<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended September 29, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the transition period from ________ to ________
COMMISSION FILE NO. 0-23456
CAMBRIDGE SOUNDWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2998824
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
311 NEEDHAM STREET
NEWTON, MASSACHUSETTS 02164
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 332-5936
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
As of November 8, 1996, there were issued and outstanding 2,889,399 shares
of the Company's Common Stock.
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CAMBRIDGE SOUNDWORKS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets
June 30, 1996 and September 29, 1996 3
Statements of Operations
Three Months Ended October 1, 1995
and September 29, 1996 4
Statements of Cash Flows
Three Months Ended October 1, 1995
and September 29, 1996 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CAMBRIDGE SOUNDWORKS, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
June 30, September 29,
1996 1996
------------- -------------
CURRENT ASSETS:
Cash $ 87,421 $ 212,993
Accounts receivable, net 2,431,670 3,789,591
Inventories 11,405,352 12,128,577
Prepaid expenses 757,247 858,858
------------- -------------
Total Current Assets 14,681,690 16,990,019
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Production equipment and tooling 407,925 427,175
Office equipment and furniture 1,148,610 1,215,522
Leasehold improvements 2,544,495 3,816,868
Motor vehicles 180,290 180,290
------------- -------------
4,281,320 5,639,855
Less-Accumulated depreciation
and amortization 1,135,478 1,440,686
------------- -------------
3,145,842 4,199,169
------------- -------------
OTHER ASSETS 302,880 394,310
------------- -------------
Total Assets $ 18,130,412 $ 21,583,498
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under line of credit $ 3,395,557 $ 3,614,959
Accounts payable 2,123,773 4,585,918
Accrued expenses 979,689 924,725
Customer prepayments and other
current liabilities 270,707 1,065,143
------------- -------------
Total Current Liabilities 6,769,726 10,190,745
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value:
Authorized--2,000,000 shares - -
Common stock, no par value:
Authorized--10,000,000 shares
Issued and outstanding - 2,889,399
at June 30, 1996 and September 29, 1996 10,346,710 10,346,710
Retained earnings 1,013,976 1,046,043
------------- -------------
Total Stockholders' Equity 11,360,686 11,392,753
------------- -------------
Total Liabilities and Stockholders' Equity $ 18,130,412 $ 21,583,498
============= =============
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CAMBRIDGE SOUNDWORKS, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
October 1, September 29,
1995 1996
------------- -------------
NET SALES $ 7,355,487 $ 11,130,289
COST OF GOODS SOLD 4,268,578 6,493,392
------------- -------------
Gross profit 3,086,909 4,636,897
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SALES AND MARKETING EXPENSES 2,898,920 3,740,516
GENERAL AND ADMINISTRATIVE EXPENSES 450,200 565,754
ENGINEERING AND DEVELOPMENT EXPENSES 152,708 199,868
------------- -------------
Total expenses 3,501,828 4,506,138
------------- -------------
Income (loss) from operations (414,919) 130,759
INTEREST INCOME (EXPENSE), net (55,561) (76,692)
------------- -------------
Income (loss) before provision (benefit)
for income taxes (470,480) 54,067
PROVISION (BENEFIT) FOR INCOME TAXES (188,000) 22,000
------------- -------------
Net income (loss) $ (282,480) $ 32,067
============= =============
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ (.10) $ .01
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 2,888,824 2,892,523
============= =============
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<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
October 1, September 29,
1995 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (282,480) $ 32,067
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 126,428 305,208
Changes in current assets and liabilities:
Accounts receivable (1,133,243) (1,357,921)
Inventories (3,570,663) (723,225)
Prepaid expenses (69,902) (101,611)
Preopening expenses 82,605 -
Accounts payable 1,904,039 2,462,145
Accrued expenses (268,200) (54,964)
Customer prepayments and other
current liabilities (10,662) 794,436
------------- -------------
Net cash (used in) provided by
operating activities (3,222,078) 1,356,135
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of property and equipment, net (529,989) (1,358,535)
Increase in other assets (9,830) (91,430)
------------- -------------
Net cash used in investing activities (539,819) (1,449,965)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit - bank, net 4,010,283 219,402
Payments on long-term debt 18,292 -
------------- -------------
Net cash provided by
financing activities 4,028,575 219,402
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 266,678 125,572
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,885 87,421
------------- -------------
CASH AND EQUIVALENTS, END OF YEAR $ 283,563 $ 212,993
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ - $ 195,000
============= =============
Interest $ 24,799 $ 78,089
============= =============
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<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
Notes to Unaudited Financial Statements
(1) BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared by
Cambridge SoundWorks, Inc. (the Company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission and include,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of interim period
results. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. The Company believes, however, that its disclosures are
adequate to make the information presented not misleading. The results for
the three months ended September 29, 1996 are not necessarily indicative of
results to be expected for the full fiscal year.
(2) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
June 30, 1996 September 29, 1996
----------- -----------
Raw materials and work-in-process $3,823,302 $4,558,250
Finished goods 7,582,050 7,570,327
----------- -----------
$11,405,352 $12,128,577
=========== ===========
Inventories consists of materials, labor and manufacturing overhead.
(3) LINE OF CREDIT
On October 4, 1996, an amendment to the Company's demand discretionary line
of credit increased the borrowing under the line of credit to $8,000,000
based upon certain percentages of eligible accounts receivable and inventory,
as defined. The line of credit is secured by all assets of the Company, with
interest payable at the bank's base rate (8.25% at September 29, 1996), plus
3/4%. The amounts outstanding at June 30, 1996 and September 29, 1996 were
$3,395,000 and $3,615,000, respectively.
(4) SIGNIFICANT CUSTOMER
During the three months ended September 29, 1996, the Company had one
customer that accounted for approximately 27% of net sales. Sales to this
customer during the three months ended October 1, 1995 accounted for 31% of
net sales.
(5) STOCK OPTIONS
On October 22, 1996, the Company amended the 1993 Stock Option Plan (the
Plan) to increase the number of shares of Common Stock authorized for
insurance under the Plan by 150,000 to 620,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the results of operations for the three month
periods ended October 1, 1995 and September 29,1996 expressed as percentages
of net sales.
Three Months Ended
October 1, September 29,
1995 1996
----- -----
NET SALES 100.0% 100.0%
COST OF GOODS SOLD 58.0 58.3
----- -----
Gross profit 42.0 41.7
----- -----
SALES AND MARKETING EXPENSES 39.4 33.6
GENERAL AND ADMINISTRATIVE EXPENSES 6.1 5.1
ENGINEERING AND DEVELOPMENT EXPENSES 2.1 1.8
----- -----
Total expenses 47.6 40.5
----- -----
Income (loss) from operations (5.6) 1.2
INTEREST INCOME (EXPENSE), net (0.8) (0.7)
----- -----
Income (loss) before provision
(benefit) for income taxes (6.4) 0.5
PROVISION (BENEFIT) FOR INCOME TAXES (2.6) 0.2
----- -----
Net income (loss) (3.8)% 0.3%
===== =====
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<PAGE>
Net Sales
Net sales increased from approximately $7.4 million for the three months
ended October 1, 1995, to $11.1 million for the three months ended September
29, 1996. The increase in net sales was primarily attributable to retail and
wholesale sales. The Company had twenty-eight retail stores open during the
three months ended September 29, 1996, compared to twenty-one retail stores
during the three months ended October 1, 1995. Several of the Company's
factory direct retail stores were relocated to high traffic mall locations
during the three months ended September 29, 1996. The Company had one
wholesale customer that accounted for 27% and 31% of net sales for the three
months ended September 29, 1996 and October 1, 1995, respectively. Catalog
sales for the three months ended September 29, 1996 decreased due, in part,
to shifts in sales to the Company's new retail stores and through the
Company's wholesale expansion.
Gross Profit
Gross profit as a percentage of net sales decreased from 42.0% during the
three months ended October 1, 1995 to 41.7% during the three months ended
September 29, 1996. The decrease in gross margin for the three month period
was due primarily to the continued increase in retail store sales and
wholesale sales which have lower overall margins than the Company's catalog
sales.
Expenses
Sales and marketing expenses increased from $2.9 million during the three
months ended October 1, 1995 to $3.7 million for the three months ended
September 29, 1996. The hiring of additional retail store personnel, and
store operating costs associated with new store openings accounted for a
substantial portion of the increase. Sales and marketing expenses as a
percentage of net sales decreased from 39.4% to 33.6%, due largely to the 51%
increase in net sales.
General and administrative expenses increased from $450,000 (6.1%) during the
three months ended October 1, 1995 to $566,000 (5.1%) for the three months
ended September 29, 1996, due to increased overhead expenses associated with
the Company's expansion.
Interest Expense/Interest Income
Interest expense of $77,000 for the three months ended September 29, 1996 and
$56,000 for the three months ended October 1,1995 results from the Company's
use of its line of credit.
Provision for Income Taxes
The Company's effective income tax rate was 40.7% during the three months
ended September 29, 1996 compared to 40% for the three months ended October
1, 1995.
-8-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 29, 1996, the Company's working capital was approximately
$6,799,000 compared to $7,912,000 as of June 30, 1996. Cash and cash
equivalents amounted to $213,000 as of September 29, 1996 compared to $87,000
as of June 30, 1996.
On October 4, 1996, an amendment to the Company's demand discretionary line
of credit from a bank increased the Company's borrowing base from $7,400,000
to $8,000,000 based upon certain percentages of eligible accounts receivable
and inventory, as defined. The line of credit is secured by all assets of
the Company, with interest payable at the bank's base rate (8.25% at
September 29, 1996), plus 3/4%. The Company has approximately $3,284,000 in
excess availability on the line of credit at September 29, 1996. The Company
believes that its resources are adequate to fund its operations through the
end of fiscal 1997.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
10.1 Letter Agreement, dated October 4, 1996, between the First
National Bank of Boston and the Company.
27 Financial Data Schedule
b.) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three months ended September 29, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as both Vice President - Finance and
Chief Financial Officer (Principal Financial Officer and Principal Accounting
Officer) of the Registrant.
Cambridge SoundWorks, Inc.
--------------------------
(Registrant)
Date: November 8, 1996 By: /s/ Wayne P. Garrett
----------------------
Wayne P. Garrett
Vice President-Finance and
Chief Financial Officer (Principal
Accounting Officer)
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<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
QUARTERLY REPORT FOR THE THREE MONTHS ENDED SEPTEMBER 29, 1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 213
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<RECEIVABLES> 3,790
<ALLOWANCES> 0
<INVENTORY> 12,128
<CURRENT-ASSETS> 16,990
<PP&E> 5,640
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<TOTAL-ASSETS> 21,583
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0
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<COMMON> 10,347
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