-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B5UchLQGnzfmOdMuYUW5C75OzHfu06lOsT/aAyykzutixYGZqgeER9IF6bqYAZ50 oPTqulUVYoS/AX1AtzHBUw== 0000912057-00-029578.txt : 20000920 0000912057-00-029578.hdr.sgml : 20000920 ACCESSION NUMBER: 0000912057-00-029578 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000325 FILED AS OF DATE: 20000623 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON ACOUSTICS INC CENTRAL INDEX KEY: 0000805268 STANDARD INDUSTRIAL CLASSIFICATION: 3651 IRS NUMBER: 042662473 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15193 FILM NUMBER: 660056 BUSINESS ADDRESS: STREET 1: 300 JUBILEE DRIVE STREET 2: P O BOX 6015 CITY: PEABODY STATE: MA ZIP: 01961-6015 BUSINESS PHONE: 5085385000 MAIL ADDRESS: STREET 1: 300 JUBILEE DRIVE STREET 2: P O BOX 6015 CITY: PEABODY STATE: MA ZIP: 01961-6015 10-K 1 a10-k.txt 10-K - - - - - - - - - - -------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 25, 2000 OR [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NO. 33-9875 ----------------- BOSTON ACOUSTICS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2662473 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION) 300 JUBILEE DRIVE PEABODY, MASSACHUSETTS 01960 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (978) 538-5000 (REGISTRANT'S TELEPHONE NUMBER,INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 8,000,000 shares of Common Stock ($.01 Par Value) (Title of Class) 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant was $35,907,359 as of June 22, 2000. There were 4,908,245 shares of Common Stock issued and outstanding as of June 22, 2000. - - - - - - - - - - -------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE (1) Registrant's Annual Report to Stockholders for the fiscal year ended March 25, 2000 (Part II, Items 5, 6, 7, 8 and Part III, 14 (a)(1)) (2) Proxy Statement for Registrant's Annual Meeting of Stockholders to be held on August 8, 2000 (Part IV, Items 10, 11, 12 and 13) BOSTON ACOUSTICS, INC.
Securities and Exchange Commission Item Number and Description Page - - - - - - - - - - ---------------------------------- ---- PART I ITEM 1. Business 1 ITEM 2. Properties 8 ITEM 3. Legal Proceedings 8 ITEM 4. Submission of Matters to a Vote of Security Holders 8 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 ITEM 6. Selected Financial Data 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 ITEM 8. Financial Statements and Supplementary Data 9 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 9 PART III ITEM 10. Directors and Executive Officers of the Registrant 10 ITEM 11. Executive Compensation 10 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 10 ITEM 13. Certain Relationships and Related Transactions 10 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 11 SIGNATURES 14 INDEX TO FINANCIAL STATEMENT SCHEDULES F-1
Inasmuch as the calculation of shares of the 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 $11.0625, the price at which the Common Stock was last sold on June 22, 2000 as reported by The Nasdaq Stock Market. All outstanding shares beneficially owned by executive officers and directors of the registrant or by any shareholder beneficially owning more than 10% of registrant's Common Stock, as disclosed herein, were considered for purposes of this disclosure to be held by affiliates. -i- PART I ITEM 1. BUSINESS Boston Acoustics, Inc. (the "Company") engineers, manufactures and markets moderately-priced, high-quality audio systems for use in home audio and video entertainment systems, in after-market automotive audio systems and in multimedia computer environments. The Company believes that its products deliver better sound quality than other comparably priced audio systems. Most of the Company's products are assembled by the Company from purchased components, although certain automotive speakers are manufactured by others according to Company specifications. All of the Company's products and subassemblies, including those supplied by outside sources, have been designed by the Company's engineering department. Boston Acoustics' speakers are marketed nationwide through selected audio and audio-video specialty dealers and through distributors in many foreign countries. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- International Operations" which is included in the Company's 2000 Annual Report which is filed as Exhibit 13 hereto. The Company was organized as a Massachusetts corporation in 1979 by Andrew G. Kotsatos and former Chief Executive Officer, Francis L. Reed, who passed away in November 1996. Its principal executive offices and manufacturing facilities are located at 300 Jubilee Drive, Peabody, Massachusetts. PRODUCTS The Company has determined it has two reportable business industry segments: Core and original equipment manufacturer (OEM) and Multimedia. Prior to fiscal 1998, the Company operated as a single segment. The Company's reportable segments are strategic business units that sell the Company's products to distinct distribution channels. Both segments derive their revenues from the sale of audio systems. They are managed separately because each segment requires distinct selling and marketing strategies, as the class of customers within each segment is different. Each business segment has distinct product lines as discussed below. The Home Loudspeaker line consists of six bookshelf models currently ranging in price from $100 to $420 per pair, four floor-standing systems currently priced from $500 to $1,600 per pair, two home theater subwoofer/satellite systems currently priced at $700 and $1,000 per system, and four powered subwoofers priced at $300, $450, $700, and $1,200. Additional products for the home theater market include five different center-channel speakers currently ranging in price from $130 to $600 each and three diffuse-field surround speakers ranging in price from $200 to $500 per pair. The Company also produces magnetically shielded versions of most of its models and produces four indoor/outdoor speaker systems (Voyager-Registered Trademark- 3, Voyager 2, Voyager Pro, and Grand Voyager) priced from $220 to $700 per pair. The Company also produces the DigitalTheater-TM- 6000 and DigitalTheater7000, complete digital home theater sound systems priced at $600 and $1,000 respectively. 1 The Designer Series line is a collection of speaker systems engineered for flush mounting in the walls or ceilings of homes, businesses and recreational vehicles. There are eleven models in the Designer Series line with prices currently ranging from $130 to $500 per pair. The Automotive Series consists of 39 models of automotive speakers with prices currently ranging from $60 to $700 per pair. The automotive line includes high-quality full-range replacement speakers, sophisticated component systems, and subwoofers. The component systems permit flexible speaker placement and provide sound rivaling that of fine home speakers. The automotive line includes the CX Series, the 700 Series of plate speakers, the Boston Rally-Registered Trademark- RC Series of component speakers, the Boston Rally RX Coaxial Series, the Competitor Series subwoofer and enclosure systems, the Generator Series subwoofers, the Boston Rally RM Series, and the premium performance ProSeries Speaker Systems. The Multimedia category of products sold through the Company's retailers, through business arrangements with two distributors and two leading computer retailers, and via a direct Internet-based sales channel currently consists of four high performance powered subwoofer/satellite speaker systems for computing environments priced from $70 to $250 per system. The OEM sales of Multimedia speaker systems sold to Gateway, Inc. ("Gateway"), a leading global direct marketer of PC products, include the Digital BA735 subwoofer/satellite system, the Digital MediaTheater-TM- three-piece system, the DigitalTheater 6000 and the BA7500 thin panel audio system designed for desktop theater applications such as DVDs and PC games. These products are available either as a component of certain pre-configured computer systems offered by Gateway, or as an upgrade option on those configurations that do not include Boston Acoustics' products as standard. NEW PRODUCTS In Fiscal 2000, as in previous years, Boston met the challenges of the changing marketplace with new systems for all of our target markets. These new products, described below, are intended to supplement or replace those products which have matured, to increase penetration into current markets, and to gain footholds in new markets. Fiscal 2000 saw the Company's introduction of the DigitalTheater 7000. This system is the second complete home theater sound system with 5.1 channel Dolby-Registered Trademark- Digital processing that Boston has introduced and follows last year's successful introduction of the smaller DT6000 system. It includes five sonically matched satellite speakers and a powered subwoofer, all driven by its own powerful six-channel 350 watt Boston designed amplifier. With a suggested retail price of only $1,000, it offers outstanding performance in a space-saving, easy-to-connect format. The DT7000 received an "Innovations 2000" award for new product design and engineering excellence at the International Winter Consumer Electronics Show in Las Vegas. The Company added two important new models to its highly-regarded Lynnfield VR line. The new VR-M50 and VR-M60 Lynnfield `Monitor' style speakers feature elegant real wood veneer cabinets and Boston's most advanced drive units for excellent sound from compact enclosures. The suggested retail price of the VR-M50 is $700 per pair and the VR-M60 is $1,000 per pair. The Company expanded its line of complete home theater speaker systems with the introduction of the System 10K, a set of five high performance satellite speakers in rugged cast aluminum housings. The result, when partnered with one of the new Boston PowerVent-Registered Trademark- subwoofers, gives the customer a complete home theater speaker system that delivers the same level of performance as a much larger system. The system 10K is priced at $1,500. 2 Boston's popular Home Audio/Home Theater `powered tower' speaker line also received attention this year with two new models, the VR975 and VR965. Both models are designed to give customers the performance of a floor standing speaker with the bass impact of a powered subwoofer, in one space saving design. Both the $1,600 per pair VR975 and the $1,000 per pair VR965 feature much of Boston's proprietary driver and electronics design experience and technology. The VR965 was one of five Boston products that won a CES "Innovations 2000" award this year. This fiscal year also saw the launch of a line of four all-new PowerVent-Registered Trademark- powered home subwoofers. Starting at $300, these subwoofers are capable of producing deep bass and high output from surprisingly compact enclosures. The PV400 is priced at $300, the PV600 at $450, the PV800 at $700. The top-of-the-line award winning compact PV1000 features a 1000-watt amplifier and a real wood veneer cabinet at $1,200 The PV1000 was also an "Innovations 2000" award-winning product at the CES awards this year. Boston's successful Multimedia line also grew this year with the introduction of three innovative new models. The Digital BA735 (launched in May) is the world's first multimedia subwoofer-satellite stereo system featuring an S/PDIF (Sony/Philips Digital Interface Format) input. Using this digital input enables the user to enjoy a much cleaner sound than with conventional speakers because the digital to analog conversion is actually done within the BA735 speaker system. The Company's latest new Digital Multimedia desktop home theater system, the BA7500 also made its debut in Fiscal 2000. The BA7500 is Boston's first product that uses Boston's patented SST-TM- (Slimline Speaker Technology-TM-) drivers. This system is a fully digitAL, self-powered sound system for the PC. It uses Dolby-Registered Trademark- Digital Decoding and Virtual Dolby to create a full 5.1 channel Dolby Digital sound experience for games, movies, music and other PC multimedia audio sources. It also features 4 channel gaming ability. The system includes four satellites and a hideaway subwoofer for $300 MSRP. The BA7500 also won an "Innovations 2000" Award at the CES show. In addition, the Company introduced the BA4800, a 5-piece multimedia sound system especially for PC `gamers' using the 4-channel gaming system. With four diminutive desktop satellites and a powerful hideaway subwoofer, the BA4800 is priced at $200. The Company's new Voyager outdoor series was also launched this year. These rugged outdoor models provide true hi-fi quality performance for outdoor listening and are fully weather resistant - even in the harshest environments. Available in both white and black finishes, the Voyager line contains four models (Voyager 2, Voyager 3, Voyager Pro and Grand Voyager) ranging from $220 to $700 per pair. Boston also launched two families of automotive subwoofers this year, the Competitor Series and the Generator Series. Both feature versions of Boston's proprietary driver cooling technology to enable the drivers to provide tight, deep bass even at high volume levels. Competitor subwoofers are also available as systems mounted in carpeted enclosures. The Competitor enclosures feature a tuned radiator to give higher power and volume from very small enclosures. Both series are available in 2 ohm or 4 ohm configurations. The four Competitor drivers range in price from $200 to $280. The two innovative Competitor enclosure models the--C110 (another CES Innovations award winning product from Boston Acoustics) and the C210--sell for $400 and $650, respectively. The Generator series is priced at $120 to $180. The Generator 15" Subwoofer won a coveted AUTOSOUND Grand Prix Award. 3 ENGINEERING AND DEVELOPMENT The Company's engineering and development department is actively engaged in the development of new products and manufacturing processes, the improvement of existing products and the research of new materials for use in the Company's products. The Company designs all of its products and subassemblies, including those supplied by outside sources. The Company's engineering and development staff includes 60 full-time employees and three outside consultants. During fiscal years 1998, 1999 and 2000 the Company spent approximately $3,513,000, $5,106,000, and $5,936,000 respectively, for engineering and development. MARKETING The Company employs 27 salespersons and retains 17 manufacturer's representatives who service the Company's dealer network. In addition, the Company retains the services of two freelance public relations consultants (one in the United States, one in Europe) to assist in the professional promotion of the Company and its products. Boston Acoustics' home audio, Designer Series (in wall/in ceiling models) and outdoor speaker products are distributed in the United States and Canada through approximately 567 selected audio or audio specialist retailers, some of whom have multiple outlets. The Company's car audio products are sold through approximately 389 similarly specialized retailers, some of whom also sell the Company's home audio products. The Company's dealers usually stock and sell a broad range of audio products including, in most cases, the Company's competitor's products. The Company seeks dealers who emphasize quality products and who are knowledgeable about the products they sell. The Company's Multimedia products are sold through an OEM agreement with Gateway, through the Company's retailers, through business arrangements with two distributors and two leading computer retailers, and via a direct Internet-based sales channel (www.bostonacoustics.com). During the fiscal year ended March 25, 2000 one customer accounted for 44% of net sales. Boston Acoustics' products are also exported to dealers in Canada and sold through exclusive distributors in over 50 foreign countries, primarily in Europe, Asia/Pacific and South/Central America. Export sales accounted for approximately 19% of net sales in Fiscal 1998, 14% in Fiscal 1999, and 17% in Fiscal 2000. See also Note 6 to Consolidated Financial Statements incorporated herein by reference, pursuant to Part II, Item 8. The Company emphasizes the high performance-to-price ratio of its products in its advertising and promotion. Boston Acoustics believes that specialty retailers can be effective in introducing retail customers to the high dollar value of the Company's products. The Company directly supports its domestic dealers and international distributors via a cooperative advertising program, prepared advertisements, detailed product literature and point of purchase materials. The Company also regularly advertises in national specialist magazines including SOUND AND VISION, CAR AUDIO AND ELECTRONICS, CAR STEREO REVIEW, MAX POWER, AUDIO VIDEO INTERIORS, DIGITAL HOME ENTERTAINMENT, HOME THEATER and AUDIO VIDEO INTERNATIONAL. During Fiscal 2000 the Company spent approximately $2,754,000 (2.6% of net sales) for advertising. 4 COMPETITION The Company competes primarily on the basis of product performance, price and the strength of its dealer organization. The market for branded loudspeaker systems is served by many manufacturers, both foreign and domestic. Many products are available over a broad price range, and the market is highly fragmented and competitive. The Company distributes its products primarily through specialty retailers where it competes directly for space with other branded speaker manufacturers. Audio systems produced by many of the Company's competitors can be purchased by consumers through mass merchandisers, department stores, mail-order merchants, and catalogue showrooms. The Company believes it is more advantageous to distribute through specialty retailers who provide sales support and service to consumers. Boston Acoustics competes with a substantial number of branded speaker manufacturers, including Bose Corporation, Infinity and JBL (divisions of Harman International Industries), Advent (division of Recoton Corp.), Polk Audio, Inc., and Klipsch and Associates, Inc. Some of these competitors have greater technical and financial resources than the Company and may have broader brand recognition than Boston Acoustics. In addition to competition from branded loudspeaker manufacturers, the Company's products compete indirectly with single name "rack systems". Rack systems contain all the various components needed to form an audio system, and are sold by Sony, Pioneer, Technics, Yamaha and many others. Rack systems are generally sold through mass merchandisers and department stores, although many of the Company's dealers also sell rack systems. MANUFACTURING AND SUPPLIERS Most of the Company's products are assembled by the Company from components specially fabricated for the Company, although certain automotive speakers and multimedia audio systems are manufactured by others in certain foreign countries according to Company specifications. The Company purchases materials and component parts from approximately 222 suppliers located in the United States, Canada, Europe and the Far East. Although Boston Acoustics relies on single suppliers for certain parts, the Company could, if necessary, develop multiple sources of supply for these parts. The Company does not have long-term or exclusive purchase commitments. The Company does have a written agreement with one of its inventory suppliers, which accounted for more than 10% of the Company's purchases during fiscal year 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- International Operations" which is included in the Company's 2000 Annual Report which is filed as Exhibit 13 hereto. SEASONALITY AND CONSUMER DISCRETION The home and automotive audio markets are both somewhat seasonal, with a majority of home speaker retail sales normally occurring in the period October through March and a majority of automotive speaker retail sales normally occurring in the period April through October. The Company's sales and earnings can also be affected by changes in the general economy since purchases of home entertainment and automotive audio products, including loudspeakers, are discretionary for consumers. 5 PATENTS AND TRADEMARKS Boston Acoustics holds eight United States patents and numerous international patents, which relate to certain speaker technologies, assemblies and cabinet design. The Company also currently has several registered trademarks including Boston-Registered Trademark-, Boston Acoustics-Registered Trademark-, PowerVent-Registered Trademark-, Tempo-Registered Trademark-, Voyager-Registered Trademark-, Runabout-Registered Trademark-, SoundBar-Registered Trademark-, and Boston Rally-Registered Trademark-. Trademarks used by the SnelL subsidiary include Snell Acoustics, Snell Multimedia, Snell Music & Cinema and Room Ready-Registered Trademark-. The Company believes that its growth, competitive position and success in the marketplace are more dependent on its technical and marketing skills and expertise than upon the ownership of patent and trademark rights. There can be no assurance that any patent or trademark would ultimately be proven valid if challenged. SIGNIFICANT CUSTOMERS The Company's financial results for the fiscal year ended March 25, 2000 include significant OEM sales of multimedia speaker systems to Gateway, Inc. ("Gateway"). The terms of these sales are governed by the Master Supply Agreement between Gateway and the Company. On July 19, 1999, the Company entered into a new three year Master Supply Agreement with Gateway. Since this Master Supply Agreement with Gateway does not contain minimum or scheduled purchase requirements, purchase orders by Gateway may fluctuate significantly from quarter to quarter over the terms of the agreement. Based on information currently available from our OEM customer, the Company anticipates that our OEM sales should reflect a slight increase in sales during the fiscal year ending March 31, 2001. The loss of Gateway as a customer or any significant portion of orders from Gateway could have a material adverse affect on the Company's business, results of operations and financial condition. In addition, the Company also could be materially adversely affected by any substantial work stoppage or interruption of production at Gateway or if Gateway were to reduce or cease conducting operations. BACKLOG The Company currently has no significant backlog. The Company's policy is to maintain sufficient inventories of finished goods to fill all orders within two business days of receipt. WARRANTIES Boston Acoustics warrants its home speakers to be free from defects in materials and workmanship for a period of five years, its Designer Series speakers and its automotive speakers for one year and its multimedia audio speaker systems for a period of three years. During the years ended March 25, 2000, March 27, 1999 and March 28, 1998, warranty costs recorded by the Company were approximately $221,000, $241,000 and $193,000, respectively. EMPLOYEES As of June 10, 2000, the Company had 366 full-time employees who were engaged as follows: 221 in production and materials management; 60 in engineering and development; 54 in marketing and sales support; and 31 in administration. None of the Company's employees are represented by a collective bargaining agreement and the Company believes that its relations with its employees are satisfactory. 6 EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning Andrew G. Kotsatos, who is Chairman of the Board, Chief Executive Officer and Treasurer of the Company, and Moses A. Gabbay who is Chief Operating Officer of the Company, is incorporated herein by reference from the Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held on August 8, 2000, under the headings "Proposal No. 1 -- Election of Directors" and "Board of Directors." Information concerning the Company's other executive officers as of June 22, 2000 is set forth below.
Name Age Title - - - - - - - - - - ---- --- ----- Michael B. Chass 30 Vice President - Multimedia Products Group Martin J. Harding 40 Vice President - Marketing Paul F. Reed 36 Vice President - Administrative Services Debra A. Ricker-Rosato 44 Vice President - Finance Michael J. Rudd 55 Vice President - New Technology Robert L. Spaner 40 Vice President - Sales
Michael B. Chass was named Vice President - Multimedia Products Group in August 1999. He joined the Company in 1994 as an account manager. In 1996 he became a Sales Manager and in 1998 became a Director of Sales. Mr. Chass was formerly employed by C.P.S. Marketing as an Assistant Director of Sales and Marketing. He holds a BSBA in Marketing from the University of Missouri. Martin J. Harding was named Vice President - Marketing in November 1998. He joined the Company in 1996 as International sales manager. In 1997 he became Director of International Sales and Marketing. Mr. Harding previously held positions specializing in International sales and marketing with Casio, Celestion and NAD Electronics. Paul F. Reed was named Vice President - Administrative Services in May 1993. He has been with the Company since its inception in 1979. From production and shipping, Mr. Reed moved to sales in 1986 and, in 1989, became a Regional Sales Manager. He was named Director of Administrative Services in 1990. Debra A. Ricker-Rosato was named Vice President - Finance in May 1993. Prior to joining the Company in October 1986 as Controller, Ms. Ricker-Rosato was employed by Babco-Textron from 1975, a manufacturer of small aircraft engine components. Her last position with Babco-Textron was that of Assistant Controller. She holds an MSF degree from Bentley College. Michael J. Rudd was named Vice President - New Technology in January 2000. He joined the Company in 1995 as a product manager. In 1997 he became Manager of New Technology - Engineering. Prior to joining the Company, Mr. Rudd worked as a consultant specializing in acoustic arrays. Mr. Rudd previously held positions with Atlantic Applied Research, Bolt Beranek and Newman and New York University. Mr. Rudd holds a PhD in Physics from the University Cambridge, England. Robert L. Spaner was named Vice President - Sales in May 1993. He joined the Company in 1987 as a regional sales manager. In 1990 he became National Sales Manager. Mr. Spaner was formerly employed by Kloss Video as Western Regional Manager and worked six years in retail sales at Tweeter, Etc. 7 Each executive officer is elected for a term scheduled to expire at the meeting of Directors following the Annual Meeting of Stockholders or until a successor is duly chosen and qualified. There are no arrangements or understandings pursuant to which any executive officer was or is to be selected for election or reelection. There are no family relationships among any Directors or executive officers, except that Paul F. Reed, an executive officer, and Lisa M. Mooney, a director, are brother and sister. ITEM 2. PROPERTIES The Company owns its principal executive offices and manufacturing facilities which sits on 15 acres of land at 300 Jubilee Drive, Peabody, Massachusetts. Snell Acoustics ("Snell"), a subsidiary of the Company, leases all of the properties used in its business. Snell maintains its principal executive offices and manufacturing facilities at 143 Essex Street, Haverhill, Massachusetts. A total of 65,090 square feet of space is leased from an unrelated party under an operating lease which expires in September 2000. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings affecting the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of shareholders during the fourth quarter of Fiscal 2000. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to the section entitled "Stock Market Activity" on page 21 in the Registrant's 2000 Annual Report to Stockholders, which is filed herewith as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to the section entitled "Selected Financial Data" on page 20 in the Registrant's 2000 Annual Report to Stockholders, 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 by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 through 10 in the Registrant's 2000 Annual Report to Stockholders, which is filed herewith as Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference to the section entitled "Quantitative and Qualitative Disclosures about Market Risk" on page 9 in the Registrant's 2000 Annual Report to Stockholders, which is filed herewith as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the Consolidated Financial Statements at March 25, 2000 and notes thereto on pages 11 through 19 in the Registrant's 2000 Annual Report to Stockholders, which is filed herewith as Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G (3) of Form 10-K and Instruction 3 to Item 401(b), the information required by this item concerning executive officers, including certain information 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 August 8, 2000 concerning Andrew G. Kotsatos, who is the Chairman of the Board, Chief Executive Officer and Treasurer of the Company, and Moses A. Gabbay, Chief Operating Officer of the Company, is set forth in Part I, Item 1, hereof, under the heading "Executive Officers of the Registrant". Information concerning Directors, including Messrs. Kotsatos and Gabbay, is incorporated by reference to the sections entitled "Proposal No. 1 -- Election of Directors", "Board of Directors" and "Compensation Interlocks and Insider Participation" in the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be held August 8, 2000. There is incorporated herein by reference to the discussion under "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held August 8, 2000 the information with respect to delinquent filings of reports pursuant to Section 16(a) of the Securities Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the sections entitled "Executive Compensation" in the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be held August 8, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the section entitled "Principal and Management Stockholders" in the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be held August 8, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the section entitled "Certain Relationships and Transactions" in the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be held August 8, 2000. 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are included as part of this report: (1) FINANCIAL STATEMENTS The following consolidated financial statements are incorporated by reference to the Registrant's 2000 Annual Report to Stockholders: Report of Independent Public Accountants. Consolidated Balance Sheets as of March 27, 1999 and March 25, 2000. Consolidated Statements of Income for the three years ended March 25, 2000. Consolidated Statements of Shareholders' Equity for the three years ended March 25, 2000. Consolidated Statements of Cash Flows for the three years ended March 25, 2000. Notes to Consolidated Financial Statements. (2) FINANCIAL STATEMENT SCHEDULES The following financial statement schedules are filed as part of this report and should be read in conjunction with the consolidated financial statements: Report of Independent Public Accountants. Schedule I -- Valuation and Qualifying Account. Other financial schedules have been omitted because they are not required or because the required information is included in the Consolidated Financial Statements or notes thereto. 11 (3) LISTING OF EXHIBITS Exhibits -------- 3.1. - Articles of Organization (1) 3.2. - Amendment to Articles of Organization (1) 3.3. - Second Amendment to Articles of Organization (1) 3.4. - Bylaws (1) 4.1. - Specimen Share Certificate (1) 10.1.+ - 1996 Stock Plan adopted by Boston Acoustics, Inc. on February 20, 1996, as amended (3) 10.2.+ - 1986 Incentive Stock Option Plan adopted by Boston Acoustics, Inc. on October 15, 1986, as amended (2) 10.3.+ - 1997 Stock Plan adopted by Boston Acoustics, Inc. on May 28, 1997. (9) 10.4.# - Purchase Agreement dated March 27, 1997 by and between Gateway 2000, Inc. and Boston Acoustics, Inc. (3) 10.5.# - Letter of Agreement dated January 14, 1997 by and between Gateway 2000, Inc. and Boston Acoustics, Inc. (3) 10.6.# - Master Supply Agreement dated July 19, 1999 by and between Gateway, Inc. and Boston Acoustics, Inc. (4) 10.7. - Loan Agreement dated as of June 13, 1997 between Boston Acoustics, Inc. and State Street Bank and Trust Company. (5) 10.8. - Revolving Credit Note dated as of June 13, 1997 in the amount of $25,000,000 made by Boston Acoustics, Inc. payable to the order of State Street Bank and Trust Company. (6) 10.9.# - Letter of Agreement dated December 22, 1997 by and between Gateway 2000, Inc. and Boston Acoustics, Inc. (7) 10.10.# - Letter of Agreement dated May 14, 1998 by and between Gateway 2000, Inc. and Boston Acoustics, Inc. (10) 13. * - 2000 Annual Report to Shareholders 21. - Subsidiaries of the Registrant (3) 23. * - Consent of Independent Public Accountants 27. * - Financial Data Schedule 99. - "Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995 (8)
* Indicates an exhibit which is filed herewith. + Indicates an exhibit which constitutes an executive compensation plan. # Indicates that portions of the exhibit have been omitted pursuant to an order granting a request for confidential treatment. - - - - - - - - - - ------------------- (1) Incorporated by reference to the similarly numbered exhibits in Part II of File No. 33-9875. (2) Incorporated by reference to the similarly numbered exhibit in Item 14 of the Company's Annual Report on Form 10-K for the year ended March 27, 1993. (3) Incorporated by reference to the similarly numbered exhibit in Item 14 of the Company's Annual Report on Form 10-K for the fiscal year ended March 29, 1997. 12 (4) Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for fiscal quarter ended September 25, 1999. (5) Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997. (6) Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997. (7) Incorporated by reference to Exhibit 10.A. to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1997. (8) Incorporated by reference to the similarly numbered exhibit in Item 14 of the Company's Annual Report on Form 10-K for the fiscal year ended March 30, 1996. (9)Incorporated by reference to Exhibit 10.C. to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998. (10)Incorporated by reference to Exhibit 10.L. to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998. (b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed by the Registrant during the last quarter covered by this report, and no other such reports were filed subsequent to March 25, 2000 through the date of this report. 13 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 City of Peabody, Commonwealth of Massachusetts, on the 22nd day of June 2000. BOSTON ACOUSTICS, INC. (Registrant) BY: /s/ Andrew G. Kotsatos ---------------------------- Andrew G. Kotsatos Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Capacities Date /s/ Andrew G. Kotsatos 6/22/00 - - - - - - - - - - ---------------------- Director, Chief Executive ------------ Andrew G. Kotsatos Officer and Treasurer /s/ Moses A. Gabbay 6/22/00 - - - - - - - - - - ---------------------- Director, and ------------ Moses A. Gabbay Chief Operating Officer /s/ Debra A. Ricker-Rosato 6/22/00 - - - - - - - - - - ---------------------- Vice President and ------------ Debra A. Ricker-Rosato Chief Accounting Officer /s/ George J. Markos 6/22/00 - - - - - - - - - - ---------------------- Director ------------ George J. Markos /s/ Lisa M. Mooney 6/22/00 - - - - - - - - - - ---------------------- Director ------------ Lisa M. Mooney
14 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Schedule I Valuation and Qualifying Accounts
----------------ALLOWANCE FOR DOUBTFUL ACCOUNTS---------------- BALANCE, CHARGED TO BEGINNING OF COSTS AND BALANCE, END YEAR EXPENSES DEDUCTIONS(1) OF YEAR For the fiscal year ended-- March 25, 2000 $ 463,000 $ 7,000 $ (125,000) $ 345,000 =========== ============ ============== ============ March 27, 1999 $ 402,000 $ 163,000 $ (102,000) $ 463,000 =========== ============ ============== ============ March 28, 1998 $ 411,000 $ 36,000 $ (45,000) $ 402,000 =========== ============ ============== ============
(1) Amounts deemed uncollectible net of recoveries of previously reserved amounts.
---------------RESERVE FOR OFF-INVOICE ALLOWANCES--------------- BALANCE, CHARGED TO BEGINNING OF COSTS AND BALANCE, END YEAR EXPENSES DEDUCTIONS OF YEAR For the fiscal year ended-- March 25, 2000 $ 2,102,000 $ 11,715,000 $ (11,254,000) $ 2,563,000 =========== ============ ============== ============ March 27, 1999 $ 1,660,000 $ 10,411,000 $ (9,969,000) $ 2,102,000 =========== ============ ============== ============ March 28, 1998 $ 1,336,000 $ 8,524,000 $ (8,200,000) $ 1,660,000 =========== ============ ============== ============
15 EX-13 2 ex-13.txt EXHIBIT 13 Exhibit 13 Boston Acoustics builds world class audio products that people enjoy owning and recommend to others. We strive to earn the respect and support of our customers and firmly believe that the best relationships are long term. [GRAPHIC OMITTED] To our shareholders: Net sales for Fiscal 2000 were $108 million, 8% less than Fiscal 1999. Net income was $6.6 million, down 41%, and diluted earnings per share decreased 42%, to $1.25 per share. The Reason The decline in sales was directly attributable to a $14.4 million decrease in OEM sales to Gateway. As in previous years, we supplied Gateway with speakers for their "better" and "best" computers - generally priced at $1,500 and up. Computer prices have dropped sharply and Gateway, along with other PC makers, sold more computers priced under $1,500 last year, and fewer of the more expensive models. The Good News The good news is that a healthy economy and lower PC prices mean that people have more money to spend on other things, including Boston Acoustics' products. Sales in our core products grew. Looking forward, we see opportunities. Virtually all computers sold today have the potential to deliver CD quality sound - "with" the right speakers. There is a large potential for aftermarket multimedia speaker system sales. To capitalize on that market, we are now working with two distributors of computer-related products, D&H Distributing and Tech Data Corporation. We are also now selling products in the stores of two of America's leading computer retailers, CompUSA and MicroCenter, and through retailers in other countries around the world. We have made changes in our OEM relationship with Gateway. In late June 2000, we began to supply speakers for Gateway's entry level computers. We now expect to supply all of their speakers - at least through January 2001, when a new purchasing cycle will begin. "Stay tuned." 1 New Products, More Technology Fiscal 2000 was a very big year for new product introductions. We introduced new systems for home, auto and multimedia applications - all incorporating technologies developed entirely by us. [GRAPHIC OMITTED] o The VR975 and VR965 are new members of our award-winning Lynnfield VR line. These sleek speakers combine the unrivaled performance of a floorstanding speaker with the bass impact of a built-in powered subwoofer. MSRP for the VR975 is $1,600 a pair; $1,000 a pair for the VR965. o The VR-M50 and VR-M60 are elegant monitor-quality speakers that look great in any environment. They are the best bookshelf speakers we've ever made. The VR-M50 is priced at $700 a pair; the VR-M60 is $1,000 a pair. o The new PowerVent(R) Powered Subwoofer line gives consumers four performance and price options while delivering the dynamic bass foundation that is essential for superior home theater and music sound reproduction. Suggested retail prices range from $300 to $1,200. o The System 10k is a set of five high performance satellite speakers that can be combined with a state-of-the-art Boston powered-vent subwoofer to provide all of the performance of top-rated floor standing speakers in a very unobtrusive set of small packages. The 10k MSRP is $1,500. [GRAPHIC OMITTED] o Our new indoor/outdoor Voyager(R) line speakers are designed to withstand immersion in salt water, high wind conditions and freezing temperatures. Shells are high-tech resin and drivers are made from high-tech plastics, rubbers and other synthetics. Bass units and tweeters are rear-mounted for total protection. MSRPs for four models range from $220 to $700 per pair. o In December, we unveiled our new SST - Slimline Speaker Technology(R) - flat panel for speakers that require less power and have higher fidelity than those designed with other flat speaker technologies. Efficiency, power handling and sonic performance are on a par with conventional speakers - in a speaker that's less than one inch thick. We have a patent pending. o The first SST technology product is the BA 7500, specially designed for all desktop audio applications, including DVDs and PC games. It can reproduce stereo, MP3, Dolby(R) Digital 5.1 surround sound and four-channel gaming 2 [GRAPHIC OMITTED] surround sound. A three-piece version is being sold through Gateway's direct retail channel, and we are marketing a five-piece system through our own retail channels. MSRP is $300. o The digital BA735 is the world's first multimedia stereo system with a digital S/PDIF (Sony/Philips Digital Interface Format) input. It's an ultra compact three-piece system that preserves all of the digital data stream from the computer, so that the signal is converted to analog within the speaker system rather than in the electrically noisy PC. The bottom line is much cleaner audio than with conventional speaker systems - from sources that can include DVD, the Internet or CD-ROM. [GRAPHIC OMITTED] o The DigitalTheater(TM) 7000 system is a complete Dolby Digital surround sound system that eliminates the confusion of purchasing separate amplifiers, decoders, speakers and connection cables. Like the DigitalTheater 6000 we introduced the previous year, it is designed for extraordinary ease of use: it detects digital input signals and switches to the correct mode automatically. All speaker and hookup cables are included, so there is nothing extra to buy and the hookup cables are color-coded for "mistake-proof" connection. MSRP is $1000. o For the automotive market, we introduced two new series of subwoofer systems aimed at the "enthusiast" automotive audio aftermarket. Drawing on patented technology developed for the widely acclaimed ProSeries, the new Competitor Series subwoofers provide unprecedented performance in an unexpectedly small amount of space - allowing them to be placed virtually anywhere in a vehicle. Their MSRPs range from $200 to $280 each. [GRAPHIC OMITTED] o Our new Generator Series subwoofer systems offer clean, deep bass in very compact enclosures. They can also be placed virtually anywhere in a car and are available in six different configurations, at MSRPs ranging from $120 to $180. Honors for Design and Engineering Five of our new products were honored with Innovations 2000 awards for new product design and engineering excellence at the International Winter Consumer Electronics Show in Las Vegas. 3 The award winners included the Lynnfield VR965 floorstanding speaker, the DigitalTheater(TM) 7000 home theater system, the Competitor Series Automotive Subwoofer System C110, the PowerVent(R) PV1000 powered subwoofer and the new Digital BA7500 multimedia sound system. Upgrading Facilities To accommodate our constantly growing technology base, we are expanding the engineering space in our Peabody headquarters by 9,600 square feet. This will allow us to move engineers from an offsite location, and to add to the staff as needed. To help meet growing demand for core products, we have installed a new state-of-the-art automated woofer manufacturing line. The new line not only allows us to expand production; it will also reduce manufacturing costs. A New Chief Operating Officer On April 25, 2000, Moses Gabbay was named Chief Operating Officer. He has been with the company since 1981, most recently serving as Vice President, Engineering. [GRAPHIC OMITTED] The aggressive promotion of our automotive speaker lines continued this year with the creation of the SEMA award winning Boston Audi TT 4 [GRAPHIC OMITTED] Looking Ahead To the best of our knowledge, based on information currently available from our OEM customer, we anticipate that our OEM sales will be slightly higher in Fiscal 2001. Looking to the longer term, we are in excellent shape. We have a steady stream of exciting new products and even more in the pipeline. We have created new technologies and new applications for existing technologies, and we will continue to come up with innovative solution-oriented products. We are financially solid - even though our capital expenditures reached $4 million in Fiscal 2000, we were still able to reduce our debt by $7 million, bringing it down to approximately $6.5 million. We repurchased a total of 172,500 shares of common stock during the fiscal year, and we paid quarterly dividends of $ .085 per share. [GRAPHIC OMITTED] The challenges we faced during Fiscal 2000 have spurred us to develop new and better ways to grow. We are looking ahead with optimism. Sincerely, /s/ Andy Andrew G. Kotsatos Chairman and Chief Executive Officer [GRAPHIC OMITTED] 5 Management's Discussion and Analysis of Financial Condition and results of Operation Results of Operations The following table sets forth the results of operations as a percentage of sales for the years ended March 25, 2000, March 27, 1999, and March 28, 1998 expressed as percentages of net sales.
March 25, March 27, March 28, For the Years Ended 2000 1999 1998 - - - - - - - - - - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 68.8 66.8 61.1 --------------------------------------- Gross profit 31.2 33.2 38.9 Selling and marketing expenses 10.3 8.7 9.9 General and administrative expenses 4.8 4.2 4.8 Engineering and development expenses 5.5 4.3 4.3 --------------------------------------- 20.6 17.2 19.0 --------------------------------------- Income from operations 10.6 16.0 19.9 Interest income (expense), net (0.6) (0.6) (1.0) Income before provision for income taxes 10.0 15.4 18.9 Provision for income taxes 3.9 5.9 7.3 --------------------------------------- Net income 6.1% 9.5% 11.6% =======================================
Fiscal 2000 Compared with Fiscal 1999 Net Sales decreased 8%, from approximately $118.0 million to $108.0 million. The overall sales decrease was due to a $14.4 million decrease in the OEM sales of multimedia speaker systems to Gateway, Inc. ("Gateway"), a leading global direct marketer of PC products. This decrease was partially offset by increased sales of our core products and sales that resulted from our entry into the Multimedia retail and distribution channels during the latter part of the fiscal year. OEM sales to Gateway included the Digital BA735 subwoofer/ satellite system introduced in the first quarter of Fiscal 2000, the Digital MediaTheater(TM) three-piece system, the DigitalTheater(TM) 6000, a complete Dolby(R) Digital 5.1 Channel Home Theater System and the BA7500 thin panel audio system designed for desktop theater applications such as DVDs and PC games. These products are available either as a component of certain pre-configured computer systems offered by Gateway, or as an upgrade option on those configurations that do not include Boston Acoustics' products as standard. The quantity of product sold as an upgrade option could fluctuate significantly from quarter to quarter and have an impact on the unit volume of OEM multimedia products. During the fiscal year, growth in the Company's core business sales was primarily the result of successful new product introductions. The VR-M50 and VR-M60 monitor speaker systems with suggested retail prices per pair of $700 and $1,000 are the Company's first real wood bookshelf speakers. Four new PowerVent,(R) powered subwoofer systems contributed to the overall sales increase by addressing the consumer's desire for physically smaller high performance subwoofers. With suggested retail prices ranging from $300 to $1,200 they replaced three discontinued models. The new Competitor Series and Generator Series of subwoofers for the automotive audio aftermarket were introduced during Fiscal 2000. The Competitor Series subwoofers are available in 15-inch, 12-inch, 10-inch and 8-inch sizes and are priced between $280 and $200 each MRSP. The Generator Series are high performance units with retail prices from $120 to $180. During the fiscal year, the Company enlarged its offering of audio systems with the DigitalTheater(TM) 7000. Retailing for $1,000, this six-piece Dolby, Digital system provides cinema quality sound and easy setup. The Company also introduced new multimedia products to its retail offerings. The BA4800 is an analog five-piece, 4 channel surround speaker system ideal for 4-channel PC gaming or any enhanced audio application at the desktop. Retailing for $200, the BA4800 provides theater-like thunder at a reasonable price. The Company's gross margin decreased as a percentage of net sales from 33.2% to 31.2% due to a combination of increased manufacturing overhead expenses associated with new product introductions, additional rent expense associated with temporary offsite warehouse space during the fiscal year, along with planned closeout sales of discontinued models. 6 Total operating expenses increased as a percentage of net sales from 17.2% to 20.6% during Fiscal 2000. Selling and marketing expenses have increased in absolute dollars primarily due to increased salaries and benefits relating to additional personnel and increased licensed royalty fees. General and administrative expenses have increased in both absolute dollars and as a percentage of net sales primarily due to the $500,000 charge recorded as a result of the resignation of the Company's former President/COO effective April 3, 2000. Engineering and development expenses increased in absolute dollars primarily due to increased salaries and benefits relating to additional personnel and increased expenses associated with new product development. Net interest expense for the fiscal year remained stable as a percentage of net sales compared to the corresponding period a year ago, primarily due to the utilization of working capital and repayments of a certain portion of the Company's line of credit obligations. The Company's effective income tax rate increased slightly during the twelve-month period ended March 25, 2000 from 38.2% to 38.6% primarily due to a smaller proportion of the Company's income being derived outside the US thereby reducing the tax benefits associated with the Company's foreign sales corporation. Net income decreased 41% to approximately $6.6 million, while diluted earnings per share decreased 42% to $1.25 per share for the same period a year ago. The decrease in net income is primarily the result of the decrease in net sales and gross profit and the increase in operating expenses as compared to the same period a year ago. Fiscal 1999 Compared with Fiscal 1998 Net Sales increased 43%, from approximately $82.4 million to $118.0 million. The overall sales increase was primarily due to an increase in the OEM sales of multimedia speaker systems to Gateway, Inc. ("Gateway"), a leading global direct marketer of PC products. These products included the BA635 three-piece system, the Digital MediaTheater(TM) three-piece system, and the DigitalTheater(TM) 6000, a complete Dolby(R) Digital 5.1 Channel Home Theater System. During the fiscal year, the Company's core business of home, Designer Series and automotive product sales increased approximately 10 percent. Contributing to the overall increase were sales of new products introduced during the fiscal year. The Company added a new model to its successful Lynnfield VR(R) Tower Series of floorstanding speakers. The VR940 with a suggested retail price of $500 per pair uses an innovative new bass driver designed and built by Boston Acoustics that delivers exceptional performance from a sleek enclosure. The System8000, a complete six-speaker home theater package with a suggested retail price of $699 per system was launched during Fiscal 1999. The CR4 and CR5 models, with suggested retails of $100 per pair and $150 per pair, respectively, were added to the line of Compact Reference Series bookshelf speakers. The Designer Series of products were complimented with the introduction of the DX Pro in-wall diffuse-field surround speaker. The DX Pro has a suggested retail of $500 per pair. In addition to the DX Pro, the Company supplemented the Designer Series with three additional models. The Model 251 and Model 261 are flush mounted wall speakers with suggested retail prices of $200 and $250 per pair, respectively. The third introduction was the Model 315, a ceiling mounted speaker with a suggested retail price of $150 per pair. During the fiscal year, the Company introduced a new generation of the Company's flagship ProSeries automotive speaker systems. The ProSeries .5 component speakers can be installed in most stock factory locations without modifying car interiors and have suggested retail prices ranging from $400 to $750 per system. In addition to the component speakers, the Company introduced its redesigned 8-inch, 10-inch and 12-inch ProSeries .5 subwoofers with suggested retail prices of $220, $270 and $300 each, respectively. The Company's gross margin increased in absolute dollars but decreased as a percentage of net sales from 38.9% to 33.2% due primarily to a shift in the sales mix to loudspeaker models with lower margins, particularly the Company's OEM multimedia speaker systems. 7 Management's Discussion and Analysis of Financial Condition and results of Operation Total operating expenses increased in absolute dollars from approximately $15,645,000 to $20,277,000 but decreased as a percentage of net sales from 19.0% to 17.2% during Fiscal 1999. Selling and marketing expenses have increased in absolute dollars primarily due to increased salaries and benefits relating to additional personnel, increased licensed royalty fees and the increased marketing expenses associated with the direct-to-consumer program for the Company's multimedia products. General and administrative expenses have increased in absolute dollars primarily due to increased depreciation expenses relating to updated computer systems. As a percentage of net sales, general and administrative expenses decreased slightly during the fiscal year ended March 27, 1999 as compared to the same period a year ago. Engineering and development expenses increased in absolute dollars primarily due to increased salaries and benefits relating to additional personnel and increased expenses associated with new product development. Net interest expense has decreased during the twelve-month period ended March 27, 1999. The decrease is primarily due to lower interest expense as a result of the Company's repayments on the Company's line of credit borrowings during the year. The Company's effective income tax rate decreased slightly during the twelve-month period ended March 27, 1999 from 38.5% to 38.2% primarily due to lower state income taxes offset by a smaller proportion of the Company's income being derived outside the US thereby reducing the tax benefits associated with the Company's foreign sales corporation. Net income increased 18% to approximately $11.3 million, while diluted earnings per share increased 23% to $2.14 per share for the same period a year ago. Liquidity and Capital Resources During Fiscal 2000 and 1999, the Company financed its growth with cash generated from operations and bank borrowings. As of March 25, 2000, the Company's working capital was approximately $24,828,000, a decrease of approximately $4,642,000 from March 27, 1999. The decrease in working capital was primarily due to decreases in inventory and borrowings on the Company's line of credit as well as increases in accounts payable, accrued payroll and other accrued expenses. At March 25, 2000 the Company's inventory decreased by approximately $2,318,000 compared to March 27, 1999 levels primarily as a result of decreased inventory purchases. Cash and cash equivalents decreased by approximately $590,000, compared to levels at the end of Fiscal 1999 primarily due to the purchase of land adjacent to the Company's corporate headquarters facility, tooling expenditures related to new products, costs related to the Company's new state-of-the art automated woofer assembly line, and the repayments made on the Company's line of credit borrowings. Current liabilities increased by approximately $2,475,000 to approximately $11,341,000 primarily as a result of increases in accounts payable related to the timing of payments, increased accrued payroll expenses and other accrued expenses, offset by decreased accrued income taxes and bank borrowings. Long-term debt decreased by $5,650,000 as a result of repayments of the Company's line of credit during Fiscal 2000. The Company has two lines of credit with two banking institutions totaling $26,500,000. At March 25, 2000 the Company had borrowings totaling $6,250,000 under its $25 million revolving credit agreement. Net cash decreased in Fiscal years 2000, 1999 and 1998 by $590,000, $1,774,000 and $1,067,000 respectively. Net cash provided by operating activities in Fiscal years 2000, 1999 and 1998 was approximately $15,061,000, $3,282,000, and $9,710,000, respectively. Differences in cash flows from operating activities over this three-year period were primarily related to significant year-to-year changes in accounts receivable, inventories and accounts payable. Net cash provided by (used in) investing activities for Fiscal years 2000, 1999 and 1998 were approximately ($4,483,000), ($4,439,000), and $2,002,000, respectively. Net cash used in investing activities in Fiscal 2000 was for improvements to the existing facility and purchases of property and equipment. Net cash used in investing activities in Fiscal 1999 was due to purchases of property and equipment relating to production tooling and computer equipment. Net cash provided by investing activities in Fiscal 1998 was primarily the result of the sale of marketable securities, partially offset by capital equipment purchases. Net cash used in financing activities in Fiscal years 2000, 1999 and 1998 were approximately $11,167,000, $617,000, and $12,779,000, respectively. In Fiscal 2000, net cash used in financing activities included $7,300,000 of repayments of borrowings under one of the Company's credit facilities. In addition, during Fiscal 2000, the Company repurchased 172,500 shares of common stock for $2,428,344. The Company believes that its current resources are adequate to meet its requirements for working capital and capital expenditures at least through Fiscal 2001. 8 New Accounting Standards In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement, as amended by SFAS No. 137, Deferral of the Effective Date of the FASB Statement No. 133, is effective for all Fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting disclosure standards for derivative instruments including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. The Company does not expect adoption of this statement to have a material impact on its consolidated financial position or results of operations. The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, in December 1999. The Company believes that compliance with the guidance provided in SAB No. 101 will not have a material impact on future operating results. In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25 in certain situations as defined. The interpretation is effective July 1, 2000, but covers certain events during the period after December 15, 1998 but before the effective date. The Company expects that the adoption of this interpretation would not have any effect on the accompanying financial statements. Quantitative and Qualitative Disclosures about Market Risk A Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments. As of March 25, 2000, the Company did not participate in any derivative financial instruments, or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 107. All of the Company's investments are considered cash equivalents money market accounts that are carried on the Company's books at amortized cost, which approximates fair market value. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. B Primary Market Risk Exposures The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. The Company's exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact it currently sells its products primarily in United States dollars. At March 25, 2000 the Company had not engaged in any foreign currency hedging activities. Significant Customers The Company's financial results for the fiscal year ended March 25, 2000 include significant OEM sales of multimedia speaker systems to Gateway. The terms of these sales are governed by the Master Supply Agreement between Gateway and the Company. On July 19, 1999, the Company entered into a new three year Master Supply Agreement with Gateway. Since this Master Supply Agreement with Gateway does not contain minimum or scheduled purchase requirements, purchase orders by Gateway may fluctuate significantly from quarter to quarter over the terms of the agreement. Based on information currently available from our OEM customer, the Company anticipates that our OEM sales should reflect a slight increase in sales during the fiscal year ending March 31, 2001. The loss of Gateway as a customer or any significant portion of orders from Gateway could have a material adverse affect on the Company's business, results of operations and financial condition. In addition, the Company also could be materially adversely affected by any substantial work stoppage or interruption of production at Gateway or if Gateway were to reduce or cease conducting operations. 9 Management's Discussion and Analysis of Financial Condition and results of Operation International Operations Export sales accounted for approximately 17%, 14% and 19% of the Company's net sales during Fiscal 2000, 1999 and 1998, respectively, with sales concentrations in Europe, Asia and Canada. The Company also distributes its products through two foreign subsidiaries. The Company obtains a substantial supply of inventory from manufacturers located in foreign countries. The Company has no long-term, fixed price contracts or arrangements for inventory supplied by such foreign manufacturers. The Company could readily obtain such inventory from other sources, but there can be no assurance that it would not be at some delay. Any substantial delay in obtaining inventory from another supplier could have an adverse effect on the Company's business, results of operation and financial condition. A number of factors beyond the control of the Company, including, but not limited to, changes in world politics, unstable governments in foreign customer and manufacturer nations and inflation, may affect the operations or financial condition of the Company's foreign customers and manufacturers, as well as the timing of orders and deliveries of Boston Acoustics' products by such customers and manufacturers. Year 2000 Compliance To date, the Company's internal business systems have experienced no adverse impact from the transition to the Year 2000. In addition, the Company is not aware of any Year 2000 related issues with any of its customers, suppliers or other third parties with whom it has business relationships. The Company does not expect to incur any significant additional costs relating to Year 2000 issues. Possible Adverse Effect of Euro Conversion On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies and a new common currency called the "euro." This represented an initial step in a process expected to culminate in the replacement of the existing currencies with the euro. The conversion to the euro will have operational and legal implications for some of our international business activities. The Company has begun evaluating these implications, but the Company has yet to estimate the potential impact on our business, operating results and financial condition. The Company's preliminary judgment, however, is that the nature of the Company's business and customers makes a material impact unlikely. 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, the Company's expected liquidity and capital resources and the Company's ability and the Company's suppliers' and customers' ability to replace, modify or upgrade computer programs in ways to adequately address the Year 2000 issue). 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, the rate of growth in the audio industry; the presence of competitors with greater technical marketing and financial resources; the Company's ability to promptly and effectively respond to technological change to meet evolving consumer demands; capacity and supply constraints or difficulties; and the Company's ability to successfully integrate new operations. The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. For a further discussion of these and other significant factors to consider in connection with forward-looking statements concerning the Company, reference is made to Exhibit 99 of the Company's Form 8-K filed on July 18, 1996. 10 Consolidated Balance Sheets
March 25, 2000 March 27, 1999 - - - - - - - - - - ----------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 1,506,741 $ 2,096,246 Accounts receivable, net of allowance for doubtful accounts of approximately $345,000 and $463,000, respectively 12,632,632 12,586,919 Inventories 19,333,515 21,651,847 Deferred income taxes 1,545,000 1,524,000 Prepaid expenses and other current assets 1,151,536 478,174 ------------------------------ Total current assets 36,169,424 38,337,186 ------------------------------ Property and Equipment, at Cost: Machinery and equipment 13,517,432 10,890,563 Building and improvements 7,925,701 7,113,384 Office equipment and furniture 4,131,718 3,862,578 Land 1,815,755 1,433,365 Motor vehicles 259,319 360,963 ------------------------------ 27,649,925 23,660,853 Less--Accumulated depreciation and amortization 12,035,891 9,699,448 ------------------------------ 15,614,034 13,961,405 ------------------------------ Other Assets, Net 1,080,569 940,226 ------------------------------ $52,864,027 $53,238,817 ============================== Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 6,002,158 $ 2,465,201 Accrued payroll and payroll-related expenses 2,148,272 1,553,933 Dividends payable 417,201 425,967 Other accrued expenses 1,171,200 796,795 Accrued income taxes -- 359,689 Current maturity of line of credit 1,602,287 3,265,018 ------------------------------ Total current liabilities 11,341,118 8,866,603 ------------------------------ Line of Credit, net of current portion 4,850,000 10,500,000 ------------------------------ Commitments (Note 8) Shareholders' Equity: Common stock, $0.01 par value- Authorized--8,000,000 shares Issued--5,080,764 and 5,011,700 shares in 2000 and 1999, respectively 50,807 50,117 Additional paid-in capital 918,534 636,581 Retained earnings 38,131,912 33,185,516 ------------------------------ 39,101,253 33,872,214 Less--Treasury stock, 172,500 shares, at cost 2,428,344 -- ------------------------------ Total shareholders' equity 36,672,909 33,872,214 ------------------------------ $52,864,027 $53,238,817 ==============================
The accompanying notes are an integral part of these consolidated financial statements. 11 Consolidated Statements of Income
For the Years Ended -------------------------------------------------------- March 25, 2000 March 27, 1999 March 28, 1998 - - - - - - - - - - -------------------------------------------------------------------------------------------------------- Net Sales $107,997,650 $117,968,407 $ 82,399,284 Cost of Goods Sold 74,248,866 78,787,500 50,344,605 -------------------------------------------------------- Gross profit 33,748,784 39,180,907 32,054,679 -------------------------------------------------------- Selling and Marketing Expenses 11,166,266 10,220,020 8,144,786 General and Administrative Expenses 5,182,270 4,951,075 3,986,437 Engineering and Development Expenses 5,935,690 5,106,001 3,513,321 -------------------------------------------------------- Total operating expenses 22,284,226 20,277,096 15,644,544 -------------------------------------------------------- Income from operations 11,464,558 18,903,811 16,410,135 Interest Income 111,941 89,012 220,430 Interest and Other Expense (754,982) (762,397) (1,059,330) -------------------------------------------------------- Income before provision for income taxes 10,821,517 18,230,426 15,571,235 Provision for Income Taxes 4,175,000 6,966,000 5,995,000 -------------------------------------------------------- Net income $ 6,646,517 $ 11,264,426 $ 9,576,235 ======================================================== Net Income per Share: Basic $ 1.32 $ 2.26 $ 1.83 ======================================================== Diluted $ 1.25 $ 2.14 $ 1.74 ======================================================== Weighted Average Common Shares Outstanding (Note 2): Basic 5,016,954 4,987,730 5,232,341 ======================================================== Diluted 5,302,734 5,254,744 5,512,179 ======================================================== Dividends per Share $ .34 $ .34 $ .33 ========================================================
The accompanying notes are an integral part of these consolidated financial statements. 12 Consolidated Statements of Shareholders' Equity
Common Stock ----------------------- Additional Total Number of $.01 Par Paid-in Retained Treasury Shareholders' Shares Value Capital Earnings Stock Equity - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- Balance March 29, 1997 6,904,432 69,044 4,950,394 38,322,082 (4,432,515) 38,909,005 Exercise of stock options 31,896 319 397,330 -- -- 397,649 Purchase of 1,347,302 shares of common stock -- -- -- -- (23,914,602) (23,914,602) Issuance of restricted common stock -- -- -- -- 105,000 105,000 Dividends -- -- -- (1,653,040) -- (1,653,040) Issuance of common stock warrants -- -- 484,000 -- -- 484,000 Net income -- -- -- 9,576,235 -- 9,576,235 --------------------------------------------------------------------------------------- Balance March 28, 1998 6,936,328 69,363 5,831,724 46,245,277 (28,242,117) 23,904,247 Exercise of stock options 40,254 403 392,126 -- -- 392,529 Dividends -- -- -- (1,688,988) -- (1,688,988) Retirement of treasury stock (1,964,882) (19,649) (5,587,269) (22,635,199) 28,242,117 -- Net income -- -- -- 11,264,426 -- 11,264,426 --------------------------------------------------------------------------------------- Balance March 27, 1999 5,011,700 $ 50,117 $ 636,581 $ 33,185,516 $ -- $ 33,872,214 Exercise of stock options and warrants 69,064 690 281,953 -- -- 282,643 Dividends -- -- -- (1,700,121) -- (1,700,121) Purchase of 172,500 shares of common stock -- -- -- -- (2,428,344) (2,428,344) Net income -- -- -- 6,646,517 -- 6,646,517 --------------------------------------------------------------------------------------- Balance March 25, 2000 5,080,764 $ 50,807 $ 918,534 $ 38,131,912 $ (2,428,344) $ 36,672,909 =======================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 13 Consolidated Statements of Cash Flows
For the Years Ended ------------------------------------------------ March 25, 2000 March 27, 1999 March 28, 1998 - - - - - - - - - - ------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net income $ 6,646,517 $ 11,264,426 $ 9,576,235 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 2,740,763 2,716,454 1,779,143 Deferred income taxes (72,000) (377,000) (345,000) Compensation expense related to issuance of restricted stock and warrants -- -- 589,000 Changes in assets and liabilities, net of acquisitions- Accounts receivable (45,713) (959,199) (2,110,297) Inventories 2,318,332 (8,673,052) (3,076,320) Prepaid expenses and other current assets (673,362) (6,069) 414,674 Accounts payable 3,536,957 (833,356) 2,204,062 Accrued payroll and other accrued expenses 968,745 (34,825) 604,840 Accrued income taxes (359,689) 184,526 73,940 ------------------------------------------------ Net cash provided by operating activities 15,060,550 3,281,905 9,710,277 ------------------------------------------------ Cash Flows from Investing Activities: Purchases of property and equipment, net (4,090,642) (4,356,459) (1,578,291) Proceeds from sale of held -to-maturity investments -- -- 3,616,618 Increase in other assets (392,093) (82,384) (36,282) ------------------------------------------------ Net cash (used in) provided by investing activities (4,482,735) (4,438,843) 2,002,045 ------------------------------------------------ Cash Flows from Financing Activities: Proceeds from exercise of stock options 282,643 392,529 397,649 Net (payments) proceeds from line of credit (7,312,731) 667,393 12,500,000 Purchases of Treasury stock (2,428,344) -- (23,914,602) Dividends paid (1,708,888) (1,677,307) (1,762,032) ------------------------------------------------ Net cash used in financing activities (11,167,320) (617,385) (12,778,985) ------------------------------------------------ Net Decrease in Cash and Cash Equivalents (589,505) (1,774,323) (1,066,663) Cash and Cash Equivalents, beginning of year 2,096,246 3,870,569 4,937,232 ------------------------------------------------ Cash and Cash Equivalents, end of year $ 1,506,741 $ 2,096,246 $ 3,870,569 ================================================ Supplemental Disclosure of Noncash Financing Activities: Dividends payable $ 417,201 $ 425,967 $ 414,287 ================================================ Retirement of Treasury stock $ -- $ 28,242,117 $ -- ================================================ Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $ 5,446,130 $ 7,127,792 $ 6,265,799 ================================================ Cash paid for interest $ 768,878 $ 785,763 $ 1,059,330 ================================================ Supplemental Disclosure of Noncash Items related to Acquisition of Boston Acoustics Deutschland: Fair value of assets acquired, excluding cash $ -- $ 639,750 $ -- ================================================ Post-acquisition adjustment to intangible assets $ -- $ 236,477 $ -- ================================================ Liabilities and debt assumed $ -- $ 876,227 $ -- ================================================
The accompanying notes are an integral part of these consolidated financial statements. 14 Notes to Consolidated Financial Statements 1. Operations and Significant Accounting Policies Boston Acoustics, Inc. and subsidiaries (the Company) engineers, manufactures and markets home loudspeakers, automotive speakers, and speakers for multimedia environments. The Company's products are principally marketed in the United States, Canada, Europe, and Asia through selected audio and audio-video specialty dealers and distributors. The accompanying consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. All significant intercompany amounts have been eliminated in consolidation. The accompanying consolidated financial statements reflect the application of the following significant accounting policies: a Revenue Recognition Revenue is recognized when products are shipped to customers, provided that there are no uncertainties regarding customer acceptance, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, and collection of the related receivable is probable. b Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. c Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following: March 25, March 27, 2000 1999 - - - - - - - - - - -------------------------------------------------------------------------------- Raw materials and work-in-process $10,547,363 $ 9,425,814 Finished goods 8,786,152 12,226,033 ------------------------------- $19,333,515 $21,651,847 =============================== Work-in-process and finished goods inventories consist of materials, labor, and manufacturing overhead. d Depreciation and Amortization The Company provides for depreciation and amortization using both the straight-line and accelerated methods 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 - - - - - - - - - - -------------------------------------------------------------------------------- Machinery and equipment 3-5 years Building and improvements 39 years Office equipment and furniture 3-5 years Motor vehicles 3 years e Warranty Costs Warranty costs are estimated and recorded by the Company at the time of product shipment. During the years ended March 25, 2000, March 27, 1999, and March 28, 1998, warranty costs recorded by the Company were approximately $221,000, $241,000, and $193,000, respectively. f Foreign Currency Translation In accordance with SFAS No. 52, Foreign Currency Translation, the Company has determined that the functional currency of its foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and liabilities for these entities are translated at year-end exchange rates, while nonmonetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year. Gains or losses from changes in exchange rates are recognized in consolidated income in the year of occurrence. During the three-year period ended March 25, 2000, foreign currency exchange gains and losses were not significant. g Income Taxes The Company provides for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. h Postretirement and Postemployment Benefits The Company has no obligation for postretirement or postemployment benefits. i Use of Estimates The preparation of 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 disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. j Concentration of Credit Risk SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company has no significant off-balance-sheet concentration of credit risk such as foreign 15 Notes to Consolidated Financial Statements exchange contracts, option contracts, or other foreign hedging arrangements. The Company maintains the majority of its cash balances with three financial institutions. The Company's accounts receivable credit risk is not concentrated within any geographic area and does not represent a significant credit risk to the Company. During Fiscal 2000, two customers represented 54% of the Company's net sales. During Fiscal 1999 and 1998, one customer represented 53% and 34%, respectively, of the Company's net sales. As of March 25, 2000, four customers represented 46% of the Company's accounts receivable balance. As of March 27, 1999, three customers represented 43% of the Company's accounts receivable balance. The Company maintains an allowance for potential credit losses, but historically it has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. k Financial Instruments SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure about fair value of financial instruments. Financial instruments consist of cash equivalents, accounts receivable, accounts payable, and debt. The estimated fair value of these financial instruments approximates their carrying value and, except for accounts receivable and accounts payable, is based primarily on market quotes. The Company's cash equivalents are generally obligations of the federal government or investment-grade corporate or municipal issuers. The Company, by policy, limits the amount of credit exposure to any one financial institution. l Impairment of Long-Lived Assets The Company follows the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 addresses accounting and reporting requirements for impairment of long-lived assets based on their fair market values. The carrying value of intangible assets, principally goodwill, is periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the related business unit. Based on its most recent analysis, the Company believes that no material impairment of intangible assets exists as of March 25, 2000. m Comprehensive Income In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. The Company adopted SFAS No. 130 effective March 29, 1998. There was no impact to the Company as a result of adopting SFAS No. 130, as there were no differences between net income and comprehensive income for all periods presented. n Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting disclosure standards for derivative instruments including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect adoption of this statement to have a material impact on its consolidated financial position or results of operations. The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, in December 1999. The Company believes that the guidance provided in SAB No. 101 will not have a material impact on future operating results. In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25 in certain situations, as defined. The interpretation is effective July 1, 2000, but covers certain events during the period after December 15, 1998 but before the effective date. The Company expects that the adoption of this interpretation will not have any effect on the accompanying financial statements. 2 Net Income per Share The Company follows the provisions of SFAS No. 128, Earnings per Share. This standard requires presentation of both basic and diluted earnings per share on the face of the statements of income. These financial statements have been prepared and presented based on this standard. For the year ended March 25, 2000 and March 28, 1998, 213,600 and 1,929 shares, respectively, have been excluded from the weighted average number of common and dilutive potential shares outstanding, as their effect would be antidilutive. For the year ended March 27, 1999, no antidilutive shares have been excluded from the weighted average number of common and dilutive potential common shares outstanding. 16 The computation of basic and diluted shares outstanding, as required by SFAS No. 128, is as follows:
For the Year Ended March 25, March 27, March 28, 2000 1999 1998 - - - - - - - - - - -------------------------------------------------------------------------------- Basic weighted average common shares outstanding 5,016,954 4,987,730 5,232,431 Dilutive effect of assumed exercise of stock options and warrant 285,780 267,014 279,748 ------------------------------------------- Weighted average common shares outstanding assuming dilution 5,302,734 5,254,744 5,512,179 ===========================================
3 Income Taxes The components of the Company's deferred tax assets consist of the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. A valuation allowance has not been provided, as the Company expects to realize all deferred tax amounts. The approximate tax effect of each temporary difference is as follows:
March 25, March 27, 2000 1999 - - - - - - - - - - -------------------------------------------------------------------------------- Current deferred tax asset- Accruals not currently deductible $ 527,000 $ 803,000 Receivable reserves 418,000 362,000 Inventory reserves 600,000 359,000 ----------------------------- 1,545,000 1,524,000 Noncurrent deferred tax asset- Depreciation 283,000 232,000 ----------------------------- Total deferred tax assets $1,828,000 $1,756,000 =============================
The noncurrent deferred income taxes are included in other assets in the accompanying consolidated balance sheets. The components of the provision for income taxes shown in the accompanying consolidated statements of income consist of the following:
March 25, March 27, March 28, 2000 1999 1998 - - - - - - - - - - -------------------------------------------------------------------------------- Current- Federal $ 3,467,000 $ 6,089,000 $ 4,776,000 State 780,000 1,254,000 1,564,000 ------------------------------------------------- 4,247,000 7,343,000 6,340,000 ------------------------------------------------- Deferred- Federal (60,000) (348,000) (297,000) State (12,000) (29,000) (48,000) ------------------------------------------------- (72,000) (377,000) (345,000) ------------------------------------------------- Provision for income taxes $ 4,175,000 $ 6,966,000 $ 5,995,000 =================================================
The effective income tax rate varies from the amount computed using the statutory U.S. income tax rate, as follows:
March 25, March 27, March 28, 2000 1999 1998 - - - - - - - - - - -------------------------------------------------------------------------------- Federal statutory rate 34.1% 34.4% 34.3% Increase in taxes resulting from state income taxes, net of federal income tax benefit 4.9 4.3 5.0 Municipal bond interest -- -- (.2) Foreign sales corporation (1.1) (.7) (1.5) Other .7 .2 .9 ----------------------------- 38.6% 38.2% 38.5% =============================
4 Shareholders' Equity a Stock Split On August 17, 1998, the stockholders approved a 3-for-2 split of the Company's common stock, effected in the form of a stock dividend. The effect of the stock split has been retroactively reflected in the accompanying consolidated financial statements. b Stock Options The Company maintained an incentive stock option plan (the 1986 Plan), which expired in October 1996. The Company has 29,650 options outstanding under the 1986 Plan as of March 25, 2000. In February 1996, the Board of Directors approved a new incentive stock option plan (the 1996 Plan) authorizing the issuance of incentive stock options and nonqualified stock options for the purchase of 300,000 shares of common stock. The 1996 Plan is administered by the Board of Directors, and options are granted at not less than the fair market value of the Company's common stock on the date of grant. As of March 25, 2000, the Company has 273,500 options outstanding under the 1996 Plan. In May 1997, the Board of Directors approved a new stock option plan (the 1997 Plan) authorizing the issuance of incentive stock options and nonqualified stock options for the purchase of 450,000 shares of common stock. The 1997 Plan permits the granting of nonqualified stock options and incentive stock options. As of March 25, 2000, the Company has 332,483 options outstanding under the 1997 Plan. 17 Notes to Consolidated Financial Statements The following is a summary of all stock option activity:
Weighted Number Average of Options Price Range Price - - - - - - - - - - -------------------------------------------------------------------------------- Outstanding at March 29, 1997 238,000 11.33 - 13.00 12.37 Granted 303,750 14.67 - 19.89 16.49 Exercised (31,896) 11.33 - 13.00 12.47 Canceled (8,000) 11.67 - 13.00 12.33 ------------------------------------ Outstanding at March 28, 1998 501,854 11.33 - 19.89 14.86 Granted 63,750 20.25 20.25 Exercised (40,254) 11.33 - 18.08 13.15 Canceled (1,100) 18.08 18.08 ------------------------------------ Outstanding at March 27, 1999 524,250 11.67 - 20.25 15.64 Granted 127,375 11.63 - 12.88 11.80 Exercised (11,500) 11.67 - 13.00 12.71 Canceled (4,492) 13.00 - 20.25 17.84 ------------------------------------ Outstanding at March 25, 2000 635,633 $11.63 - $20.25 $14.90 ==================================== Exercisable at March 25, 2000 359,164 $11.63 - $20.25 $14.68 ==================================== Exercisable at March 27, 1999 211,953 $11.67 - $19.89 $14.30 ==================================== Options available for future grants at March 25, 2000 114,717 =========
The Company follows the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which requires the measurement of the fair value of stock options and warrants to be included in the statement of income or, for options to employees, to be disclosed in the notes to the 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, Accounting for Stock Issued to Employees, and elect the disclosure-only alternative under SFAS No. 123 for options granted after January 1, 1996 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions used are as follows:
March 25, March 27, March 28, 2000 1999 1998 - - - - - - - - - - -------------------------------------------------------------------------------- Risk-free interest rate 6.03%-6.78% 4.18% 6.15% Expected dividend yield (per share) $ 0.34 $ 0.34 $ 0.33 Expected lives (years) 5-10 5-7 5-10 Expected volatility 48% 52% 26%
The weighted average grant date fair value per share of options granted during the years ended March 25, 2000, March 27, 1999 and March 28, 1998 under these plans is $5.02, $9.23 and $5.72, respectively. As of March 25, 2000, March 27, 1999, and March 28, 1998, the weighted average remaining contractual life of outstanding options under these plans is 6.09 years, 6.80 years, and 7.25 years, respectively. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and basic and diluted net income per share would have been reduced to the following pro forma amounts:
March 25, March 27, March 28, 2000 1999 1998 - - - - - - - - - - -------------------------------------------------------------------------------- Net income- As reported $ 6,646,517 $11,264,426 $ 9,576,235 Pro forma 5,795,414 10,455,893 9,031,049 Net income per share, as reported- Basic $ 1.32 $ 2.26 $ 1.83 Diluted 1.25 2.14 1.74 Net income per share, pro forma- Basic $ 1.16 $ 2.10 $ 1.73 Diluted 1.09 1.99 1.64
c Warrant In connection with a supply agreement entered into in March 1997, the Company granted a customer a fully exercisable warrant to purchase up to 150,000 shares of common stock at an exercise price of $11.67 per share. In accordance with SFAS No. 123, the Company calculated the value of these warrants at $484,000, which was charged to operations during Fiscal 1998, as product was shipped to the customer. In July 1999, the customer exercised all outstanding warrants through a cashless exercise, resulting in the issuance of 57,564 shares of common stock. d Issuance of Restricted Common Stock In July 1997, the Company issued 7,500 shares of restricted common stock to an officer at no cost. The shares vested immediately. The Company recorded the fair value of the restricted common stock as a charge to operations in Fiscal 1998. e Purchase of Common Stock On June 13, 1997, the Company entered into an agreement with the estates of its founder and former chief executive officer and his spouse. Under the terms of the agreement, the Company acquired approximately 1,347,000 shares of the Company's common stock owned by the estate for approximately $23,915,000. The Company obtained a $25,000,000 unsecured line of credit with a bank to finance this transaction. 5 Line of Credit In June 1997, the Company entered into a unsecured revolving loan agreement with a bank for $25,000,000. The loan matures on July 1, 2002. Interest is charged at LIBOR on the first day of the interest period plus a fixed-rate spread based on certain financial ratios (6.54% as of March 25, 18 2000). As of March 25, 2000, $6,250,000 was outstanding under this revolving loan agreement, of which $1,500,000 has been classified as short-term, as the Company expects to repay this amount during Fiscal 2001. In connection with this agreement, the Company must comply with certain restrictive covenants, including maintaining minimum levels of profitability. As of March 25, 2000, the Company was in compliance with all covenants. The Company also has a $1,500,000 unsecured line of credit with another bank available for letters of credit, bankers' acceptances and direct advances. Interest on letters of credit and bankers' acceptances is based on the prevailing rate (1.5% at March 25, 2000). Direct advances accrue interest at the bank's commercial base rate (9.0% at March 25, 2000). No amounts were outstanding under the line of credit at March 25, 2000 and March 27, 1999. During Fiscal 1999, the Company entered in a line of credit with a German bank denominated in deutschemarks. At March 25, 2000, there was DM 204,768 outstanding under this line of credit. 6 Segment Reporting The Company has determined it has two reportable segments: core, and original equipment manufacturer (OEM) and multimedia. The Company's reportable segments are strategic business units that sell the Company's products to distinct distribution channels. Both segments derive their revenues from the sale of audio systems. They are managed separately because each segment requires different selling and marketing strategies as the class of customers within each segment is different. The Company's disclosure of segment performance is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company does not allocate operating expenses between its two reportable segments. Accordingly, the Company's measure of profit for each reportable segment is based on gross profit.
OEM and 2000 Core Multimedia Total - - - - - - - - - - -------------------------------------------------------------------------------- Net sales $ 58,797,803 $ 49,199,847 $107,997,650 ============================================== Gross profit 21,633,212 12,115,572 33,748,784 ============================================== Depreciation and amortization $ 988,573 $ 148,701 $ 1,137,274 ============================================== Capital expenditures $ 3,466,081 $ 624,561 $ 4,090,642 ============================================== OEM and 1999 Core Multimedia Total - - - - - - - - - - -------------------------------------------------------------------------------- Net sales $ 55,484,371 $ 62,484,036 $117,968,407 ============================================== Gross profit 23,968,152 15,212,755 39,180,907 ============================================== Depreciation and amortization $ 753,611 $ 58,236 $ 811,847 ============================================== Capital expenditures $ 4,076,372 $ 280,087 $ 4,356,459 ============================================== OEM and 1998 Core Multimedia Total - - - - - - - - - - -------------------------------------------------------------------------------- Net sales $ 51,703,187 $ 30,696,097 $ 82,399,284 ============================================== Gross profit 21,141,874 10,912,805 32,054,679 ============================================== Depreciation and amortization $ 656,342 $ 22,818 $ 679,160 ============================================== Capital expenditures $ 1,427,154 $ 151,137 $ 1,578,291 ==============================================
Total assets specifically identifiable within each reportable segment are as follows: March 25, March 27, 2000 1999 - - - - - - - - - - -------------------------------------------------------------------------------- Core $45,808,922 $43,974,112 OEM and Multimedia 7,055,105 9,264,705 ---------------------------------- $52,864,027 $53,238,817 ================================== The following table identifies sales by geographic region. Sales are attributed to countries based on location of customer:
March 25, March 27, March 28, For the Years Ended 2000 1999 1998 - - - - - - - - - - -------------------------------------------------------------------------------- United States $ 89,638,049 $101,452,830 $ 66,743,420 Other 18,359,601 16,515,577 15,655,864 -------------------------------------------------- $107,997,650 $117,968,407 $ 82,399,284 ==================================================
No individual country included in "Other" accounted for more than 10% of net sales for the fiscal years presented above. 7 Employee Benefit Plan The Company has a 401(k) Retirement Plan (the 401(k) Plan). The 401(k) Plan is a defined contribution plan established under the provisions of Section 401(k) of the Internal Revenue Code. The Company may make a matching contribution of 25% of each participant's contribution, up to a maximum of 5% of a participant's compensation for the plan year. The Company contributed approximately $84,000, $73,000, and $58,000 to the 401(k) Plan during Fiscal 2000, 1999, and 1998, respectively. 8 Commitments The Company has leased certain of its facilities under operating lease agreements that expire in Fiscal 2001. The leases require payments of approximately $175,000 through 2001. Total rent expense for Fiscal 2000, 1999, and 1998 was $388,000, $218,000, and $143,000, respectively. 19 Report of Independent Public Accountants To Boston Acoustics, Inc.: We have audited the accompanying consolidated balance sheets of Boston Acoustics, Inc. (a Massachusetts corporation) and subsidiaries as of March 25, 2000 and March 27, 1999 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 25, 2000. 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 auditing standards generally accepted in the United States. 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 Boston Acoustics, Inc. and subsidiaries as of March 25, 2000 and March 27, 1999 and the results of their operations and their cash flows for each of the three years in the period ended March 25, 2000 in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Boston, Massachusetts May 10, 2000 Five Year Selected Financial Data
2000 1999 1998 1997 1996 - - - - - - - - - - ------------------------------------------------------------------------------------------- Income Statement Data Net Sales $107,998 $117,968 $ 82,399 $ 50,309 $ 46,325 Net Income 6,647 11,264 9,576 5,485 6,631 Basic Earnings Per Share 1.32 2.26 1.83 0.85 1.01 Diluted Earnings Per Share 1.25 2.14 1.74 0.82 1.01 Weighted Average Shares Outstanding Basic 5,017 4,988 5,232 6,427 6,530 Diluted 5,303 5,255 5,512 6,684 6,532 Dividends Per Share $ 0.34 $ 0.34 $ 0.33 $ 0.33 $ 0.33 Balance Sheet Data Working Capital $ 24,828 $ 29,471 $ 20,319 $ 24,681 $ 26,083 Total Assets 52,864 53,239 42,499 42,230 43,124 Shareholders' Equity 36,673 33,872 23,904 38,909 39,893
Quarterly Financial Data
First Second Third Fourth Quarter Quarter Quarter Quarter Year - - - - - - - - - - ---------------------------------------------------------------------------------- Year Ended March 25, 2000 Net Sales $ 21,845 $ 28,680 $ 30,567 $ 26,906 $107,998 Gross Profit 7,040 8,638 10,409 7,662 33,749 Net Income 1,139 1,673 2,800 1,035 6,647 Basic Earnings Per Share 0.23 0.33 0.55 0.21 1.32 Diluted Earnings Per Share 0.21 0.31 0.51 0.19 1.25 - - - - - - - - - - ---------------------------------------------------------------------------------- Year Ended March 27, 1999 Net Sales $ 21,500 $ 26,350 $ 37,306 $ 32,812 $117,968 Gross Profit 7,510 8,888 12,235 10,548 39,181 Net Income 2,019 2,563 3,953 2,729 11,264 Basic Earnings Per Share 0.41 0.51 0.79 0.55 2.26 Diluted Earnings Per Share 0.39 0.48 0.75 0.52 2.14
20 Shareholder Information Boston Acoustic, Inc. encourages investors to become informed about its business. Additional information, copies of this report and the Company's Form 10-K filed with the Securities and Exchange Commission may be obtained by writing to Debra A. Ricker-Rosato, Vice President - Finance. Dividend Policy In August of 1992 the Company authorized a 50% increase in its annual dividend rate from $.133 to $.20 per share. In February 1993 the Company authorized an increase to $.267 per share and in February 1995 authorized an increase to $.333 per share. In August 1998, after announcing a 3:2 stock split, the Company authorized an increase to $.34 per share. Dividends are declared and paid quarterly. Four quarterly dividends totalling $.34 were declared during Fiscal 2000. Stock Market Activity The common stock of Boston Acoustics, Inc. has been listed on the NASDAQ National Market System under the symbol BOSA since its initial public offering on December 12, 1986. The following table sets forth high and low closing prices by quarter reported by NASDAQ: Fiscal 2000 High Low - - - - - - - - - - -------------------------------------------------------------------------------- First Quarter 19.313 15.938 Second Quarter 23.625 14.750 Third Quarter 16.500 11.063 Fourth Quarter 15.250 11.875 Fiscal 1999 High Low - - - - - - - - - - -------------------------------------------------------------------------------- First Quarter 27.170 20.000 Second Quarter 31.000 21.000 Third Quarter 26.500 20.250 Fourth Quarter 30.500 18.000 There were 141 shareholders of record as of March 25, 2000. Shareholders who beneficially own common stock held in nominee of street name are not included in the number of shareholders of record. Corporate Information Corporate Headquarters Boston Acoustics, Inc. 300 Jubilee Drive Peabody, MA 01960 Telephone: (978) 538-5000 Fax: (978) 538-5091 Website: www.bostonacoustics.com Auditors Arthur Andersen LLP Boston, Massachusetts Legal Counsel Peabody & Arnold LLP Boston, Massachusetts Transfer Agent BankBoston c/o Boston EquiServe, LP Boston, Massachusetts Board of Directors Andrew G. Kotsatos Chairman, Chief Executive Officer and Treasurer Boston Acoustics, Inc. Moses A. Gabbay Chief Operating Officer Boston Acoustics, Inc. George J. Markos Senior Vice President and General Counsel Yell-O-Glow Corporation Lisa M. Mooney Executive Officers Andrew G. Kotsatos Chairman, Chief Executive Officer and Treasurer Moses A. Gabbay Chief Operating Officer Michael B. Chass Vice President - Multimedia Products Group Martin J. Harding Vice President - Marketing Paul F. Reed Vice President - Administrative Services Debra A. Ricker-Rosato Vice President - Finance Michael J. Rudd Vice President - New Technology Robert L. Spaner Vice President - Sales Boston BostonAcoustics.com Boston Acoustics, Inc. 300 Jubilee Drive Peabody, MA 01960 (978) 538-5000 www.bostonacoustics.com EX-23 3 ex-23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated May 10, 2000 included in this annual report on Form 10-K, into the Company's previously filed Registration Statement No. 333-75559, No. 33-18793 and No. 333-62581. /s/ Arthur Andersen LLP Boston, Massachusetts June 22, 2000 EX-27 4 ex-27.txt EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS IN ITS ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED MARCH 25, 2000, WHICH ARE INCORPORATED BY REFERENCE INTO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR SUCH FISCAL YEAR. 0000805268 BOSTON ACOUSTICS, INC. YEAR MAR-25-2000 MAR-25-2000 1506741 0 12632632 345000 19333515 36169424 27649925 12035891 52864027 11341118 4850000 0 0 50807 39050446 52864027 107997650 107997650 74248866 22284226 0 0 643041 10821517 4175000 6646517 0 0 0 6646517 1.32 1.25
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