- --------------------------------------------------------------------------------
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 December 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 February 10, 1997, there were issued and outstanding 2,889,399 shares of
the Company's Common Stock.
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<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets
June 30, 1996 and December 29, 1996 3
Statements of Operations
Three and Six Months Ended December 31, 1995
and December 29, 1996 4
Statements of Cash Flows
Six Months Ended December 31, 1995 and December 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 4 Submission of matters to a Vote of Security Holders 10
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CAMBRIDGE SOUNDWORKS, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
June 30, 1996 December 29, 1996
------------- -----------------
CURRENT ASSETS:
Cash $ 87,421 $ 1,460,703
Accounts receivable, net 2,431,670 2,595,379
Inventories 11,405,352 13,286,833
Prepaid expenses 757,247 786,272
----------- -----------
Total Current Assets 14,681,690 18,129,187
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Production equipment and tooling 407,925 517,843
Office equipment and furniture 1,148,610 1,264,860
Leasehold improvements 2,544,495 4,100,381
Motor vehicles 180,290 180,290
----------- -----------
4,281,320 6,063,374
Less-Accumulated depreciation
and amortization 1,135,478 1,707,298
----------- -----------
3,145,842 4,356,076
----------- -----------
OTHER ASSETS 302,880 197,461
----------- -----------
Total Assets $18,130,412 $22,682,724
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under line of credit $ 3,395,557 $ 1,995,676
Accounts payable 2,123,773 6,186,004
Accrued expenses 979,689 2,049,851
Customer prepayments and other
current liabilities 270,707 649,789
----------- -----------
Total Current Liabilities 6,769,726 10,881,320
----------- -----------
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
December 29, 1996 10,346,710 10,346,710
Retained earnings 1,013,976 1,454,694
----------- -----------
Total Stockholders' Equity 11,360,686 11,801,404
----------- -----------
Total Liabilities and
Stockholders' Equity $18,130,412 $22,682,724
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
December 31, December 29, December 31, December 29,
------------ ------------ ------------ ------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 15,008,778 $ 18,074,654 $ 22,364,265 $ 29,204,943
COST OF GOODS SOLD 8,753,086 10,843,968 13,021,664 17,337,360
------------ ------------ ------------ ------------
Gross profit 6,255,692 7,230,686 9,342,601 11,867,583
------------ ------------ ------------ ------------
SALES AND MARKETING EXPENSES 4,578,034 5,744,707 7,476,954 9,485,222
GENERAL AND ADMINISTRATIVE EXPENSES 530,645 577,429 980,845 1,143,183
ENGINEERING AND DEVELOPMENT EXPENSES 160,781 138,452 313,489 338,320
------------ ------------ ------------ ------------
Total expenses 5,269,460 6,460,588 8,771,288 10,966,725
------------ ------------ ------------ ------------
Income from operations 986,232 770,098 571,313 900,858
INTEREST EXPENSE, net (102,369) (89,447) (157,930) (166,140)
------------ ------------ ------------ ------------
Income before provision for income taxes 883,863 680,651 413,383 734,718
PROVISION FOR INCOME TAXES 353,000 272,000 165,000 294,000
------------ ------------ ------------ ------------
Net income $ 530,863 $ 408,651 $ 248,383 $ 440,718
============ ============ ============ ============
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .18 $ .14 $ .08 $ .15
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 2,939,410 2,939,855 2,947,430 2,909,453
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
December 31, 1995 December 29, 1996
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 248,383 $ 440,718
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 318,095 571,820
Changes in current assets and liabilities:
Accounts receivable (1,821,837) (163,709)
Income tax refund receivable 293,578 --
Inventories (2,708,784) (1,881,481)
Prepaid expenses 10,420 (29,025)
Preopening expenses 157,605 --
Accounts payable 216,644 4,062,231
Accrued expenses 855,328 1,070,162
Customer prepayments and other current liabilities 335,398 379,082
----------- -----------
Net cash (used in) provided by operating activities (2,095,170) 4,449,798
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (944,444) (1,782,054)
Increase in other assets (62,182) 105,419
----------- -----------
Net cash used in investing activities (1,006,626) (1,676,635)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit - bank, net 3,648,694 (1,399,881)
Proceeds from issuance of debt, net 16,540 --
----------- -----------
Net cash provided by (used in) financing activities 3,665,234 (1,399,881)
----------- -----------
NET INCREASE IN CASH 563,438 1,373,282
CASH, BEGINNING OF PERIOD 16,885 87,421
----------- -----------
CASH, END OF PERIOD $ 580,323 $ 1,460,703
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 4,000 $ 195,000
=========== ===========
Interest $ 122,886 $ 162,030
=========== ===========
</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 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 six months
ended December 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 December 29, 1996
------------- -----------------
Raw materials and work-in-process $ 3,823,302 $ 4,591,941
Finished goods 7,582,050 8,694,892
------------ ------------
$ 11,405,352 $ 13,286,833
============ ============
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 December 29, 1996), plus 3/4%. The
amounts outstanding at June 30, 1996 and December 29, 1996 were $3,396,000 and
$1,996,000, respectively.
(4) Significant Customer
During the three and six months ended December 29, 1996, the Company had one
customer that accounted for approximately 8% and 15% of net sales, respectively.
Sales to this customer during the three and six months ended December 31, 1995
accounted for 21% and 24% of net sales, respectively.
(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 issuance under
the Plan by 150,000 to 620,000. On January 14, 1997, the Company granted
incentive stock options, under the Company's 1993 Stock Option Plan, to certain
employees to purchase 164,720 shares of common stock at an exercise price of
$3.75 per share. These options vest over a period of two years.
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 six
month periods ended December 31, 1995 and December 29,1996 expressed as
percentages of net sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
December 31, December 29, December 31, December 29,
------------ ------------ ------------ ------------
1995 1996 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
COST OF GOODS SOLD 58.3 60.0 58.2 59.4
------ ------ ------ ------
Gross profit 41.7 40.0 41.8 40.6
------ ------ ------ ------
SALES AND MARKETING EXPENSES 30.5 31.8 33.4 32.5
GENERAL AND ADMINISTRATIVE EXPENSES 3.5 3.2 4.4 3.9
ENGINEERING AND DEVELOPMENT EXPENSES 1.1 0.8 1.4 1.1
------ ------ ------ ------
Total expenses 35.1 35.8 39.2 37.5
------ ------ ------ ------
Income from operations 6.6 4.2 2.6 3.1
INTEREST EXPENSE, net (0.7) (0.5) (0.8) (0.6)
------ ------ ------ ------
Income before provision for income taxes 5.9 3.7 1.8 2.5
PROVISION FOR INCOME TAXES 2.4 1.5 0.7 1.0
------ ------ ------ ------
Net income 3.5% 2.2% 1.1% 1.5%
====== ====== ====== ======
</TABLE>
7
<PAGE>
Net Sales
Net sales for the second quarter of 1995 increased from approximately $15.0
million for the three months ended December 31, 1995, to $18.1 million for the
three months ended December 31, 1996. Net sales for the six months ended
December 31, 1996 increased to approximately $29.2 million compared to $22.4
million during the same period in 1995. The increase in net sales was primarily
attributable to the 45% increase in retail sales over the same period in 1995.
Same store sales increased 14% over last year's second quarter. The Company had
twenty seven retail stores open during the three months ended December 29, 1996
compared to twenty three during the three months ended December 31, 1995.
Wholesale sales decreased 26%, due largely to a decrease in shipments to the
Company's largest customer. The Company expects continued decreases in sales to
its largest wholesale customer. Catalog sales for both the three and six month
periods ended December 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 41.7% during the three
months ended December 31, 1995 to 40.0% during the three months ended December
29, 1996. Gross profit for the six month period ended December 31, 1995 was
41.8% compared to 40.6% in for the same six month period in 1996. The decrease
in gross margin for both the three and six 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 for the three months ended December 31, 1995
increased from $4.6 million (30.5% of net sales) to $5.7 million (31.8% of net
sales) for the three months ended December 29, 1996. Sales and marketing
expenses for the six months ended December 31, 1995 increased from $7.5 million
(33.4% of net sales) to $9.5 million (32.5% of net sales) for the six months
ended December 29, 1996. The hiring of retail store personnel, increased
advertising expense, and retail store operating costs accounted for a
substantial portion of the increase in sales and marketing expense.
General and administrative expenses for the three months ended December 31, 1995
increased from $531,000 (3.5% of net sales) to $577,000 (3.2% of net sales) for
the three months ended December 29, 1996. General and administrative expenses
for the six months ended December 31, 1995 increase from $981,000 (4.4% of net
sales) to $1,143,000 (3.9% of net sales) during the six months ended December
29, 1996. General and administrative expenses have remained relatively
consistent in absolute dollars during both the three and six month periods due
to the Company's ability to increase sales with a minimal increase to expenses.
Interest Expense, net
Interest expense of $102,000 and $89,000 for the three months ended in 1995 and
1996 respectively, and $158,000 and $166,000 for the six months ended 1995 and
1996 respectively, results from the Company's use of its line of credit.
8
<PAGE>
Provision for Income Taxes
The Company's effective income tax rate for the three and six months ended was
December 31, 1995 and December 29, 1996 was 40%.
LIQUIDITY AND CAPITAL RESOURCES
As of December 29, 1996, the Company's working capital was approximately
$7,248,000 compared to $7,912,000 as of June 30, 1996. Cash amounted to
$1,461,000 as of December 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 December 29,
1996), plus 3/4%. The Company has approximately $3,782,000 in excess
availability on the line of credit at December 29, 1996. The Company believes
that its resources are adequate to fund its operations through the end of fiscal
1997.
9
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) On October 22, 1996, the Annual Meeting of the Stockholders of the
Company was held at the principal executive offices of the Company.
(b) Not applicable Pursuant to Instruction 3 of Item 4 of Part II
(c) At the Annual Meeting, the stockholders voted on the following
matters:
1. Proposal No. 1 - To elect directors for the ensuing year. The
number of directors of the Company was fixed at four (4) and
Thomas J. DeVesto, Thomas E. Brew Jr., Leo Kahn and Peter B.
Seamans were nominated and elected as directors for the Company
to serve until the next annual meeting of stockholders and
thereafter until successors are elected and qualified. The
following votes were tabulated for each nominee:
Name For Against
---- --- -------
Thomas J. DeVesto 2,042,554 9,610
Thomas E. Brew, Jr. 2,040,654 11,510
Leo Kahn 2,044,854 7,310
Peter B. Seamans 2,043,554 8,610
There were no abstentions or broker non-votes for Proposal No. 1.
2. Proposal No. 2 - To ratify the adoption by the Board of Directors
of an amendment to the Company's 1993 Stock Option Plan (the
"1993 Stock Option Plan") to increase by 150,000 the number of
shares of Common Stock authorized for issuance under the 1993
Stock Option Plan. The following votes were tabulated for
Proposal No. 2:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
1,114,414 31,224 7,581 898,945
3. Proposal No. 3 - To ratify the action of the Directors in
appointing Arthur Andersen LLP as auditors for the Company. The
following votes were tabulated for Proposal No. 3:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
2,046,844 3,760 1,560 0
(d) Not applicable
10
<PAGE>
Item 5 Other Information
At the Annual Meeting of the Board of Directors of the Company held
immediately after the Annual Meeting of the Stockholders of the Company on
October 22, 1996, the Board of Directors voted to increase the number of
directors of the Company to five (5) and Franklin S. Browning, Jr. was nominated
and elected as a director of the Company to serve until the next annual meeting
of stockholders and thereafter until his successor is elected and qualified.
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 three months ended December 29, 1996.
11
<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: February 10, 1997 By: /s/ Wayne P. Garrett
---------------------
Wayne P. Garrett
Vice President-Finance and
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT FOR THE THREE MONTHS ENDED DECEMBER 29, 1996
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> DEC-29-1996
<CASH> 1,441
<SECURITIES> 0
<RECEIVABLES> 2,595
<ALLOWANCES> 0
<INVENTORY> 13,287
<CURRENT-ASSETS> 18,129
<PP&E> 6,063
<DEPRECIATION> 1,707
<TOTAL-ASSETS> 22,683
<CURRENT-LIABILITIES> 10,881
<BONDS> 0
0
0
<COMMON> 10,347
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,683
<SALES> 18,075
<TOTAL-REVENUES> 18,075
<CGS> 10,844
<TOTAL-COSTS> 6,401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 681
<INCOME-TAX> 372
<INCOME-CONTINUING> 409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
