addition, this letter does not constitute
a waiver of any rights or remedies which the Lender may have under the
Agreement or otherwise arising.
<PAGE>
Please sign the letter where indicated below to confirm your agreement
with the provisions hereof.
Very truly yours,
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Timothy G. Clifford
______________________________
Title: Vice President
ACCEPTED AND AGREED
as of the date of the above letter:
CAMBRIDGE SOUNDWORKS, INC.
By: /s/ Wayne P. Garrett
___________________________________
Title: Vice President - CFO
<PAGE>
Exhibit 13
CAMBRIDGE SOUNDWORKS, INC. ANNUAL REPORT 1996
To Our Stockholders:
Fiscal 1996 was a year of record sales for Cambridge SoundWorks. Our sales
increase of 62% was in part the result of the fact that we added new stores and
a new warehouse facility which should continue to contribute to future sales
growth. Other initiatives in our ongoing program to expand sales include
completion of the first year in our relationships with Best Buy Company and AEI
Music, development of a new promotional product distribution program, and new
foreign distributors. Marketing relationships with IBM and Cyrix Computer also
added to 1996 sales and, more importantly, further established the Cambridge
SoundWorks brand on the national and international level. 1996 was also a record
year for new product introductions, with seven new speaker models introduced at
a New York press conference in May. With these new models, in conjunction with
our existing lines, Cambridge SoundWorks now covers all the major segments of
the home hi fi speaker market.
RECORD SALES.
Net sales for fiscal 1996 increased 62% to $43.585 million compared to $26.928
million for the same twelve month period last year. Net income for the year was
$250,835, or $.09 per share, compared to a net loss of $771,418, or $.27 per
share a year ago.
NEW STORES.
In fiscal 1996, we opened six new Factory-Direct stores, located in Harvard
Square, Cambridge, MA; the Emerald Square Mall in North Attleboro, MA; the
Square One Mall in Saugus, MA; the Mall of New Hampshire in Manchester, NH; the
Mall at Rockingham Park, Salem, NH; and the Stonestown Galleria in San
Francisco, CA. At the close of fiscal 1996 we had a total of 23 locations.
In addition, we have recently opened new Factory-Direct stores in the West Farms
Mall in Hartford, CT; the Solomon Pond Mall in Marlboro, MA; the Maine Mall in
South Portland, ME; the Stoneridge Mall in Pleasanton, CA; and the Great Mall in
Milpitas, CA. We have also moved four stores to better locations. Stores being
relocated include the Concord, CA stand-alone store moving to the Sun Valley
Mall in Concord, CA; the downtown San Francisco store on Van Ness moving one
block to a much larger (4,000 sq. ft.), more visible location; the Danvers, MA
stand-alone store moving to the North Shore Mall in Peabody, MA; and the
Burlington, MA stand-alone store moving to the Burlington Mall, Burlington, MA.
Our store strategy is based on the success of Cambridge SoundWorks' current mall
and high-traffic locations. These stores focus on home stereo and home theater
products, presenting them in a simple, uncluttered layout that emphasizes both
the quality of the products as well as factory-direct savings.
NEW WAREHOUSE FACILITY.
To keep pace with the growth of our sales, in early fiscal 1996, we moved our
main warehouse to a 99,000 sq. ft. facility in Westwood, MA.
NEW PRODUCTS.
At a May press conference in New York, we introduced more new products in 1996
than in any other year in our history.
[PHOTO]
Our new TOWER, TOWER II, TOWER III and CENTERSTAGE speakers.
Our TOWER-TM- ($1,499 pr.), TOWER II ($999 pr.) and TOWER III ($599 pr.) floor-
standing speakers expand our marketing efforts into a very significant price
cat-egory previously unexplored by the company. Our CENTERSTAGE-TM- speaker
($349) is a high-output model designed to match our TOWER series speakers.
CENTER CHANNEL II ($159) is a new low-profile speaker similar to our popular
CENTER CHANNEL PLUS. Both of these center speakers broaden our presence in the
burgeoning home theater field. MICROWORKS-TM- ($349) is a high-power, high-
output amplified subwoofer/satellite speaker system for use with multimedia
computers or in stand-alone music systems. And POWERED SUBWOOFER III ($249)
rounds out our highly acclaimed line of amplified subwoofers. These products
will appear on our store shelves and in our catalog starting in mid September.
We expect significant revenue contributions from them in fiscal 1997.
BEST BUY COMPANY.
We completed the first year of our relationship with Best Buy
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
Company in fiscal 1996. Most Cambridge SoundWorks products are now displayed and
sold in over 260 Best Buy stores nationwide. Best Buy is the country's largest
consumer electronics retailer.
AEI MUSIC.
Fiscal 1996 was also the first full year of our relationship with AEI Music,
Inc., the country's leading music service company. We developed a special series
of heavy-duty speakers for the retail/restaurant/hotel market called Cambridge
SoundWorks PROLINE-TM-. These speakers have begun to appear in retail stores,
restaurants and hotels nationally.
PROMOTIONAL PRODUCT DISTRIBUTION.
Cambridge SoundWorks ventured into the promotional products arena in fiscal 1996
through our partnership with CYRK, Inc. As a result, our SOUNDWORKS-Registered
Trademark- system was placed as a premium in the "Marlboro Gear" catalog.
THE MULTIMEDIA MARKET.
In fiscal 1996 we began to develop important relationships with computer
manufacturers. Our first appearance in the multimedia area of the January 1996
Consumer Electronics Show in Las Vegas led to bundling agreements for our
SOUNDWORKS amplified speaker system with IBM and Cyrix. We are pleased with the
recognition we gained from associating our products with these companies and
consider such relationships a promising area of future growth for Cambridge
SOUNDWORKS.
NEW FOREIGN DISTRIBUTORS.
The company has now established relationships with distributors in France,
Germany, Italy, Mexico, Thailand, China, Singapore and the United Arab Emirates.
Foreign distribution is seen as a major new area of growth for Cambridge
SOUNDWORKS.
CRITICAL REVIEWS.
The company's products continue to attract the favorable attention
of the industry's critics. A small sampling:
- PC magazine says about our SOUNDWORKS system "The best
buy in new PC sound systems has to be SOUNDWORKS...you
may have to listen to a high-quality CD to appreciate just how good
SOUNDWORKS is." They say our MODEL TWELVE, "is unquestionably the finest
computer-related sound system we have yet heard, and its portability makes
this Editors' Choice winner that much more attractive."
- THE NEW YORK TIMES says, "SOUNDWORKS has the most natural musical
timbre."
- STEREO REVIEW magazine says our ENSEMBLE-TM- IV speaker system, "is one
of the top bargains in today's market." They also said our POWERED
SUBWOOFER is, "clearly the best subwoofer of the pack...
it blew them away."
- MACUSER magazine gave our SOUNDWORKS system their Four-Mouse Award, and
said, "In a side-by-side comparison, it's hard to tell the difference
between the SOUNDWORKS system and a set of full-sized speakers...except for
the former's superior bass."
- HOME THEATER magazine gave our ENSEMBLE IV HOME THEATER speaker system
its top "Hot Ticket" rating, saying, "Ensemble IV sounds much better than
the other sub/sat systems we've tested - at half the price of many."
- PC COMPUTING magazine gave our SOUNDWORKS speaker system their Editors'
Choice Award, and called it "the best multimedia speaker system over $100."
- BOOT magazine says our new MICROWORKS system, "delivers chest-thumpin'
bass, crystal-clear highs and almost no distortion at any level."
MORE NEW PRODUCTS ON THE WAY.
In addition to the products mentioned, the company intends to continue to
introduce new products and new product categories. In fiscal 1997 we plan to
market our first automotive sound products. Also, in fiscal 1996 we acquired the
RDL Acoustics brand, and established an agreement with the firm's principle
designer, Roy Allison, to create a new series of "Room Designed Loudspeakers" to
be marketed by the company. We plan to introduce speakers under the RDL
Acoustics brand in fiscal 1997. As we enter fiscal 1997, we are looking forward
to continued growth.
Best regards,
/s/ Tom De Vesto
Thomas J. DeVesto
President, CEO
- - -REGISTERED TRADEMARK- ENSEMBLE, SOUNDWORKS AND CAMBRIDGE SOUNDWORKS ARE
REGISTERED TRADEMARKS OF CAMBRIDGE SOUNDWORKS, INC. TOWER, MICROWORKS AND
CENTERSTAGE ARE TRADEMARKS OF CAMBRIDGE SOUNDWORKS, INC.
<PAGE>
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.
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Ended Year Ended Year Ended
Income Statement Data: 12/31/93 12/31/94 7/2/95 7/2/95 6/30/96
(IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $14,267 $19,432 $15,015 $26,928 $43,585
Cost of goods sold 7,281 10,133 8,697 15,043 25,872
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 6,986 9,299 6,318 11,885 17,713
- --------------------------------------------------------------------------------------------------------------------------
Sales and marketing expenses 4,296 6,890 5,830 10,406 14,254
General and administrative expenses 1,041 1,617 1,182 2,197 2,062
Engineering and development expenses 557 669 404 761 679
Total expenses 5,894 9,176 7,416 13,364 16,995
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,092 123 (1,098) (1,479) 718
Interest income (expense), net (18) 182 10 150 (301)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision
(benefit) for taxes 1,074 305 (1,088) (1,329) 417
Provision (benefit) for income taxes 421 98 (435) (558) 167
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 653 $ 207 $ (653) $ (771) $ 250
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common and
common equivalent share $ .44 $ .08 $ (.23) $ (.27) $ .09
- --------------------------------------------------------------------------------------------------------------------------
Weighed average number of common and
common equivalent shares outstanding 1,478 2,461 2,873 2,870 2,922
Dividends per common share - - - - -
Balance Sheet Data:
Working capital $ 1,323 $ 9,539 $8,363 $ 8,363 $7,912
Total Assets 3,272 15,947 15,029 15,029 18,130
Total Stockholders' Equity 1,544 11,703 11,108 11,108 11,361
</TABLE>
2
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System under
the symbol HIFI. The following table sets forth the range of high and low
selling prices for the Common Stock of the Company from April 13, 1994 (the date
the Company's Common Stock commenced trading on Nasdaq) for the fiscal periods
indicated, as reported on the Nasdaq National Market. This information reflects
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not necessarily reflect actual transactions.
FISCAL 1994 HIGH LOW
- --------------------------------------------------------------------------------
Second Quarter (from April 13, 1994) $8.50 $7.125
Third Quarter $8.750 $5.875
Fourth Quarter $9.875 $4.875
FISCAL 1995 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $6.75 $3.375
Second Quarter $7.625 $4.875
FISCAL 1996 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $7.75 $4.75
Second Quarter $6.00 $4.25
Third Quarter $6.375 $3.625
Fourth Quarter $4.625 $3.25
On August 30, 1996, there were 67 record holders of the Company's Common Stock.
The Company believes the actual number of beneficial owners of the Common Stock
is greater than the stated number of holders of record because a large number of
the shares of the Company's Common Stock is held in custodial or nominee
accounts for the benefit of persons other than the record holder.
The Company has never paid a dividend on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future.
3
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS YEAR YEAR
DECEMBER 31, DECEMBER 31, ENDED ENDED ENDED
1993 1994 7/2/95 7/2/95 6/30/96
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 51.0 52.1 57.9 55.9 59.4
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 49.0 47.9 42.1 44.1 40.6
- ----------------------------------------------------------------------------------------------------------------------------
Sales and marketing expenses 30.1 35.5 38.8 38.6 32.7
General and administrative expenses 7.3 8.3 7.9 8.2 4.7
Engineering and development expenses 3.9 3.5 2.7 2.8 1.6
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 41.3 47.3 49.4 49.6 39.0
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 7.7 .6 (7.3) (5.5) 1.6
Interest income (expense), net (.1) 1.0 0.0 .6 .6
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes 7.6 1.6 (7.3) (4.9) 1.0
Provision (benefit) for income taxes 3.0 .5 (2.9) ( 2.1) .4
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4.6% 1.1% (4.4%) (2.8)% .6%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JULY 2, 1995
Net sales for the twelve month period increased from $26.9 million in 1995 to
$43.6 million in 1996, an increase of 62%. The increase in net sales was due
primarily to the Company's continuing strategy of retail and wholesale
expansion, which included shipments in connection with an exclusive reseller
agreement with Best Buy, Co., Inc. (Best Buy) a national chain of more than 260
specialty retail stores. The Company opened six retail stores, including five
stores in New England and one in Northern California, bringing the total number
of retail stores to 23 at the year ended June 30, 1996. Catalog sales
decreased, due in part to shifts in sales to the Company's
retail stores.
Retail, catalog and wholesale sales accounted for 55%, 16% and 29% of net sales
for the year ended June 30, 1996, respectively. For the year ended July 2,
1995, retail, catalog and wholesale sales accounted for 55%, 32% and 13% of net
sales, respectively. Sales of products manufactured by the Company accounted
for 72%, and sales of stereo components manufactured by other companies
accounted for 28% of net sales for the year ended June 30, 1996. For the year
ended July 2, 1995, sales of products manufactured by the Company accounted for
69%, and sales of stereo components manufactured by other companies accounted
for 31% of net sales. The increase in products manufactured by the company as a
percentage of net sales results from the expansion of its wholesale channels of
distribution.
The Company's gross margin decreased from 44.1% for the year ended July 2, 1995,
to 40.6% for the year ended June 30, 1996. The increase in retail store sales,
which have lower overall margins than catalog sales, retail pricing competition
particularly with stereo components manufactured by other companies, and the
increased sales volume in the wholesale expansion had a negative impact on the
Company's gross margin. The Company does not expect a significant change in
gross margin as the Company adds retail stores and as wholesale sales increase
at their projected levels.
Sales and marketing expenses increased from $10.4 million for the year ended
July 2, 1995 (38.6% of net sales) to $14.3 million (32.7% of net sales) for the
year ended June 30, 1996. The hiring of retail store personnel and retail store
operating costs, along with selling costs associated with the Company's
wholesale division accounted for a substantial portion of the increase. General
and administrative expenses for the twelve month period decreased from $2.2
million (8.2% of net sales) for 1995 to $2.1 million (4.7% of net sales) in
1996. Engineering and development expenses for the twelve month period decreased
from $761,000 (2.8% of net sales) in 1995 to $680,000 (1.6% of net sales) in
1996.
Interest income amounted to $165,000 in 1995 from investments in United States
Treasury Securities purchased with the net proceeds of the Company's initial
public offering, which was completed in April 1994. Interest expense of
$301,000 for the year ended June 30, 1996 results from the Company's use of its
line of credit.
The Company's effective income tax rate for the year ended June 30, 1996 was
40.0% as compared to 41.9% for the year ended July 2, 1995.
The Company posted net income for the year ended June 30, 1996 of $251,000
(.6% of net sales), compared to a net loss of $771,000 (2.8% of net sales) for
the year ended July 2, 1995. The increase in net income resulted primarily from
the Company's ability to increase sales in its retail and wholesale divisions
with a minimal increase to operating expense.
YEAR ENDED JULY 2, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net sales for the twelve month period increased from $19.4 million for the year
ended December 31, 1994 to $26.9 million for the year ended July 2, 1995, an
increase of 39%. The increase in net sales was due primarily to the opening of
new retail stores and initial shipments in connection with an exclusive reseller
agreement with Best Buy. Catalog sales decreased due in part to shifts in sales
to the Company's retail stores.
In February 1995, the Company announced the signing of a definitive sales
agreement with Best Buy. The Company's products became available in more than
200 Best Buy stores by July 2, 1995. The gross margin on sales of the Company's
speakers to Best Buy is significantly lower than on sales of the Company's
speakers through its catalog or at its Company-owned retail stores. However,
operating expenses as a percentage of net sales are significantly lower on the
Company's sales to Best Buy than on its catalog and retail store sales.
Retail, catalog and wholesale sales accounted for 55%, 32%, and 13% of net
sales for the year ended July 2, 1995, respectivley. For the year ended
December 31, 1994, retail stores accounted for 52%, and catalog sales accounted
for 48% of net sales. Sales of products manufactured by the Company accounted
for 69%, and sales of stereo components manufactured by other companies
accounted for 31% of net sales for the year ended July 2, 1995. For the year
ended December 31, 1994, sales of products manufactured by the Company accounted
for 62%, and sales of stereo components manufactured by other companies
accounted for 38% of net sales. The increase in sales of products manufactured
by the Company as a percentage of net sales results from the initial shipments
under the exclusive reseller agreement with Best Buy.
4
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
The Company's gross margin decreased from 47.9% for the year December 31, 1994,
to 44.1% for the year ended July 2, 1995, due to the increase in retail store
sales and the initial wholesale shipments, which have lower overall margins than
catalog sales.
Sales and marketing expenses increased from $6.9 million for the year ended
December 31, 1994 (35.5% of net sales) to $10.4 million (38.6% of net sales) for
the year ended July 2, 1995. The hiring of additional personnel, increased
advertising expenses, and amortization of pre-opening costs associated with the
Company's entrance into the West Coast region late in 1994 accounted for a
substantial portion of the increase. General and administrative expenses
increased from $1.6 million for the year ended December 31, 1994 (8.3% of net
sales) to $2.2 million (8.2% of net sales) for the year ended July 2, 1995.
Professional fees, insurance and overhead expenses associated with the Company's
retail expansion have resulted in a substantial portion of the increase in
general and administrative expenses. Engineering and development expenses
increased from $669,000 (3.5% of net sales) for the year ended December 31,
1994 to $761,000 (2.8% of net sales) for the year ended July 2, 1995.
Interest income of $182,000 for the year ended December 31, 1994 and $165,000
for the year ended July 2, 1995 resulted from investments in United States
Treasury Securities purchased with the net proceeds of the Company's initial
public offering, which was completed in April 1994.
The Company's effective income tax rate increased to 41.9% for the year ended
July 2, 1995 from 32.1% for the year ended December 31, 1994.
The Company reported net income for the year ended December 31, 1994 of $207,000
(1.1% of net sales), compared to a net loss of $771,000 (2.8% of net sales) for
the year ended July 2, 1995. The decrease in net income resulted primarily from
a decrease in the Company's gross margin as noted above, and the amortization of
pre-opening costs associated with the Company's entrance into the West Coast
region late in calendar 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Net sales for the twelve month period increased from $14.3 million in 1993 to
$19.4 million in 1994, an increase of 36%. The increase in net sales was due
primarily to the opening of 13 new retail stores, including seven stores in New
England and six in Northern California, bringing the total number of Company-
owned retail stores to 14 by the end of Fiscal 1994. The introduction of new
Cambridge SOUNDWORKS products, including ENSEMBLE II and SOUNDWORKS, also
contributed to the increase in net sales. Catalog sales decreased slightly by
3%.
Retail store sales accounted for 52%, and catalog sales accounted for 48%, of
net sales in 1994. In 1993, retail stores accounted for one-third, and catalog
sales accounted for two-thirds, of net sales. Sales of products manufactured by
the Company accounted for 62%, and sales of stereo components manufactured by
other companies accounted for 38%, of net sales in 1994. In 1993, sales of
products manufactured by the Company accounted for two-thirds, and sales of
stereo components manufactured by other companies accounted for one-third, of
net sales.
The Company's gross margin decreased from 49.0% in 1993 to 47.9% in 1994. In
1994, manufacturing overhead efficiencies were offset by shifts in the Company's
sales mix. Retail store sales, which have lower overall margins than catalog
sales, increased as a percentage of net sales. In addition, sales of stereo
components manufactured by other companies, which have significantly lower
margins than sales of speakers manufactured by the Company, increased as a
percentage of net sales. Retail pricing competition, particularly with stereo
components manufactured by other companies, also had a negative impact on the
Company's gross margin in 1994.
Sales and marketing expenses increased from $4.3 million in 1993 (30.1% of net
sales) to $6.9 million in 1994 (35.5% of net sales). Increase in advertising
expenses related to the Company's retail store expansion and increase in store
operating costs, including the hiring of additional retail sales personnel and
related support staff, accounted for a substantial portion of the increase in
sales and marketing expenses.
General and administrative expenses increased from $1.0 million in 1993 (7.3% of
net sales) to $1.6 million in 1994 (8.3% of net sales) reflecting increases in
professional fees and increases in overhead necessary to support the Company's
retail store expansion. Engineering and development expenses increased in total
dollars, from $557,000 in 1993 to $669,000 in 1994, but decreased as a
percentage of net sales, from 3.9% in 1993 to 3.5% in 1994.
Interest income amounted to $187,000 in 1994 from investments in United States
Treasury Securities purchased with the net proceeds of the Company's initial
public offering which was completed during April 1994.
The Company's effective income tax rate decreased from 39.2% in 1993 to 32.1% in
1994 because research and development credits increased as a percentage of
taxable income in 1994.
Net income decreased from $653,000 in 1993 (4.6% of net sales) to $207,000 in
1994 (1.1% of net sales) due primarily to increases in operating expenses.
During 1994, the Company's retail store expansion proceeded at a faster pace
than originally planned, and the Company made substantial investment in store
development, management infrastructure and marketing which had a short-term
negative impact on the Company's profits. Management believes that these
investments enhanced the ability of the Company to continue to expand
profitably.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1994, the Company financed its growth primarily from cash generated
from operations and seasonal bank borrowings. In April 1994, the Company
completed an initial public offering which generated net proceeds to the Company
of $9,935,000. A portion of the proceeds, $ 4,212,334 was used to purchase
fixed assets and leasehold improvements for the Company's new retail stores and
its new manufacturing, warehousing and administrative office facilities in
Newton, Massachusetts.
With the introduction of wholesale sales in March 1995, and the continued
expansion of retail stores, total inventories increased from $2.4 million at
April 1994 to $11.4 million at June 1996.
In April 1995, the Company obtained a demand discretionary line of credit with a
bank in order to finance its increased investment in inventories and support
continued sales growth. Advances are made against the line based on a lending
formula on receivables and inventory. The line of credit is secured by all the
Company's assets with interest payable at the bank's base rate (8.25% at June
30, 1996 ) plus 3/4%.
On June 30, 1996 an amendment to the Company's demand discretionary line of
credit increased the borrowing base to $7,400,000. The Company had $1,771,000
in excess availability on the line of credit at June 30, 1996. The Company
believes that its resources are adequate to fund its operations through the end
of fiscal 1997.
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers, or
employees may contain "forward-looking" information which involve risk and
uncertainties. Any statements in this report that are not statements of
historical fact are forward-looking statements (including, but not limited to,
statements concerning the characteristics and growth of the Company's market and
customers, the Company's objectives and plans for future operations, possible
aquisitions, and the Company's expected liquidity and capital resources). Such
forward-looking statements are based on a number of assumptions and involve a
number of risks and uncertainties, and accordingly, actual results could differ
materially. Factors that may cause such differences include, but are not limited
to: the continued and future acceptance of the Company's products and services;
the rate of growth in the industries of the Company's customers; the presence
of competitors with greater technical, marketing and financial resources; the
Company's ability to promptly and effectively respond to technological changes
which meet evolving customer needs; capacity and supply constraints or
difficulties; and the Company's ability to successfully integrate new
operations.
5
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
BALANCE SHEETS
ASSETS July 2, 1995 June 30, 1996
- ----------------------------------------------------------------------------
CURRENT ASSETS:
Cash $ 16,885 $ 87,421
Accounts receivable, net 803,047 2,431,670
Income tax refund receivable 380,928 -
Inventories 10,523,627 11,405,352
Prepaid expenses 180,209 187,247
Deferred tax asset 223,000 570,000
Preopening costs 157,605 -
- ----------------------------------------------------------------------------
Total Current Assets 12,285,301 14,681,690
- ----------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Production equipment and tooling 451,791 407,925
Office equipment and furniture 955,818 1,148,610
Leasehold improvements 1,952,226 2,544,495
Motor vehicles 140,737 180,290
- ----------------------------------------------------------------------------
3,500,572 4,281,320
Less Accumulated depreciation and
amortization 835,370 1,135,478
- ----------------------------------------------------------------------------
2,665,202 3,145,842
- ----------------------------------------------------------------------------
OTHER ASSETS 78,957 302,880
- ----------------------------------------------------------------------------
Total Assets $ 15,029,460 $18,130,412
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------
CURRENT LIABILITIES:
Borrowings under line of credit $ - $ 3,395,557
Accounts payable 3,329,328 2,123,773
Accrued expenses 483,176 979,689
Customer prepayments and other
current liabilities 109,118 270,707
- ----------------------------------------------------------------------------
Total Current Liabilities 3,921,622 6,769,726
- ----------------------------------------------------------------------------
COMMITMENTS (Notes 5, 8 and 9) - -
STOCKHOLDERS' EQUITY:
Preferred stock, no par value-
Authorized - 2,000,000 shares - -
Common stock, no par value-
Authorized - 10,000,000 shares
Issued and outstanding 2,888,824
shares and 2,889,399 shares at July 2,
1995 and June 30, 1996, respectively 10,344,697 10,346,710
Retained earnings 763,141 1,013,976
- ----------------------------------------------------------------------------
Total Stockholders' Equity 11,107,838 11,360,686
- ----------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 15,029,460 $ 18,130,412
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months Year Ended Year Ended
December 31, December 31, Ended July 2, July 2, June 30,
1993 1994 1995 1995 1996
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 14,266,862 $ 19,431,892 $ 15,014,837 $ 26,927,699 $ 43,585,017
COST OF GOODS SOLD 7,280,636 10,133,001 8,696,852 15,043,196 25,871,582
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 6,986,226 9,298,891 6,317,985 11,884,503 17,713,435
- --------------------------------------------------------------------------------------------------------------------------
SALES AND MARKETING EXPENSES 4,296,496 6,890,254 5,829,589 10,406,100 14,253,742
GENERAL AND ADMINISTRATIVE EXPENSES 1,040,620 1,616,323 1,182,245 2,196,623 2,061,351
ENGINEERING AND DEVELOPMENT EXPENSES 556,997 669,179 403,773 760,590 679,637
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 5,894,113 9,175,756 7,415,607 13,363,313 16,994,730
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,092,113 123,135 (1,097,622) (1,478,810) 718,705
INTEREST INCOME 2,664 187,241 23,078 164,735 -
INTEREST EXPENSE (20,915) (5,225) (13,325) (15,343) (300,870)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes 1,073,862 305,151 (1,087,869) (1,329,418) 417,835
PROVISION (BENEFIT) FOR INCOME TAXES 421,000 98,000 (435,000) (558,000) 167,000
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 652,862 $ 207,151 $ (652,869) $ (771,418) $ 250,835
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ .44 $ .08 $ (.23) $ (.27) $ .09
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALLENT SHARES OUTSTANDING 1,478,107 2,461,169 2,872,617 2,869,626 2,922,323
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Retained Stockholders'
Shares Amount Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 1,456,580 $ 334,750 $ 555,997 $ 890,747
Net income - - 652,862 652,862
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 1,456,580 334,750 1,208,859 1,543,609
Initial public offering of common
stock, net of issuance costs of $1,344,793 1,410,000 9,935,207 - 9,935,207
Exercise of stock options 5,000 16,800 - 16,800
Net income - - 207,151 207,151
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 2,871,580 10,286,757 1,416,010 11,702,767
Exercise of stock options 17,244 57,940 - 57,940
Net loss - - (652,869) (652,869)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 2, 1995 2,888,824 10,344,697 763,141 11,107,838
Exercise of stock options 575 2,013 - 2,013
Net income - - 250,835 250,835
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 2,889,399 $10,346,710 $ 1,013,976 $11,360,686
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months Year Ended Year Ended
December 31, December 31, Ended July 2 , July 2, June 30,
1993 1994 1995 1995 1996
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 652,862 $ 207,151 $ (652,869) $ (771,418) $ 250,835
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities-
Depreciation and amortization 76,928 276,915 286,482 499,888 744,009
Deferred (prepaid) income taxes - 233,000 (308,000) 100,000 (284,000)
Changes in current assets and liabilities-
Accounts receivable, net 149,037 (312,583) (427,164) (692,644) (1,628,623)
Income tax refund receivable - (667,000) 286,072 (380,928) 380,928
Inventories (1,016,863) (5,761,353) (2,189,452) (7,165,942) (881,725)
Prepaid expenses (38,415) (148,824) 164,622 207,569 (70,038)
Preopening costs - (717,719) 560,114 (157,605) 157,605
Accounts payable 579,402 2,192,488 (6,161) 2,304,890 (1,205,555)
Accrued expenses 31,629 232,034 (131,269) 172,171 496,513
Accrued income taxes (294,663) (86,913) - - -
Customer prepayments and other
current liabilities (87,972) 59,575 (185,085) (13,943) 161,589
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 51,945 (4,493,229) (2,602,710) (5,897,962) (1,878,462)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (180,328) (2,136,742) (850,943) (2,698,048) (1,224,649)
Increase in other assets - (46,800) (15,830) (54,156) (223,923)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (180,328) (2,183,542) (866,773) (2,752,204) (1,448,572)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net - - - - 3,395,557
Repayment of capital lease obligation (10,280) (47,812) - (42,345) -
Sale of common stock, net of issuance costs - 9,935,207 - - -
Exercise of stock options - 16,800 57,940 74,740 2,013
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (10,280) 9,904,195 57,940 32,395 3,397,570
- ------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH (138,663) 3,227,424 (3,411,543) (8,617,771) 70,536
CASH, BEGINNING OF PERIOD 339,667 201,004 3,428,428 8,634,656 16,885
- ------------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 201,004 $ 3,428,428 $ 16,885 $ 16,885 $ 87,421
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Income taxes $ 715,463 $ 561,563 $ 77,500 $ 157,500 $ 145,500
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Interest $ 20,920 $ 5,225 $ 13,325 $ 14,490 $ 276,454
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
8
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
N0TE 1 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Cambridge SoundWorks, Inc. (the Company) was organized in 1988. The Company
designs and manufactures speakers for stereo, home theater and multimedia
computing. The Company markets its products and sells other audio and video
components through a mail-order catalog, Company-owned retail stores and other
methods of distribution, including large retail chains throughout the United
States.
The accompanying financial statements reflect the application of certain
accounting policies described in this note and elsewhere in the accompanying
notes to financial statements. The preparation of these financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(a) CHANGE IN FISCAL YEAR
On March 14, 1995, the Company's Board of Directors approved a change in the
Company's fiscal year. The Company's fiscal year ends on the Sunday nearest the
end of June. Included in the accompanying financial statements are unaudited
statements of income and cash flows for the year ended July 2, 1995. These
financial statements have been prepared on a basis consistent with those of
audited periods.
(b) INITIAL PUBLIC OFFERING
A registration statement relating to the Company's initial public offering of
common stock was declared effective on April 13, 1994. In connection with this
offering, 1,610,000 shares of common stock were sold to the public (including
210,000 shares sold pursuant to an overallotment option exercised by the
underwriters), of which 1,410,000 shares were sold by the Company and 200,000
shares were sold by selling stockholders. Net proceeds to the Company were
approximately $9,935,000.
(c) CREDIT CARD POLICY
The Company generally does not extend credit to catalog and Company-owned retail
store customers, except through third-party credit cards, including its branded
Cambridge SoundWorks credit card. Credit under these accounts is extended by
third parties, and accordingly, the Company bears no financial risk under these
agreements except in the case of fraud. The Company's agreements with third-
party credit companies provide for the electronic processing of credit approvals
and the electronic submission of transactions. Upon the submission of these
transactions to the credit card companies, payment is transmitted to the
Company's bank account. Accordingly, the Company records these amounts as cash
upon the electronic submission of the transaction to the appropriate processing
agency.
The Company pays fees to third-party credit card companies. These fees range
from .75% to 2.9% of the amount financed. These fees were approximately
$317,000, $371,000, $198,000, $423,000 and $597,000 for the years ended December
31, 1993 and 1994, for the six-month period ended July 2, 1995, and for the
years ended July 2, 1995 and June 30, 1996, respectively, and are included in
selling and marketing expenses in the accompanying statements of operations.
(d) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
July 2, June 30,
1995 1996
- --------------------------------------------------------------------------------
Raw materials and work-in-process $ 3,906,025 $ 3,823,302
Finished goods 6,617,602 7,582,050
- --------------------------------------------------------------------------------
$ 10,523,627 $ 11,405,352
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Inventories consist of materials, labor and manufacturing overhead.
(e) PREPAID EXPENSES
The Company sells its products and those of others directly to consumers through
a mail-order catalog. Direct mail costs related to catalog mailings, including
printing and postage, which constitute direct-response advertising, are
classified as prepaid expenses and are expensed over the estimated useful life
of each catalog, typically two to four months, commencing on the date of the
mailing.
(f) PREOPENING COSTS
Throughout fiscal 1995 and during the first half of fiscal 1996, the Company
opened numerous retail stores. The Company incurs direct costs prior to the
opening of new stores. These preopening costs are amortized over periods of up
to nine months.
(g) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using the straight-line
method by charges to operations in amounts estimated to allocate the cost of the
assets over their estimated useful lives as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------------------------------------------------
Production equipment and tooling 3-5 Years
Office equipment and furniture 5 Years
Leasehold improvements Life of lease
Motor vehicles 3 Years
(h) CUSTOMER PREPAYMENTS
Advance payments received from customers are classified as customer prepayments
and recognized as revenue when the products are shipped.
(i) REVENUE RECOGNITION AND WARRANTY COSTS
The Company recognizes revenue from product sales, net of estimated future sales
returns, at the time of shipment. The Company has not provided for any warranty
reserves, as warranty costs incurred by the Company have not been significant.
(J) NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per share data are computed using the weighted average number
of shares of common stock outstanding during each period. Common equivalent
shares from stock options have been included in the computation using the
treasury stock method only when their effect would be dilutive. Fully diluted
net income (loss) per share data have not been separately presented, as the
difference from primary net income (loss) per share data is insignificant.
(k) ENGINEERING AND DEVELOPMENT EXPENSES
Engineering and development expenses are charged to operations as incurred.
(l) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk are principally accounts receivable. This credit risk with respect
to accounts receivable is primarily limited to one large retail customer to whom
the Company makes substantial sales. To reduce the credit risk, the Company
routinely assesses the financial strength of this and other customers and, as a
consequence, believes that its accounts receivable credit risk exposure is
limited. The Company maintains an allowance for potential credit losses but
historically has not experienced any significant credit losses related to an
individual customer or groups of customers in any particular industry or
geographic area.
The estimated fair value of the Company's financial instruments, which include
cash, accounts receivable and borrowings under the line of credit, approximates
their carrying value.
NOTE 2 SIGNIFICANT CUSTOMERS
During the six-month period and year ended July 2, 1995 and the year ended June
30, 1996, one customer accounted for approximately 23%, 13% and 22% of net
sales, respectively. This customer accounted for substantially all of the
Company's accounts receivable at July 2, 1995 and June 30, 1996. During the
years ended December 31, 1993 and 1994, there were no customers that accounted
for greater than 10% of net sales.
NOTE 3 LINE OF CREDIT
In April 1995, the Company entered into a $5 million demand discretionary line
of credit (line of credit) with The First National Bank of Boston. As of June
30, 1996, the agreement was amended to increase the borrowings under the line of
credit up to $7.4 million based upon certain percentages of eligible accounts
receivable and inventory, as defined. The line of credit is secured by all
assets of the Company. Borrowings under the line of credit accrue interest at
the bank's prime rate (8.25% at June 30, 1996) plus .75%. Based on the line of
credit lending formula, as defined, the Company had available for borrowing,
approximately $ 1.8 million at June 30, 1996.
NOTE 4 INCOME TAXES
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under SFAS No. 109, the Company recognizes a
current tax liability or asset for current taxes payable or refundable and a
deferred tax liability or asset for the estimated future tax effects of
temporary differences to the extent they are realizable.
9
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
NOTE 4 INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months Year Ended Year Ended
December 31, December 31, Ended July 2, July 2, June 30,
1993 1994 1995 1995 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current-
Federal $ 318,000 $ (104,000) $ (107,000) $ (508,000) $ 345,000
State 103,000 (31,000) (20,000) (150,000) 106,000
- --------------------------------------------------------------------------------------------------------------------
421,000 (135,000) (127,000) (658,000) 451,000
- --------------------------------------------------------------------------------------------------------------------
Deferred-
Federal - 196,000 (266,000) 61,000 (216,000)
State - 37,000 (42,000) 39,000 (68,000)
- --------------------------------------------------------------------------------------------------------------------
- 233,000 (308,000) 100,000 (284,000)
- --------------------------------------------------------------------------------------------------------------------
Total provision (benefit) $ 421,000 $ 98,000 $ (435,000) $ (558,000) $ 167,000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to the provisions of SFAS No. 109, as of July 2, 1995 and June 30,
1996, the Company recorded deferred tax assets of approximately $223,000 and
$570,000, respectively. These deferred tax assets primarily result from timing
differences in the recognition of revenues and expenses for tax and financial
reporting purposes. The sources of these differences and the approximate amount
of each are as follows:
July 2, June 30,
1995 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Inventory reserve $ 183,000 $ 244,000
Net operating loss carryforward and
other credit carryforwards 126,000 66,000
Other reserves 32,000 97,000
Depreciation 34,000 175,000
Store preopening costs (63,000) -
Valuation allowance (89,000) (12,000)
- --------------------------------------------------------------------------------
$ 223,000 $ 570,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
Six
Year Year Months Year Year
Ended Ended Ended Ended Ended
December 31, December 31, July 2, July 2, June 30,
1993 1994 1995 1995 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statutory tax rate 34.0% 34.0% (34.0)% (34.0)% 34.0%
State taxes, net of
federal benefit 6.3 6.3 (6.3) (6.3) 6.3
Research and
development
credits (1.1) (8.2) - (1.7) -
Other - - 0.3 - (0.3)
- --------------------------------------------------------------------------------------------------------------------
Effective tax rate 39.2% 32.1% (40.0)% (42.0)% 40.0%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5 COMMITMENTS
The Company conducts its operations in leased facilities and leases certain
equipment under operating lease agreements. These operating leases expire
through January 2006. Future minimum lease payments under these operating
leases are approximately as follows:
FISCAL YEAR AMOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1997 $ 2,537,000
1998 2,677,000
1999 2,697,000
2000 2,193,000
2001 1,973,000
Thereafter 8,555,000
- --------------------------------------------------------------------------------
$ 20,632,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company is also obligated to pay for certain operating and other expenses in
accordance with the terms of its various leases.
Total rent expense under these leases for the years ended December 31, 1993 and
1994, the six-month period ended July 2, 1995 and the years ended July 2, 1995
and June 30, 1996 was approximately $153,000, $320,000, $576,000, $799,000 and
$1,929,000, respectively.
NOTE 6 STOCKHOLDERS' EQUITY
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The company will be
required to disclose the pro forma net income or loss and per share amounts in
the notes to the financial statements using the fair-value-based method
beginning in the year ending June 30, 1997, with comparable disclosures for the
year ended June 30, 1996. The Company has not determined the impact of these
pro forma adjustments.
(a) PREFERRED STOCK
The Company has authorized 2,000,000 shares of no par preferred stock. The
Board of Directors has full authority to issue this stock and to fix the voting
powers, preferences, rights, qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, redemption privileges and
liquidation preferences, and the number of shares constituting any series or
designation of such series. With regard to dividends, redemption privileges and
liquidation preferences, any particular series of preferred stock may rank
junior to, on parity with, or senior to any other series of preferred stock or
the common stock.
(b) STOCK OPTION PLANS
The Company's 1993 Stock Option Plan (the 1993 Plan) is administered by the
Board of Directors and authorizes the Company to issue options to purchase up to
470,000 shares that have been reserved by the Company. Under the terms of the
1993 Plan, the Company may grant employees either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock, at
a price not less than the fair market value at the date of grant, which vest
over periods determined by the Board of Directors. In addition, the Company may
grant nonqualified options to nonemployees.
Under a separate plan, on February 1, 1993, the Board of Directors and
stockholders granted a former officer an option to purchase 22,244 shares of
common stock at an exercise price of $3.36 per share, the fair market value of
the common stock at the date of grant as determined by the Board of Directors,
pursuant to an Incentive Stock Option Plan and Agreement. As of July 2, 1995,
the former officer had exercised all options under this plan.
The following table summarizes stock option activity under the stock option
plans for the years ended December 31, 1993 and 1994, the six-month period ended
July 2, 1995 and the year ended June 30, 1996:
10
<PAGE>
CAMBRIDGE SOUNDWORKS,INC.
NOTE 6 STOCKHOLDERS' EQUITY (Continued)
Number Exercise Price
of Shares per Share
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Outstanding, December 31, 1992 - $ -
Granted 22,244 3.36
Outstanding, December 31, 1993 22,244 3.36
Granted 101,120 8.00 - 8.02
Terminated (21,440) 6.25 - 8.00
Exercised (5,000) 3.36
- ------------------------------------------------------------------------
Outstanding, December 31, 1994 96,924 3.36 - 8.02
Granted 169,200 3.50 - 6.25
Terminated (18,320) 3.50 - 8.02
Exercised (17,244) 3.36
- ------------------------------------------------------------------------
Outstanding, July 2, 1995 230,560 3.50 - 8.02
Granted 356,780 4.00 - 6.00
Terminated (142,190) 3.50 - 8.02
Exercised (575) 3.50
- ------------------------------------------------------------------------
Outstanding June 30, 1996 444,575 $3.50 - $8.02
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Exercisable, June 30, 1996 58,135 $3.50 - $8.02
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NOTE 7 RELATED PARTIES
During fiscal 1993, the Company paid approximately $154,000 to certain
stockholders of the Company and to companies controlled by those stockholders
for consulting and other services. Management believes these services were
obtained by the Company at terms no less favorable than could have been obtained
from nonrelated parties.
NOTE 8 EMPLOYMENT AGREEMENTS
In February 1994, the Company entered into three-year employment agreements with
Henry Kloss and Thomas J. DeVesto, officers of the Company. Pursuant to the
employment agreements, Messrs. Kloss and DeVesto receive annual salaries as
determined by the Board of Directors, subject to a specified minimum amount in
the first year of the three-year period. If either agreement is terminated by
either party for any reason, the Company is required to pay to Mr. Kloss or Mr.
DeVesto a payment equal to his then annual salary, subject to a one-year
agreement not to compete. The employment agreement with Mr. Kloss was
terminated in April 1996 (see Note 9).
NOTE 9 LICENSE AND CONSULTING AGREEMENT
In February 1994, the Company entered into a license agreement with Henry Kloss,
a stockholder of the Company, whereby the Company has the right to use Mr.
Kloss's name on its products. The license agreement between the Company and Mr.
Kloss provides that the Company has the perpetual right to use his name on
products that Mr. Kloss designed or had a substantial role in designing, subject
to termination, as to any products whose appearance or performance
specifications are materially changed by the Company without Mr. Kloss's
consent. Upon the termination of Mr. Kloss's employment, the Company may not
use his name generically or in connection with a product unless the Company had
previously done so, even if Mr. Kloss designed the product while employed by the
Company. Under this agreement, the Company is not required to make any payments
to Mr. Kloss for the right to use his name.
In April 1996, the Company entered into a consulting agreement with Henry Kloss,
with respect to the selection and design by the Company of current and future
products, expiring in September 1999. Pursuant to the consulting agreement, the
employment agreement between the Company and Mr. Kloss (see Note 8) was
effectively terminated, with no additional payments due. The consulting
agreement calls for annual payments to Mr. Kloss of $330,000 plus certain fringe
benefits, as described therein, through September 1996 with annual payments
thereafter of $110,000, plus certain fringe benefits, as described therein from
September 1996 through September 1999. Mr. Kloss is also subject to certain
noncompete restrictions, as described therein.
NOTE 10 BENEFIT PLAN
During fiscal 1996, the Company adopted the Cambridge SoundWorks 401(k) Plan
(the Plan), a voluntary savings plan for all eligible employees, as defined.
The Plan is a qualified benefit plan in accordance with Section 401(k) of the
Internal Revenue Code. Under the terms of the Plan, participants may contribute
a certain percentage of their annual compensation, up to a defined maximum. The
Company may, but is not obligated to, make a matching contribution up to a
certain percentage of each participant's contribution. For the year ended June
30, 1996, the Company did not make a matching contribution to the Plan.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cambridge SoundWorks, Inc.:
We have audited the accompanying balance sheets of Cambridge SoundWorks, Inc. (a
Massachusetts corporation) as of July 2, 1995 and June 30, 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1993 and 1994, the six-month period ended July 2, 1995 and
the year ended June 30, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cambridge SoundWorks, Inc. as
of July 2, 1995 and June 30, 1996, and the results of its operations and its
cash flows for the years ended December 31, 1993 and 1994, the six-month period
ended July 2, 1995 and the year ended June 30, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 9, 1996
11
<PAGE>
BOARD OF DIRECTORS
Thomas J. DeVesto President, Chief Executive Cambridge
Officer SoundWorks, Inc.
Thomas E. Brew, Jr. President, Chief Executive Kurzweil Applied
Officer Intelligence, Inc.
Leo Kahn Partner United Properties
Henry E. Kloss Product Development Cambridge
Consultant SoundWorks, Inc.
Peter B. Seamans Partner Peabody & Arnold
EXECUTIVE OFFICERS
Thomas J. DeVesto President, Chief Executive Officer
Wayne P. Garrett Vice President - Finance, Chief Financial Officer
Thomas J. Hannaher Vice President - Marketing
Robert S. Mainiero Vice President - Business Development
Sandy Ruby Vice President - Retail
CORPORATE INFORMATION
CORPORATE OFFICES
Cambridge SoundWorks, Inc.
311 Needham Street
Newton, MA 02164
(617) 332-5936
(617) 332-9229 Fax
LEGAL COUNSEL
Peabody & Arnold
Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
Boston, Massachusetts
TRANSFER AGENT
State Street Bank and Trust Company
Corporate Stock Department
4th Floor
2 Heritage Drive
N. Quincy, MA 02171
(617) 328-5000
INVESTOR RELATIONS
John H. Swanson
Swanson Communications, Inc.
234 5th Avenue
New York, NY 10001
(212) 683-4890
(212) 679-1184 Fax
STOCK DATA
Cambridge SoundWorks, Inc., is traded on the NASDAQ National
Market System under the symbol HIFI.
ANNUAL MEETING
The annual meeting of shareholders will be held on October 22, 1996
at 11:00 a.m. at the Company's headquarters, 311 Needham Street, Newton, MA
02164
PRESS RELEASES AND QUARTERLY RESULTS
Beginning in fiscal 1997 the Company will not be printing and mailing quarterly
reports to shareholders. Press releases including quarterly financial results
are available by fax to all shareholders immediately upon its release, free of
charge, by calling PR Newswire's Company News On Call at 1-800-758-5804 (ext.
114553) or through access on the Internet at http://www.prnewswire.com.
FORM 10-Q AND 10-K
The Company's quarterly and annual reports to the Security and Exchange
Commission are filed electronically on Form 10-Q and 10-K, respectively. These
reports can be accessed on the Internet at http://www.sec.gov or can be
obtained, free of charge, by phoning or writing to the Company or its Investor
Relations counsel .
INTERNET SITE
The Company's Internet site may be accessed at the following address:
http://www.hifi.com.
12
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports, included in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-8 (File No. 33-80830).
/s/ Arthur Andersen L.L.P.
Boston, Massachusetts
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-03-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.0
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 2,432
<ASSETS-OTHER> 303
<OTHER-ITEMS-ASSETS> 15,395
<TOTAL-ASSETS> 18,130
<PAYABLE-FOR-SECURITIES> 2,124
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,646
<TOTAL-LIABILITIES> 6,770
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,347
<SHARES-COMMON-STOCK> 2,889,399
<SHARES-COMMON-PRIOR> 2,888,824
<ACCUMULATED-NII-CURRENT> 261
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 11,360
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 16,995
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 301
<GROSS-EXPENSE> 43,335
<AVERAGE-NET-ASSETS> 11,234
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 3.93
<EXPENSE-RATIO> 3.86
<AVG-DEBT-OUTSTANDING> 1,698
<AVG-DEBT-PER-SHARE> .59
</TABLE>
