<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 March 31, 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 ORGANIZATION) IDENTIFICATION NO.)
311 NEEDHAM STREET
NEWTON, MASSACHUSETTS 02164
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 332-5936
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
As of May 12, 1996, there were issued and outstanding 2,889,399 shares of
the Company's Common Stock.
- --------------------------------------------------------------------------------
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets
July 2, 1995 and March 31, 1996 3
Statements of Operations
Three and Nine Months Ended April 2, 1995
and March 31, 1996 4
Statements of Cash Flows
Nine Months Ended April 2, 1995 and March 31, 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
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
CAMBRIDGE SOUNDWORKS, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
July 2, 1995 March 31, 1996
------------ --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,885 $ 159,288
Accounts receivable 803,047 1,700,319
Income tax refund receivable 380,928 -
Inventories 10,523,627 12,215,982
Prepaid expenses 403,209 493,431
Preopening costs 157,605 -
------------- -------------
Total current assets 12,285,301 14,569,020
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Production equipment and tooling 451,791 461,572
Office equipment and furniture 955,818 1,089,232
Leasehold improvements 1,952,226 2,803,797
Motor vehicles 140,737 180,290
------------- -------------
3,500,572 4,534,891
Less-Accumulated depreciation
and amortization 835,370 1,347,234
------------- -------------
2,665,202 3,187,657
------------- -------------
OTHER ASSETS 78,957 112,465
------------- -------------
$ 15,029,460 $ 17,869,142
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ - $ 2,995,604
Current portion of debt - 15,184
Accounts payable 3,329,328 2,235,412
Accrued expenses 483,176 964,238
Customer prepayments and other
current liabilities 109,118 284,503
------------- -------------
Total current liabilities 3,921,622 6,494,941
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value:
Authorized--2,000,000 shares - -
Common stock, no par value:
Authorized--10,000,000 shares
Issued--2,888,824 at July 2, 1995 and
2,889,399 at March 31, 1996 10,344,697 10,346,710
Retained earnings 763,141 1,027,491
------------- -------------
Total stockholders' equity 11,107,838 11,374,201
-------------
$ 15,029,460 $ 17,869,142
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an intregal part of these financial statements.
3
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
April 2, March 31, April 2, March 31,
-------- --------- -------- ---------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 8,428,153 $ 10,939,693 $ 20,341,015 $ 33,303,958
COST OF GOODS SOLD 4,656,437 6,579,081 11,002,781 19,600,745
------------- ------------- ------------- ------------
Gross profit 3,771,716 4,360,612 9,338,234 13,703,213
------------- ------------- ------------- ------------
SALES AND MARKETING EXPENSES 2,843,820 3,583,358 7,420,331 11,060,312
GENERAL AND ADMINISTRATIVE EXPENSES 512,881 491,252 1,527,259 1,472,097
ENGINEERING AND DEVELOPMENT EXPENSES 214,175 186,573 570,992 500,062
------------- ------------- ------------- ------------
Total expenses 3,570,876 4,261,183 9,518,582 13,032,471
------------- ------------- ------------- ------------
Income (loss) from operations 200,840 99,429 (180,348) 670,742
INTEREST INCOME (EXPENSE), net 18,333 (72,962) 157,972 (230,892)
------------- ------------- ------------- ------------
Income (loss) before provision
(benefit) for income taxes 219,173 26,467 (22,376) 439,850
PROVISION (BENEFIT) FOR INCOME TAXES 88,000 10,500 (35,000) 175,500
------------- ------------- ------------- ------------
Net income $ 131,173 $ 15,967 $ 12,624 $ 264,350
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .05 $ .01 $ .00 $ .09
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 2,907,747 2,913,322 2,927,106 2,932,790
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
The acompanying notes are an intregal part of these financial statements.
4
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------
April 2, 1995 March 31, 1996
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,624 $ 264,350
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 342,765 511,864
Changes in current assets and liabilities:
Accounts receivable (1,743,830) (897,272)
Income tax refund receivable (206,375) 380,928
Inventories (5,717,060) (1,692,355)
Prepaid expenses 271,233 (90,222)
Preopening costs (414,456) 157,605
Accounts payable 1,607,027 (1,093,916)
Accrued expenses 479,268 481,062
Customer prepayments and other current liabilities 50,118 175,385
------------ ------------
Net cash used in operating activities (5,318,686) (1,802,571)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,261,586) (1,034,319)
Increase in other assets (83,744) (33,508)
------------ ------------
Net cash used in investing activities (2,345,330) (1,067,827)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from line of credit, net - 2,995,604
Proceeds from issuance of debt, net - 15,184
Exercise of stock options 16,800 2,013
Repayment of capital lease obligation (42,345) -
------------ ------------
Net cash (used in) provided by financing activities (25,545) 3,012,801
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,689,561) 142,403
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,634,656 16,885
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 945,095 $ 159,288
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 80,000 $ 4,000
------------ ------------
------------ ------------
Interest $ 1,165 $ 204,821
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<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 and nine months
ended and March 31, 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:
<TABLE>
<CAPTION>
July 2, 1995 March 31, 1996
------------ --------------
<S> <C> <C>
Raw materials and work-
in-process $ 3,906,025 $ 3,998,253
Finished goods 6,617,602 8,217,729
------------- --------------
$ 10,523,627 $ 12,215,982
------------- --------------
------------- --------------
</TABLE>
Inventories consists of materials, labor and manufacturing overhead.
(3) 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 changed its fiscal year to end on the Sunday
nearest the end of June and previously reported results for the six month period
ended July 2, 1995. The third quarter for fiscal 1996 comprises the period from
January 1,1996 through March 31, 1996.
(4) LINE OF CREDIT
On October 18, 1995, an amendment to the Company's demand discretionary line of
credit increased the borrowing base to $5,800,000. The line of credit is
secured by all of the current assets of the Company, with interest payable at
the bank's base rate (8.25% at March 31, 1996), plus 1/4%. The amounts
outstanding at July 2, 1995 and March 31, 1996 were $0 and $2,995,604,
respectively.
(5) SIGNIFICANT CUSTOMER
During the three and nine months ended March 31, 1996, the Company had one
customer that accounted for approximately 16% and 21% of net sales,
respectively. Sales to this customer during the three and nine months ended
April 2, 1995 accounted for 18% and 7% of net sales, respectively.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the results of operations for the three and
nine month periods ended April 2, 1995 and March 31, 1996 expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 2, March 31, April 2, March 31,
-------- --------- -------- ---------
1995 1996 1995 1996
-------- --------- -------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES 100.0 % 100.0 % 100.0 % 100.0 %
COST OF GOODS SOLD 55.2 60.1 54.1 58.9
------ ------ ------ -----
Gross profit 44.8 39.9 45.9 41.1
------ ------ ------ -----
SALES AND MARKETING EXPENSES 33.8 32.8 36.5 33.2
GENERAL AND ADMINISTRATIVE EXPENSES 6.1 4.5 7.5 4.4
ENGINEERING AND DEVELOPMENT EXPENSES 2.5 1.7 2.8 1.5
------ ------ ------ -----
Total expenses 42.4 39.0 46.8 39.1
------ ------ ------ -----
Income (loss) from operations 2.4 0.9 (0.9) 2.0
INTEREST INCOME (EXPENSE), net 0.2 (0.7) 0.8 (0.7)
------ ------ ------ -----
Income (loss) before provision (benefit) for income taxes 2.6 0.2 (0.1) 1.3
PROVISION (BENEFIT) FOR INCOME TAXES 1.0 0.1 (0.2) 0.5
------ ------ ------ -----
Net income 1.6 % 0.1 % 0.1 % 0.8 %
------ ------ ------ -----
------ ------ ------ -----
</TABLE>
7
<PAGE>
Net Sales
Net sales for the third quarter increased from approximately $8.4 million for
the quarter ended April 2, 1995, to $11.0 million for the quarter ended March
31, 1996. Net sales for the nine months ended March 31, 1996 increased to
approximately $33.3 million compared to approximately $20.3 million during the
comparable prior period. Increased retail and wholesale sales accounted for the
majority of the sales increase for both the three and nine month periods. The
Company had twenty-three retail stores open during the quarter ended March 31,
1996, compared to fifteen retail stores during the quarter ended April 2, 1995.
Catalog sales for both the three and nine month periods ended March 31, 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 44.8% during the three
months ended April 2, 1995, to 39.9% during the three months ended March 31,
1996. Gross profit for the nine month period ended March 31, 1996 was 41.1%
compared to 45.9% for the nine month period ended April 2, 1995. The decrease
in gross margin for both the three and nine month period was due primarily to
increases in retail store sales and wholesale sales which have lower overall
margins than the Company's catalog sales.
Expenses
Sales and marketing expenses increased in dollars from $2.8 million for the
three months ended April 2, 1995 to $3.6 million for the three months ended
March 31, 1996, but decreased as a percentage of net sales from 33.8% in 1995 to
32.8% of net sales in 1996. Sales and marketing expenses increased in dollars
from $7.4 million for the nine months ended April 2, 1995 to $11.0 million for
the nine months ended March 31, 1996, but decreased as a percentage of net sales
from 36.5% in 1995 to 33.2% in 1996. The Company's retail expansion has
accounted for a substantial portion of the increases in expenses in dollars
while decreasing as a percentage of net sales.
General and administrative expenses decreased in dollars from $513,000 (6.1% of
net sales) for the three months ended April 2, 1995 to $491,000 (4.5% of net
sales) for the three months ended March 31, 1996. General and administrative
expenses decreased in dollars from approximately $1,527,000 (7.5% of net sales)
for the nine months ended April 2, 1995 to $1,472,000 (4.4% of net sales) during
the nine months ended March 31, 1996. General and administrative expenses have
remained relatively consistent in dollars during both the three and nine month
periods due to the Company's ability to increase sales with a minimal increase
to expenses.
Interest Expense/Interest Income
Interest expense of approximately $73,000 and $231,000 for the three and nine
month periods ended March 31, 1996 results from the Company's use of its line of
credit. Interest income of approximately $18,000 and $158,000 for the three and
nine month periods ended April 2, 1995, respectively resulted primarily from
investments in United States Treasury Securities purchased with the remaining
net proceeds from the Company's initial public offering in 1994.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's working capital was approximately $8,074,000
compared to $8,364,000 as of July 2, 1995. Cash and cash equivalents amounted
to $159,000 as of March 31, 1996 compared to $17,000 as of July 2, 1995.
On October 18, 1995 an amendment to the Company's demand discretionary line of
credit from a bank increased the borrowing base up to $5,800,000 based upon
certain levels of accounts receivable and inventory. The line of credit is
secured by all of the current assets of the Company, with interest payable at
the bank's base rate (8.25% at March 31, 1996), plus 1/4%. The Company has
approximately $1,575,000 in excess availability on the line of credit at March
31, 1996. The Company believes that its resources are adequate to fund its
operations through the end of calendar 1996.
9
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
27 Financial Data Schedule
b.) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1996.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as both Vice President - Finance and Chief
Financial Officer (Principal Financial Officer and Principal Accounting Officer)
of the Registrant.
Cambridge Soundworks, Inc.
-------------------------
(Registrant)
Date: May 12, 1996 By: /s/ Wayne P. Garrett
----------------------------
Wayne P. Garrett
Vice President-Finance and
Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT FOR THE PERIOD ENDED MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1.0
<CASH> 159
<SECURITIES> 0
<RECEIVABLES> 1,700
<ALLOWANCES> 0
<INVENTORY> 12,216
<CURRENT-ASSETS> 14,569
<PP&E> 4,535
<DEPRECIATION> 1,347
<TOTAL-ASSETS> 17,869
<CURRENT-LIABILITIES> 6,495
<BONDS> 0
0
0
<COMMON> 10,347
<OTHER-SE> 1,027
<TOTAL-LIABILITY-AND-EQUITY> 17,869
<SALES> 10,939
<TOTAL-REVENUES> 10,939
<CGS> 6,579
<TOTAL-COSTS> 4,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 26
<INCOME-TAX> 10
<INCOME-CONTINUING> 16
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
