-----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, VGf+xRjvVrng7DiBQie0OZAJnmDmIk0MbUNSIOFcE0XT2w+G/NKhe3w9kFwDe1jg nOsAmcTc9pkW4cpm02CvgQ== 0000927016-02-003690.txt : 20020722 0000927016-02-003690.hdr.sgml : 20020722 20020722160626 ACCESSION NUMBER: 0000927016-02-003690 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020330 FILED AS OF DATE: 20020722 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON ACOUSTICS INC CENTRAL INDEX KEY: 0000805268 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 042662473 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15193 FILM NUMBER: 02707841 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/A 1 d10ka.txt FORM 10K AMENDMENT NO. 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-K/A (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 30, 2002 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/A or any amendment to this Form 10-K/A. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant was $39,187,949 as of June 3, 2002. There were 4,595,595 shares of Common Stock issued and outstanding as of June 3, 2002. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE (1) Registrant's Annual Report to Stockholders for the fiscal year ended March 30, 2002 (Part II, Items 5, 6, 7, 8 and Part III, Item 14 (a)(1)) (2) Proxy Statement for Registrant's Annual Meeting of Stockholders to be held on August 13, 2002 (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 7 ITEM 3. Legal Proceedings 7 ITEM 4. Submission of Matters to a Vote of Security Holders 7 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 ITEM 6. Selected Financial Data 8 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 ITEM 8. Financial Statements and Supplementary Data 16 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III ITEM 10. Directors and Executive Officers of the Registrant 17 ITEM 11. Executive Compensation 17 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 17 ITEM 13. Certain Relationships and Related Transactions 17 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 18 SIGNATURES 20 INDEX TO FINANCIAL STATEMENT SCHEDULES F-i
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/A, and the Registrant disclaims that such figure is binding for any other purpose. The aggregate market value of Common Stock indicated is based upon $13.05, the price at which the Common Stock was last sold on June 3, 2002 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", or "Boston") 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 home, automotive and multimedia speakers are manufactured by others according to Company specifications and under the direction of Boston Acoustics personnel. All of the Company's products and subassemblies, including those supplied by outside sources, have been designed or specified 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" on Page 16. The Company was organized as a Massachusetts corporation in 1979 by Andrew G. Kotsatos, Chairman of the Board, 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 four bookshelf models currently ranging in price from $150 to $400 per pair, four floor-standing systems currently priced from $500 to $1,600 per pair, a series of hardwood bookshelf and floor-standing speakers ranging from $700 to $2,700 per pair, two home theater subwoofer/satellite systems currently priced at $1,000 and $1,500 per system, a five-piece satellite system priced at $1,500 per system, and four powered subwoofers priced at $300, $450, $700, and $1,200 each. Additional products for the home theater market include six different center channel speakers currently ranging in price from $200 to $600 each, a diffuse-field surround speaker priced at $800 per pair, and three models of micro satellites which accommodate space restrictions ranging in price between $100 and $325 each. The Company also produces magnetically shielded versions of most of its models and produces four indoor/outdoor speaker systems (Voyager(R) 3, Voyager 2, Voyager Pro, and Grand Voyager) priced from $220 to $700 per pair. Prices referenced are USD suggested retail prices. The Designer line is a collection of speaker systems engineered for installing in the walls and ceilings of homes, businesses, and recreational vehicles. These systems are designed to blend into any decor 1 and to be every bit as musical and exciting as the Company's reference-quality speaker systems. There are currently 14 speaker models in the Designer line, ranging in price from $130 to $2,000 per pair, two powered subwoofers priced at $500 each, and one subwoofer power amplifier priced at $600. The Designer line includes the VRi series, the 300 series, and the installed powered subwoofer systems. The Automotive series of products consists of 45 models of after-market automotive speakers with prices currently ranging from $70 to $750 per pair. The automotive line includes high-quality full-range replacement speakers, sophisticated component systems, and subwoofers. The component systems with system specific crossovers, permit flexible speaker placement and provide sound rivaling that of fine home speakers. The Company manufactures both raw drivers and enclosed systems for any installation blueprint. The automotive line includes the FS Series, the FX Series, the Boston Rally(R) 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 which are sold through the Company's retailers, and through business arrangements with several leading distributors and computer retailers, consists of five high performance powered subwoofer/satellite speaker systems for computing environments and are priced from $30 to $300 per system. The OEM sales of multimedia speaker systems sold to Gateway, Inc. ("Gateway"), a leading direct marketer of PC products, include the BA745 subwoofer/satellite system and the BA7800 audio system designed for desktop theater applications such as DVD movies 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 2002, as in previous years, Boston Acoustics 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. In fiscal 2002, the Company expanded its successful range of VR-M series of loudspeakers with the addition of the VR-M80 and VR-M90 floor-standing speakers. The VR-M80 and VR-M90 sell for $2,000 and $2,700 per pair, respectively. These elegant, full-range loudspeakers completed the VR-M line. The Boston Bravo, at $200 per speaker, was introduced as a versatile product for use as a surround speaker, a main speaker, or a speaker for background music applications. Its unique, quarter-cylinder shape allows it to blend seamlessly where any two or three room surfaces meet. A matching center channel version, the Boston Bravo Center with a suggested retail of $250, is suitable for placement on top of tube televisions. The introduction of the System 9500 home theater system provided dealers with a step-up 5.1 speaker package, where previously the Company had not offered a speaker system at or near the $1,500 price point. The Unity DVD home theater system, a $1,000 combination of a Boston 5.1 speaker package with a DVD player/receiver manufactured by Kenwood Corporation, gave the Company exposure in the rapidly expanding segment of the consumer electronics marketplace. During fiscal 2002, the Company added the VRi Series, a reference series consisting of six in-wall and in-ceiling speakers to its Designer product line. The VRi560 and VRi580 in-wall speakers, as well as the VRi565 and VRi585 in-ceiling speakers, are designed for use in the finest whole-house music systems. The VRi553 and VRi593 are designed for use in in-wall home theater systems. The VRi series features Boston's VR aluminum dome tweeter, a patent pending tweeter pivoting mechanism, and cast aluminum speaker baffles. The VRi line is voiced to match Boston's VR-M series of home speakers. The suggested retails are as follows: the VRi565 is $700 per pair; VRi560, 2 $800 per pair; VRi585, $900 per pair; Vri580, $1,000 per pair; Vri553, $1,200 per pair; and VRi593, $2,000 per pair. To complement the Designer line of products, in fiscal 2002, the Company introduced, a series of installed subwoofers, designed for use when a consumer wants the low frequency output of a subwoofer, but does not wish to see a box in the listening room. The series consists of the VRiSub82 in-wall subwoofer, the Sub10F in-floor subwoofer, and the SA1 subwoofer power amplifier. Each SA1 amplifier will power up to two Sub10Fs, or two VRiSub82s. The suggested retails of the VRiSub82 and the Sub10F are $500 each and the SA1 is priced at $600. During fiscal 2002, the Company introduced two new multimedia products, the BA745 and the BA7800. The BA745 is a compact, self-powered speaker system that brings dynamic, full-range sound to the desktop for high fidelity playback of CD's and MP3's, computer games, or DVD movies. It is a three-piece system with two micro-sized satellites and a sleek subwoofer. Three channels of amplification are housed in the subwoofer cabinet, one for the subwoofer and two for the satellites. The system has convenient connections for both headphone and microphone use located on the right satellite. The BA7800 is a high-powered 4.1 audio system, featuring four high-performance satellite speakers and a potent 8-inch subwoofer. A powerful onboard 5-channel amplifier is actively-equalized for optimum sound, while Boston's proprietary BassTrac(R) circuitry assures clean bass at all listening levels. Drawing upon Boston Acoustics' years of expertise in home theater and music system design, this system delivers top-of-the-line sound for desktop applications. The BA7800 has both headphone and microphone jacks conveniently located on the right satellite. 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 or specifies all of its products and subassemblies, including those supplied by outside sources. The Company's engineering and development staff includes 51 full-time employees and five outside consultants. During fiscal years 2000, 2001 and 2002, the Company spent approximately $5,936,000, $5,316,000, and $5,252,000 respectively, for engineering and development. Marketing The Company employs 22 salespersons and retains 13 manufacturer's representatives who service the Company's U.S. and Canada dealer network. In addition, the Company retained 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 430 selected audio or audio specialist retailers, some of whom have multiple outlets, and to selected custom installers. The Company's car audio products are sold through approximately 240 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, and through business arrangements with several leading distributors and computer retailers. One customer accounted for 43% of net sales in fiscal 2000, 45% in fiscal 2001 and 30% in fiscal 2002. 3 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 18% of net sales in fiscal 2000, 17% in fiscal 2001 and 15% in fiscal 2002. 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, Eurotuner (previously Max Power), Audio Video Interiors, Home Theater, Mobile Entertainment, Super Street, Sport Compact Car, Sport Truck, and Audio Video International. During fiscal 2002, the Company spent approximately $2,302,000 (2.7% of net sales) for advertising. 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 through the internet and factory-owned outlet stores. The Company believes it is more advantageous to distribute through specialty retailers who provide product demonstration, technical information and service, and face-to-face sales support to consumers. Boston Acoustics competes with a substantial number of branded speaker manufacturers, including Bose Corporation, Infinity and JBL (divisions of Harman International Industries), B&W, 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 "integrated systems". Integrated systems contain all the various components needed to form an audio system, and are sold by Sony, Pioneer, Bose, JVC, Yamaha, and many others. Integrated systems are generally sold through mass merchandisers and department stores, although many of the Company's dealers also sell integrated systems. During the past two years, home theater systems with Integrated DVD video have garnered significant market share. While these systems were historically sold in mass merchants or "big box" retailers, the Company's dealers are selling systems at the higher price point. Manufacturing and Suppliers Most of the Company's products are assembled by the Company from components specially fabricated for the Company, although certain loudspeaker models 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 220 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 fixed price contracts or arrangements for 4 inventory supplied by any foreign or domestic manufacturers. The Company did have one inventory supplier, which accounted for more than 10% of the Company's purchases during fiscal year 2002. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- International Operations" on page 16. 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 March through September. 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. Selected unaudited quarterly financial data for the Company's last two fiscal years is presented below:
Quarterly Financial Data (Amounts in Thousands Except Per Share Data) First Second Third Fourth Quarter Quarter Quarter Quarter Year Year Ended March 30, 2002 Net Sales $ 20,443 $ 21,067 $ 23,205 $ 20,621 $ 85,336 Gross Profit 5,510 6,399 7,883 6,408 26,200 Net Income 171 736 1,516 1,487 3,910 Basic Earnings Per Share 0.03 0.15 0.32 0.32 0.82 Diluted Earnings Per Share 0.03 0.15 0.32 0.32 0.82 Year Ended March 31, 2001 Net Sales $ 23,420 $ 35,340 $ 34,383 $ 27,224 $ 120,367 Gross Profit 7,264 9,711 9,529 4,739 31,243 Net Income (Loss) 1,149 2,238 1,831 (1,321) 3,897 Basic Earnings (Loss) Per Share 0.23 0.46 0.37 (0.27) 0.79 Diluted Earnings (Loss) Per Share 0.23 0.45 0.36 (0.27) 0.79
Because the Company works on a 5-4-4 week quarter, there is an extra week every five years. The second quarter of fiscal 2001 represents 14 weeks of sales and earnings compared to 13 weeks during the second quarter of fiscal 2002. Fiscal 2002, therefore, represents 52 weeks of sales and earnings compared to 53 weeks during fiscal 2001. The quarterly sales and earnings pattern in any given year may not be indicative of quarterly results to be expected in any other year. Patents and Trademarks Boston Acoustics holds eleven United States patents and numerous international patents, which relate to certain audio technologies, assemblies and cabinet design. The Company also currently has 5 several registered trademarks including Boston(R), Boston Acoustics(R), PowerVent(R), BassTrac(R), MagnaGuard(R), Voyager(R), SoundBar(R), Boston Rally(R), DirectVent(R), Kortec(R), ProSeries(R), SST(R), VR(R), and RadialVent(R). Trademarks used by the Company's subsidiary, Snell Acoustics ("Snell") include Snell Acoustics, Snell Multimedia, Snell Music & Cinema, and Room Ready(R). 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 30, 2002 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 which defines such issues as ordering and invoicing procedures, shipping charges, warranties, repair service support, product safety requirements, etc. This Master Supply Agreement with Gateway does not contain minimum or scheduled purchase requirements; therefore, purchase orders by Gateway may fluctuate significantly from quarter to quarter. Based on information currently available from our OEM customer, the Company anticipates that our OEM sales should decrease during the fiscal year ending March 29, 2003. Although the loss of Gateway as a customer or the loss of any significant portion of orders from Gateway could have a material adverse effect on the Company's business, results of operations and financial condition, the Company's management has taken steps which it believes will mitigate the adverse consequences of the expected decline in orders from Gateway. 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 for a period of two years, its automotive speakers for one year and its multimedia audio speaker systems for a period of one to three years. During the years ended March 30, 2002, March 31, 2001, and March 25, 2000, warranty costs recorded by the Company were approximately $174,000, $270,000, and $221,000, respectively. Employees As of May 18, 2002, the Company had 271 full-time employees who were engaged as follows: 144 in production and materials management; 51 in engineering and development; 48 in marketing and sales support; and 28 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. Executive Officers of the Registrant 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 13, 2002. 6 Item 2. Properties The Company owns its principal executive offices and manufacturing facilities which sit on 15 acres of land at 300 Jubilee Drive, Peabody, Massachusetts. The Company's subsidiary, Snell Acoustics, 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 2002. 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 2002. 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 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 as reported by NASDAQ: Fiscal 2002 High Low First Quarter 11.750 10.100 Second Quarter 12.050 8.530 Third Quarter 12.150 8.750 Fourth Quarter 12.000 9.260 Fiscal 2001 High Low First Quarter 12.438 9.125 Second Quarter 14.125 10.813 Third Quarter 15.688 12.375 Fourth Quarter 15.625 10.766 There were approximately 107 shareholders of record as of March 30, 2002. Shareholders who beneficially own common stock held in nominee or street name are not included in the number of shareholders of record. Item 6. Selected Financial Data The selected financial data presented below are derived from the Company's audited financial statements for each year in the five-year period ended March 30, 2002.
(Amounts in Thousands Except Per Share Data) 2002 2001 2000 1999 1998 Income Statement Data Net Sales $85,336 $120,367 $110,391 $117,968 $82,399 Net Income 3,910 3,897 6,647 11,264 9,576 Basic Earnings Per Share 0.82 0.79 1.32 2.26 1.83 Diluted Earnings Per Share 0.82 0.79 1.25 2.14 1.74 Weighted Average Shares Outstanding Basic 4,775 4,914 5,017 4,988 5,232 Diluted 4,785 4,962 5,303 5,255 5,512 Dividends Per Share 0.34 0.34 0.34 0.34 0.33 Balance Sheet Data Working Capital $22,668 $ 32,502 $ 24,702 $ 29,471 $20,319 Total Assets 48,418 58,032 52,737 53,239 42,499 Shareholders' Equity 37,998 38,879 36,546 33,872 23,904
8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth the results of operations for the years ended March 30, 2002, March 31, 2001, and March 25, 2000 expressed as percentages of net sales.
For the Year Ended March 30, March 31, March 25, 2002 2001 2000 (52 weeks) (53 weeks) (52 weeks) - -------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 69.3 74.0 69.4 - -------------------------------------------------------------------------------------- Gross profit 30.7 26.0 30.6 Selling and marketing expenses 12.2 10.6 10.1 General and administrative expenses 5.6 4.5 4.6 Engineering and development expenses 6.2 4.4 5.4 - -------------------------------------------------------------------------------------- Total operating expenses 24.0 19.5 20.1 - -------------------------------------------------------------------------------------- Income from operations 6.7 6.5 10.5 Interest income (expense), net (0.2) (0.5) (0.6) Other expense (0.1) (0.4) (0.1) Income before provision for income taxes 6.4 5.6 9.8 Provision for income taxes 1.8 2.4 3.8 - -------------------------------------------------------------------------------------- Net income 4.6% 3.2% 6.0% ======================================================================================
Fiscal 2002 Compared with Fiscal 2001 Net sales for the fiscal year decreased 29%, to $85.3 million compared to $120.4 million in fiscal 2001. Fiscal 2002 reflects 52 weeks of sales and earnings compared to 53 weeks during fiscal 2001. The overall sales decrease was the result of a 53.1% (approximately $31.0 million) decrease in sales of the OEM and multimedia segment accompanied with a 6.5% (approximately $4.0 million) decrease in sales of the Core business segment compared to fiscal 2001. Both business segments were negatively impacted by the downturn in the global economy, particularly the softness in the personal computer business, and International core sales compared to fiscal 2001. Despite the drop in sales, however, net income remained essentially the same as a year ago, at $3.9 million, and diluted earnings per share rose from $.79 to $.82. 9 During fiscal 2002, the Company's OEM and multimedia segment sales were primarily sold through our OEM customer, Gateway, Inc. ("Gateway"), a leading direct marketer of PC products. The Company's sales to Gateway were primarily three-piece speaker systems during fiscal 2002 as compared to both three-piece and two-piece speaker systems in fiscal 2001. During the first nine months of fiscal 2002, products sold to Gateway included the Digital BA735 subwoofer/satellite system and the Digital BA7500 thin panel audio system designed for desktop theater applications such as DVD movies and PC games. During the fourth quarter of fiscal 2002, the Company replaced these two speaker systems with the BA745 and BA7800, models with enhanced feature sets compared to the digital models they replaced. New product introductions throughout fiscal 2002 in the Core home entertainment product categories contributed to the improvement in our overall operating results despite the difficult uncertainty in the U.S. economy and international markets. During the year, the Company expanded its successful range of VR-M series of loudspeakers with the addition of two floor-standing models. The VR-M80 and the VR-M90 with suggested retails of $2,000 and $2,700 per pair, respectively, are available in cherry real wood veneer. The Company introduced its Boston Bravo(TM), a multi-purpose, compact speaker suitable for use as a surround speaker, a main speaker or a speaker for background music applications. The Boston Bravo, available in white or black, retails for $200. A matching center channel version, the Boston Bravo Center, retailing for $250, is suitable for placement on top of tube televisions. During the third quarter of fiscal 2002, the Company introduced the new Unity DVD Home Theater System. The Unity is a co-branded system featuring a high-performance receiver/DVD player manufactured by Kenwood Corporation and a six-speaker Boston Acoustics' home theater system, including an 8-inch,100-watt powered subwoofer. The Unity has a manufacturer's suggested retail price ("MSRP") of $1,000. The Company also introduced two new home theater six-speaker systems during the fall of 2001. The System 9000II, with a suggested retail of $1,000, is comprised of two Micro 90x II front satellite speakers, two Micro 80x II surround speakers, a Micro 90c II center channel speaker and a matching 10-inch, 120-watt powered subwoofer. The System 9500, with a suggested retail of $1,500, is a 5.1 speaker package consisting of a 12-inch, 300-watt powered subwoofer, four Micro 90x II satellites, and a Micro 90c II center channel. Both the System 9000II and the System 9500 are available in traditional black finish or buffed silver-gray finish. During the second quarter of fiscal 2002, the Company made initial shipments of its new VRi Series of installed speaker systems consisting of six models of unique in-wall rectangles and ceiling-mount rounds. The VRi Series, with suggested retails ranging from $700 to $2,000 per pair, offer high-end in-home solutions for custom installations. To complement the Designer line of products, the Company introduced a series of installed subwoofers. The series consists of the VriSub82 in-wall subwoofer and the Sub10F in-floor subwoofer, both with suggested retails of $500 each, and the SA1 subwoofer power amplifier which retails for $600. The Company's gross margin increased as a percentage of net sales from 26.0% in fiscal 2001 to 30.7% in fiscal 2002. The increase was primarily the result of improved manufacturing efficiencies, reduced scrap and rework costs, the elimination of contract labor and off-site warehousing costs, as well as, lower inventory write-offs for obsolete and slow-moving inventory as compared to the same period a year ago. The OEM/Multimedia segment of sales, which has lower gross margins, represented only 32.1% of total net sales during fiscal 2002 as compared to 48.6% of total net sales in fiscal 2001. The combination of the smaller portion of OEM/Multimedia segment sales, the introduction of new core products designed with higher gross margins and the enhanced manufacturing efficiencies resulted in an improvement in our overall gross margin. Total operating expenses, despite increasing as a percentage of net sales from 19.5% to 24.0% due to the lower overall sales level, decreased in absolute dollars by approximately $3.0 million. Selling and marketing expenses have decreased by approximately $2.2 million primarily due to a decrease in salaries and related expenses (approximately $0.5 million), lower travel expenditures (approximately $0.3 million), and reduced advertising costs associated with both the Core and multimedia product categories (approximately $1.4 million). General and administrative expenses have decreased by 10 approximately $0.7 million. The decrease is primarily attributable to a number of factors, the most significant of which is the write down of the goodwill of Boston Acoustics Deutschland, GmbH during fiscal 2001, along with a reduction in certain administrative expenses pertaining to the subsidiary (in the aggregate, approximately $0.3 million). In addition, the Company had lower expenses during fiscal 2002 relating to personnel recruitment (approximately $0.1 million) and insurance costs (approximately $0.1 million). The decrease of approximately $0.1 million of engineering and development expenses is attributed to lower payroll-related expenses, lower travel expenditures and a decrease in depreciation expenses related to research and development equipment as compared to the same period a year ago. Interest expense, net for the fiscal year decreased in both absolute dollars and as a percentage of net sales compared to the corresponding period a year ago. The decrease is due to lower borrowing rates and the repayment of $9.0 million of the Company's outstanding line of credit during fiscal 2002. Other expense for fiscal 2002 included a charge of approximately $69,000 for foreign currency translation losses related to the strength of the USD and its effect on the Company's foreign subsidiaries. The Company's effective income tax rate decreased during fiscal 2002 from 42.4% to 28.5% primarily resulting from the U.S. Company's fourth quarter bad debt deduction for intercompany receivables from its wholly-owned German subsidiary. The write-off of this receivable created taxable income in the German subsidiary that will allow the Company to utilize and benefit the net operating loss carryforwards associated with the German subsidiary. Net income for fiscal 2002 remained consistent with fiscal 2001 at approximately $3.9 million, while diluted earnings per share increased 4% to $0.82 per share as compared to the same period a year ago. Net income remained consistent in spite of the 29% reduction in net sales due to increased gross margin percentages in the Core business, lower percentage of overall sales attributed to the OEM/Multimedia segment, reduced operating expenses, reduced interest charges, and a lower effective income tax rate. Fiscal 2001 Compared with Fiscal 2000 Net sales increased 9%, from approximately $110.4 million in fiscal 2000 to $120.4 million in fiscal 2001. Because the Company works on a 5-4-4 week quarter, there is an extra week of sales and operations every five years. The second quarter of fiscal 2001 represents 14 weeks of sales and earnings compared to 13 weeks during the second quarter of fiscal 2000. Fiscal 2001, therefore, represents 53 weeks of sales and earnings compared to 52 weeks during fiscal 2000. The overall sales increase was due to increases in both business segments during the first eight months of the fiscal year offset by the slowing economy and industry-wide decline in U.S. retail sales that began impacting the Core segment in December 2000. The overall sales increase in fiscal 2001 was the result of an 18.7% (approximately $9.2 million) increase in sales of the OEM and Multimedia business segment and a 1.3% (approximately $0.8 million) increase in sales of the Core segment compared to fiscal 2000. Although the OEM and Multimedia segment reflected an increase over the corresponding period a year ago, the increase was lower than originally expected. The overall sales increase in the OEM and Multimedia segment resulted primarily from sales of the BA65, the Company's first entry-level speaker system for computers. The BA65, a powered two-piece speaker system that offers performance similar to Boston's more expensive multimedia products was introduced in June 2000 and was made available through our OEM customer, Gateway. In addition, the Company experienced increased sales of its retail range of multimedia speaker systems offered through Multimedia retail and distribution channels. New product introductions in the Core home entertainment product categories during the second and third quarters of fiscal 2001 contributed to the overall results of the Core segment. The VR-MC center channel speaker system and the VR-MX surround speaker were introduced to compliment the VR-M50 and VR-M60 Monitor bookshelf speaker systems introduced last fiscal year. The VR-MC 11 with a suggested retail of $600 and the VR-MX with a suggested retail of $800 per pair are both available in cherry or black ash real wood veneer. The Lynnfield VR910 and VR920 high performance center channel speaker systems with suggested retails of $350 and $600, respectively, have end caps shaped and colored to match the design of our Lynnfield VR900 series of floor standing speakers. These models were introduced during the first quarter of fiscal 2001. Sales of the PowerVent(R) powered subwoofer systems introduced last fiscal year continued to augment the Core business and offer high-quality bass reproduction for home entertainment systems. The CX line of after-market automotive speakers was replaced by the FX Series during the third quarter of fiscal 2001. The new FX Series includes nine models ranging from $70 per pair to $140 per pair U.S. (MSRP). In addition, during the last half of the year, the Company introduced a new entry-level line of component automotive systems, the FS Series. The FS50 and FS60 with suggested retails of $220 each and the FS80 with a suggested retail of $230 deliver high quality sound and broaden our product range of after-market automotive speaker systems. The Company's gross margin decreased as a percentage of net sales from 30.6% in fiscal 2000 to 26.0% in fiscal 2001 due to increased production expenses including those associated with the Company's efforts to complete the fulfillment of back orders experienced during the first quarter of fiscal 2001. These expenses included the hiring of temporary contract labor (approximately $0.9 million), increased overtime and rework (approximately $0.5 million), as well as higher scrap, freight, and warehousing costs (approximately $1.6 million) as compared to the same period a year ago. Gross margins were also negatively impacted by the sales mix of the OEM/Multimedia segment of sales, which have lower gross margins and represented a larger portion of total net sales in fiscal 2001 as compared to fiscal 2000. During the fourth quarter of fiscal 2001, the Company's gross margin was affected by write-offs for obsolete and slow-moving inventory (approximately $0.6 million), rework of specific finished goods inventory (approximately $0.9 million), and restructuring charges related to the cutbacks of personnel in both January and March of 2001 (approximately $0.2 million). During fiscal 2001, total operating expenses increased by approximately $1.3 million but decreased as a percentage of net sales from 20.1% to 19.5%. Selling and marketing expenses increased by approximately $1.5 million, as well as, increased as a percentage of net sales primarily due to increased salaries and benefits relating to additional personnel hired in the beginning of the fiscal year and increased advertising and related expenditures associated with both the Core and Multimedia product categories. General and administrative expenses increased by approximately $354,000 while decreasing slightly as a percentage of net sales. The increase is attributable to increases in payroll-related costs, insurance expenses, and the write down of the goodwill associated with the acquisition of the Company's German subsidiary in fiscal 1999. Engineering and development expenses decreased by approximately $620,000, as well as, decreased as a percentage of net sales primarily due to lower consulting fees and lower outside services as compared to the same period a year ago. Interest expense, net for the fiscal year decreased by approximately $82,000 and as a percentage of net sales compared to the corresponding period a year ago, due to lower borrowing rates, despite an increase in the Company's line of credit borrowings during the second fiscal quarter of approximately $5 million. Other expense for fiscal 2001 include a charge of approximately $434,000 for foreign currency translation losses related to the strength of the USD and its effect on the Company's foreign subsidiaries. The Company's effective income tax rate increased during fiscal 2001 from 38.6% to 42.4% primarily as a result of the inability to benefit net operating losses sustained by the Company's subsidiaries outside the U.S., including the foreign currency translation charge recorded in the fourth quarter and higher state tax liabilities as compared to a year ago. Net income decreased 41% to approximately $3.9 million, while diluted earnings per share decreased 37% to $0.79 per share as compared to the same period a year ago. The decrease in net income for fiscal 2001 is primarily the result of the increases in production expenses during the year, inventory 12 rework and write-downs during the fourth quarter, a change in the product mix in the OEM and Multimedia business segment resulting in lower gross margins, and higher foreign currency translation costs as compared to the same period a year ago. Liquidity and Capital Resources As of March 30, 2002, the Company's working capital was approximately $22,668,000, a decrease of approximately $9,800,000 from March 31, 2001. The decrease in working capital was primarily due to decreases in inventory and accounts receivable, as well as, an increase in the current maturity of the line of credit, partially offset by an increase in cash and cash equivalents. At March 30, 2002, the Company's inventory decreased by approximately $10,252,000 compared to March 31, 2001 levels, primarily as a result of a reduction in purchases pertaining to both the Core and OEM segments of the business. Cash and cash equivalents increased by approximately $2,349,000, compared to levels at the end of fiscal 2001 primarily due to cash provided by operating activities exceeding cash expended for repayments of the line of credit as well as purchases of treasury stock. Current liabilities increased by approximately $1,277,000 to approximately $10,402,000 primarily as a result of an increase in the current maturity of the line of credit. Long-term debt decreased by $10,000,000 as a result of repayments of $9,000,000 and a reclassification of the remaining $1,000,000 to current liabilities during fiscal 2002. The Company has two lines of credit with two banking institutions totaling $26,500,000. At March 30, 2002, the Company had borrowings totaling $2,500,000 under its $25 million revolving credit agreement and $0 outstanding under its $1.5 million revolving credit agreement. On May 1, 2002, the Company renewed its $25 million revolving credit agreement for a term of three years maturing on July 1, 2005. Net cash increased in fiscal 2002 and fiscal 2001 by $2,349,000 and $1,279,000, respectively. Net cash decreased in fiscal 2000 by $590,000. Net cash provided by operating activities in fiscal years 2002, 2001 and 2000 was approximately $18,138,000, $1,117,000, and $15,187,000, respectively. Differences in cash flows from operating activities over this three-year period were primarily related to significant year-to-year changes in net income, accounts receivable, inventories and accounts payable. Net cash used in investing activities for fiscal years 2002, 2001 and 2000 was approximately $1,950,000, $3,323,000, and $4,483,000, respectively. Net cash used in investing activities in fiscal years 2002, 2001 and 2000 were for improvements to the existing facility and purchases of property and equipment. Net cash (used in) provided by financing activities in fiscal years 2002, 2001 and 2000 was approximately ($13,840,000), $3,485,000, and ($11,294,000), respectively. In fiscal 2002, net cash used in financing activities included $9,000,000 of repayments of borrowings under one of the Company's credit facilities. In addition, during fiscal 2002, the Company repurchased 332,200 shares of common stock for approximately $3,192,000. In fiscal 2001, net cash provided by financing was the result of net borrowings under one of the Company's lines of credit of approximately $5,048,000. In fiscal 2000, net cash used in financing activities included $7,313,000 of net 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 approximately $2,428,000. The Company believes that its current resources are adequate to meet its requirements for working capital and capital expenditures at least through fiscal 2003. Critical Accounting Policies Our significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K. We believe that our most critical accounting policies include revenue recognition, sales returns and other allowances and allowance for bad debts, and inventory related reserves. 13 Revenue Recognition We recognize revenue in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition. Revenue is recognized when products are (1) shipped to customers provided that there are no uncertainties regarding customer acceptance, (2) when the sales price is fixed or determinable and (3) collection of the related receivable is probable. At the time of revenue recognition, we provide reserves for sales returns and rebates, timely pay discounts, and freight reserves. The determination of criteria (2) and (3) are based on management's judgements regarding the fixed nature of sales price for the products delivered and the collectibility of those amounts. At the time of revenue recognition, we accrue a warranty reserve for estimated costs to provide warranty services. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. Sales returns and other allowances, and allowance for bad debts Our management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends and changes in customer demand for our products when evaluating the adequacy of the reserve for sales returns and other allowances. Significant management judgements and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Similarly, our management must make estimates of the uncollectibility of our accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Historically, we have not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of raw material and work-in-process and finished goods. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. As demonstrated during 2001, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. New Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. This statement is effective for all business combinations initiated after June 30, 2001. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. This statement applies to goodwill and intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired. Under this statement, goodwill as well as certain other intangible assets determined to have an infinite life will no longer be amortized; instead, these assets will be reviewed for impairment on a periodic basis. This statement is effective for the Company for 14 the first quarter in the fiscal year ended March 29, 2003. The Company's adoption of SFAS No.141 and 142 is not expected to have a material impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, which supercedes SFAS No. 121. SFAS No. 144 further refines the requirements of SFAS No. 121 that companies (i) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows and (ii) measure an impairment loss as the difference between the carrying amount and the fair value of the asset. In addition, SFAS No. 144 provides guidance on accounting and disclosure issues surrounding long-lived assets to be disposed of by sale. This statement is effective for the Company for the first quarter in the fiscal year ended March 29, 2003. The Company does not believe the adoption of this statement will have a material impact on its financial position. Quantitative and Qualitative Disclosures about Market Risk (a) Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments. As of March 30, 2002, 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 and consist of money market accounts. 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. For the year ended March 30, 2002, foreign currency translation losses were approximately $69,000 and were the result of a strong USD as compared to the foreign currencies of the Company's subsidiaries. As of March 30, 2002, the Company had not engaged in any foreign currency hedging activities. Significant Customers The Company's financial results for the fiscal year ended March 30, 2002 include significant OEM sales of multimedia speaker systems to Gateway. During fiscal 2002, Gateway accounted for 29.7% of the Company's net sales. The terms of these sales are governed by the Master Supply Agreement between Gateway and the Company which defines such issues as ordering and invoicing procedures, shipping charges, warranties, repair service support, product safety requirements, etc. This Master Supply Agreement with Gateway does not contain minimum or scheduled purchase requirements; therefore, purchase orders by Gateway may fluctuate significantly from quarter to quarter. Based on information currently available from our OEM customer, the Company anticipates that our OEM sales should decrease during fiscal 2003 as compared to fiscal 2002. Although the loss of Gateway as a customer or the loss of any significant portion of orders from Gateway could have a material adverse effect on the Company's business, results of operations and financial condition, the Company's management has taken steps (including pursuit of additional OEM customers, expansion of the Company's automotive products offerings and renewed efforts to increase sales of the Company's Core products) which it believes will mitigate the adverse consequences of the expected decline in orders from Gateway. 15 International Operations Export sales accounted for approximately 15% of the Company's net sales during fiscal 2002, 17% during fiscal 2001 and 18% during fiscal 2000, with sales concentrations in Europe, Asia and Canada. The Company also distributes its products through its three 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 operations 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. 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, and the Company's expected liquidity and capital resources). Such forward-looking statements are based on a number of assumptions and involve a number of risks and uncertainties, and accordingly, actual results could differ materially. Factors that may cause such differences include, but are not limited to: the continued and future acceptance of the Company's products, 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. Item 8. Financial Statements and Supplementary Data The Financial Statements of the Company are set forth following Page 20 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 16 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 13, 2002 concerning Andrew G. Kotsatos, who is the Chairman of the Board and Treasurer of the Company, Moses A. Gabbay, Chief Executive Officer of the Company, and Allan J. Evelyn, President , is set forth in Part I, Item 1, hereof, under the heading "Executive Officers of the Registrant". Information concerning Directors, including Messrs. Kotsatos, Gabbay and Evelyn, 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 13, 2002. 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 13, 2002 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 13, 2002. 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 13, 2002. 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 13, 2002. 17 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 See the Index to Financial Statements following Page 20 of this report. (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, as amended (7) 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.# - Letter of Agreement dated December 22, 1997 by and between Gateway 2000, Inc. and Boston Acoustics, Inc. (5) 10.8.# - Letter of Agreement dated May 14, 1998 by and between Gateway 2000, Inc. and Boston Acoustics, Inc. (8) 10.9. * - Amended and Restated Loan Agreement dated as of May 1, 2002 between Boston Acoustics, Inc. and Citizens Bank of Massachusetts. 10.10.* - Amended and Restated Revolving Credit Note dated as of May 1, 2002 in the amount of $25,000,000 made by Boston Acoustics, Inc. payable to the order of Citizens Bank of Massachusetts. 13. ** - 2002 Annual Report to Shareholders 21. - Subsidiaries of the Registrant (3) 23. * - Consent of Independent Public Accountants 99.1 - "Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995 (6) 99.2 * - Letter to the Securities and Exchange Commission regarding Arthur Andersen LLP 18 * Indicates an exhibit which is filed herewith. * * Indicates an exhibit which is filed subsequently. + 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 the Company's Registration Statement on Form S-1, 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. (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.A. to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1997. (6) 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. (7) Incorporated by reference to Exhibit 4.1. to the Company's Registration Statement on Form S-8, File No. 333-84714. (8) 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 30, 2002 through the date of this report. 19 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 17th day of July 2002. BOSTON ACOUSTICS, INC. (Registrant) BY: /s/ Andrew G. Kotsatos ---------------------------- Andrew G. Kotsatos Chairman of the Board 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 7/17/02 - ------------------------------ Director, Chairman of the ------------ Andrew G. Kotsatos Board and Treasurer /s/ Moses A. Gabbay 7/17/02 - ------------------------------ Director and Chief Executive ------------ Moses A. Gabbay Officer /s/ Allan J. Evelyn 7/17/02 - ------------------------------ Director and President ------------ Allan J. Evelyn /s/ Debra A. Ricker-Rosato 7/17/02 - ------------------------------ Vice President and ------------ Debra A. Ricker-Rosato Chief Accounting Officer /s/ Alexander E. Aikens, III 7/17/02 - ------------------------------ Director ------------ Alexander E. Aikens, III /s/ George J. Markos 7/17/02 - ------------------------------ Director ------------ George J. Markos /s/ Lisa M. Mooney 7/17/02 - ------------------------------ Director ------------ Lisa M. Mooney /s/ Fletcher H. Wiley 7/17/02 - ------------------------------ Director ------------ Fletcher H. Wiley 20 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Consolidated Financial Statements as of March 30, 2002 and March 31, 2001 Together with Auditors' Report Index Page Report of Independent Public Accountants 1 Consolidated Balance Sheets--March 30, 2002 and March 31, 2001 2 Consolidated Statements of Income for the Years Ended March 30, 2002, March 31, 2001 and March 25, 2000 3 Consolidated Statements of Shareholders' Equity for the Years Ended March 30, 2002, March 31, 2001 and March 25, 2000 4 Consolidated Statements of Cash Flows for the Years Ended March 30, 2002, March 31, 2001 and March 25, 2000 5 Notes to Consolidated Financial Statements 6-19 -i- Report of Independent Public Accountants To Boston Acoustics, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Boston Acoustics, Inc. (a Massachusetts corporation) and subsidiaries (the Company) as of March 30, 2002 and March 31, 2001 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial position of Boston Acoustics, Inc. and subsidiaries as of March 30, 2002 and March 31, 2001 and the results of their operations and their cash flows for each of the three years in the period ended March 30, 2002 in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Boston, Massachusetts May 13, 2002 1 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets
March 30, March 31, ASSETS 2002 2001 Current Assets: Cash and cash equivalents $ 5,134,558 $ 2,785,846 Accounts receivable, net of allowance for doubtful accounts of approximately $366,000 and $385,000 in 2002 and 2001, respectively 10,830,538 11,426,411 Inventories 14,370,308 24,622,417 Deferred income taxes 1,724,000 2,044,000 Prepaid expenses and other current assets 1,010,792 747,844 ------------ ------------ Total current assets 33,070,196 41,626,518 ------------ ------------ Property and Equipment, at cost: Machinery and equipment 16,833,179 15,132,205 Building and improvements 8,795,567 8,816,515 Office equipment and furniture 5,067,810 4,907,967 Land 1,815,755 1,815,755 Motor vehicles 255,956 253,164 ------------ ------------ 32,768,267 30,925,606 Less--Accumulated depreciation and amortization 18,848,303 15,533,147 ------------ ------------ 13,919,964 15,392,459 ------------ ------------ Other Assets, Net 1,428,286 1,012,671 ------------ ------------ $ 48,418,446 $ 58,031,648 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable 5,230,684 2,743,371 Accrued payroll and payroll-related expenses 1,185,529 1,779,942 Dividends payable 390,626 418,990 Other accrued expenses 1,095,369 2,682,654 Current maturity of line of credit 2,500,000 1,500,000 ------------ ------------ Total current liabilities 10,402,208 9,124,957 ------------ ------------ Line of Credit, Net of Current Maturity - 10,000,000 ------------ ------------ Commitments (Note 9) Minority Interest in Joint Venture 18,265 27,325 ------------ ------------ Shareholders' Equity: Common stock, $0.01 par value- Authorized--8,000,000 shares Issued--5,100,314 and 5,101,814 shares in 2002 and 2001, respectively 51,003 51,018 Additional paid-in capital 1,191,988 1,191,973 Subscriptions receivable (272,917) (292,417) Retained earnings 42,648,558 40,357,136 ------------ ------------ 43,618,632 41,307,710 Less--Treasury stock, 504,700 and 172,500 shares in 2002 and 2001, respectively, at cost 5,620,659 2,428,344 ------------ ------------ Total shareholders' equity 37,997,973 38,879,366 ------------ ------------ $ 48,418,446 $ 58,031,648 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 2 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Consolidated Statements of Income
For the Year Ended March 30, March 31, March 25, 2002 2001 2000 Net Sales $ 85,335,768 $ 120,367,092 $ 110,391,165 Cost of Goods Sold 59,135,678 89,124,468 76,642,381 ------------- ------------- ------------- Gross profit 26,200,090 31,242,624 33,748,784 ------------- ------------- ------------- Selling and Marketing Expenses 10,446,858 12,689,399 11,166,266 General and Administrative Expenses 4,806,545 5,470,738 5,116,648 Engineering and Development Expenses 5,252,466 5,316,005 5,935,690 ------------- ------------- ------------- Total operating expenses 20,505,869 23,476,142 22,218,604 ------------- ------------- ------------- Income from operations 5,694,221 7,766,482 11,530,180 Interest Income 155,910 120,241 111,941 Interest Expense (310,773) (681,624) (754,982) Other Expense (68,959) (433,782) (65,622) ------------- ------------- ------------- Income before provision for income taxes 5,470,399 6,771,317 10,821,517 Provision for Income Taxes 1,560,000 2,874,000 4,175,000 ------------- ------------- ------------- Net income $ 3,910,399 $ 3,897,317 $ 6,646,517 ============= ============= ============= Net Income per Share: Basic $ 0.82 $ 0.79 $ 1.32 ============= ============= ============= Diluted $ 0.82 $ 0.79 $ 1.25 ============= ============= ============= Weighted Average Common Shares Outstanding (Note 2): Basic 4,774,746 4,914,206 5,016,954 ============= ============= ============= Diluted 4,784,926 4,962,027 5,302,734 ============= ============= ============= Dividends per Share $ 0.34 $ 0.34 $ 0.34 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 3 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
Common Stock Additional Total Number of $0.01 Par Paid-In Subscriptions Retained shareholders' Shares Value Capital Receivable Earnings Treasury Stock Equity Balance, March 27, 1999 5,011,700 $ 50,117 $ 636,581 $ - $ 33,185,516 $ - $ 33,872,214 Exercise of stock options 69,064 690 281,953 (126,667) - - 155,976 and warrants 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 (126,667) 38,131,912 (2,428,344) 36,546,242 Exercise of stock options 21,050 211 273,439 (209,950) - - 63,700 Repayment of subscriptions - - - 44,200 - - 44,200 receivables Dividends - - - - (1,672,093) - (1,672,093) Net income - - - - 3,897,317 - 3,897,317 --------- --------- ---------- ---------- ------------ ------------ ------------ Balance, March 31, 2001 5,101,814 51,018 1,191,973 (292,417) 40,357,136 (2,428,344) 38,879,366 Repurchase of common stock and forgiveness of subscrition receivable (1,500) (15) 15 19,500 - - 19,500 Purchase of 332,200 shares of common stock - - - - - (3,192,315) (3,192,315) Dividends - - - - (1,618,977) - (1,618,977) Net income - - - - 3,910,399 - 3,910,399 --------- --------- ---------- ---------- ------------ ------------ ------------ Balance, March 30, 2002 5,100,314 $ 51,003 $1,191,988 $ (272,917) $ 42,648,558 $ (5,620,659) $ 37,997,973 ========= ========= ========== ========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial atatements. 4 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
For the Year Ended March 30, 2002 March 31, 2001 March 25, 2000 Cash Flows from Operating Activities: Net income $ 3,910,399 $ 3,897,317 $ 6,646,517 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 3,317,849 3,737,753 2,740,763 Deferred income taxes - (597,000) (72,000) Changes in assets and liabilities, net of acquisition- Accounts receivable 595,873 1,206,221 (45,713) Inventories 10,252,109 (5,288,902) 2,318,332 Prepaid expenses and other current assets (262,948) 277,025 (546,695) Accounts payable 2,487,313 (3,258,787) 3,536,957 Accrued payroll and other accrued expenses (2,162,198) 1,143,124 968,745 Accrued income taxes - - (359,689) --------------- --------------- -------------- Net cash provided by operating activities 18,138,397 1,116,751 15,187,217 --------------- --------------- -------------- Cash Flows from Investing Activities: Purchases of property and equipment (1,842,661) (3,275,681) (4,090,642) Increase in other assets (107,368) (47,274) (392,093) --------------- --------------- -------------- Net cash used in investing activities (1,950,029) (3,322,955) (4,482,735) --------------- --------------- -------------- Cash Flows from Financing Activities: Proceeds from exercise of stock options - 63,700 155,976 Net proceeds from (payments on) line of credit (9,000,000) 5,047,713 (7,312,731) Purchase of treasury stock (3,192,315) - (2,428,344) Dividends paid (1,647,341) (1,670,304) (1,708,888) Repayment of subscriptions receivable - 44,200 - --------------- --------------- -------------- Net cash (used in) provided by financing activities (13,839,656) 3,485,309 (11,293,987) --------------- --------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents 2,348,712 1,279,105 (589,505) Cash and Cash Equivalents, beginning of fiscal year 2,785,846 1,506,741 2,096,246 --------------- --------------- -------------- Cash and Cash Equivalents, end of fiscal year $ 5,134,558 $ 2,785,846 $ 1,506,741 =============== =============== ============== Supplemental Disclosure of Noncash Financing and Investing Activities: Dividends payable $ 390,626 $ 418,990 $ 417,201 =============== =============== ============== Forgiveness of subscription receivable $ 19,500 $ - $ - =============== =============== ============== Exercise of stock options through the issuance of subscriptions receivable $ - $ 209,950 $ 126,667 =============== =============== ============== Minority interest in foreign subsidiary $ 9,060 $ 27,325 $ - =============== =============== ============== Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $ 2,339,290 $ 3,161,000 $ 5,446,130 =============== =============== ============== Cash paid for interest $ 348,296 $ 658,387 $ 768,878 =============== =============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 5 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 (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 Boston Acoustics Inc., its wholly-owned subsidiaries: BA Acquisition Corp. (also known as Snell Acoustics); Boston Acoustics Securities Corporation (a Massachusetts securities corporation); Boston Acoustics Foreign Sales Corporation; Boston Acoustics Italia, S.r.l (an Italian corporation) and Boston Acoustics Deutschland, GmbH (a German corporation), and its majority-owned subsidiary, Boston Acoustics UK, Ltd. (a United Kingdom corporation). During fiscal 2001, the Company contributed approximately $27,000 to become a 51% owner of Boston Acoustics UK, Ltd. The Company has recorded the remaining 49% interest in Boston Acoustics UK, Ltd. (approximately $27,000) as a minority interest on the accompanying consolidated balance sheets. 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 The Company recognizes revenue in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin 101 (SAB 101), 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. At the time of revenue recognition, the Company provides reserves for sales returns and rebates, timely pay discounts, and freight reserves. The Company charges many of its customers shipping and freight costs related to the delivery of its products. Accordingly, the Company follows the provisions of Emerging Issues Task Force Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. Amounts charged to customers for shipping and handling costs are included in net sales in the accompanying consolidated statements of income. The related shipping and handling costs are recorded in cost of sales in the accompanying consolidated statements of income. (b) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. 6 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 (c) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following: March 30, March 31, 2002 2001 Raw materials and work-in-process $ 5,662,983 $ 8,374,305 Finished goods 8,707,325 16,248,112 --------------- --------------- $ 14,370,308 $ 24,622,417 =============== =============== Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. (d) Reclassifications Certain amounts in the prior-period consolidated financial statements have been reclassified to conform to the current period's presentation. (e) 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: Estimated Asset Classification Useful Life Machinery and equipment 3-5 years Building and improvements 39 years Office equipment and furniture 3-5 years Motor vehicles 3 years (f) Warranty Costs Warranty costs are estimated and recorded by the Company at the time of product shipment. During the years ended March 30, 2002, March 31, 2001 and March 25, 2000, warranty costs recorded by the Company were approximately $174,000, $270,000 and $221,000, respectively. (g) Foreign Currency Translation In accordance with Statement of Financial Accounting Standards (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 7 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 during the year. Gains or losses from changes in exchange rates are recognized in consolidated income in the year of occurrence. During the years ended March 30, 2002, March 31, 2001 and March 25, 2000, foreign currency translation losses were approximately $69,000, $434,000 and $66,000, respectively, and were included in other expense in the accompanying consolidated statements of income. (h) 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. (i) Postretirement and Postemployment Benefits The Company has no obligation for postretirement or postemployment benefits. (j) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. (k) 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 risks and credit risk concentrations. The Company has no significant off-balance-sheet credit risks such as those associated with foreign exchange contracts, option contracts, or other foreign hedging arrangements. The Company is subjected to concentration of credit risk with respect to its cash and cash equivalents and accounts receivable balances. The Company maintains the majority of its cash balances with three highly credit worthy 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. 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. 8 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 Significant customers with respect to accounts receivable and sales are as follows: Accounts Net Sales for the Year Ended Receivable as of March 30, March 31, March 25, March 30, March 31, 2002 2001 2000 2002 2001 Customer A 30% 45% 43% 17% 23% Customer B 15% 10% * 28% 12% Customer C * * * 10% 10% *Customer does not exceed 10% of net sales. (l) Financial Instruments SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure about the fair value of financial instruments. Financial instruments consist of cash equivalents, accounts receivable, accounts payable, subscriptions receivable and lines of credit. The estimated fair values of these financial instruments approximate their carrying values. 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. (m) 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 long-lived assets held and used are periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the related business unit. During fiscal 2001, the Company determined that goodwill of approximately $236,000 related to the acquisition of Boston Acoustics Deutschland, GmbH was impaired and as a result wrote it down to zero. This amount is included in general and administrative expenses in the accompanying statement of income for the year ended March 31, 2001. Based on its most recent analysis, the Company believes that no other material impairment of long-lived assets exists as of March 30, 2002. (n) Comprehensive Income The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. There were no differences between net income and comprehensive income for any of the periods presented. 9 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 (o) Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. This statement is effective for all business combinations initiated after June 30, 2001. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. This statement applies to goodwill and intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired. Under this statement, goodwill, as well as certain other intangible assets determined to have infinite lives will no longer be amortized; instead, these assets will be reviewed for impairment on a periodic basis, at least annually. This statement is effective for the Company for the first quarter in the fiscal year ended March 29, 2003. The Company's adoption of SFAS No. 141 and No. 142 is not expected to have a material impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121. SFAS No. 144 further refines the requirements of SFAS No. 121 that companies (i) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows and (ii) measure an impairment loss as the difference between the carrying amount and the fair value of the asset. In addition, SFAS No. 144 provides guidance on accounting and disclosure issues surrounding long-lived assets to be disposed of by sale. This statement is effective for the Company for the first quarter in the fiscal year ended March 29, 2003. The Company does not believe the adoption of this statement will have a material impact on its financial position. The Company adopted the provisions of Emerging Issues Task Force Issue No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products, (EITF 00-25), as codified by EITF 01-09 beginning January 1, 2002. EITF 00-25 addresses whether consideration given to a customer from a vendor should be classified as an adjustment to the selling price of the product sold or as a cost of the product sold. The task force reached a consensus that cash consideration given by a vendor to a customer is presumed to be a reduction of the selling price of the vendor's products or services and therefore, should be characterized as a reduction of revenue when recognized in the vendor's income statement. This guidance in this issue should be applied no later than in financial statements for annual or interim periods beginning after December 15, 2001. The Company offers cooperative advertising programs to its largest customers whereby the customers can earn sales credits for approved advertisements involving the Company's products. The Company has historically recorded these credits as an adjustment to the selling price of its products. As a result, the adoption of EITF 00-25 did not have a significant impact on the Company's financial statements. During the years ended March 30, 2002, March 31, 2001 and March 25, 2000, 10 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 cooperative advertising credits included as sales adjustments were approximately $2,135,000, $1,970,000 and $1,610,000, respectively. (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 consolidated statements of income. These financial statements have been prepared and presented based on this standard. The computation of basic and diluted shares outstanding, as required by SFAS No. 128, is as follows: For the Year Ended March 30, March 31, March 25, 2002 2001 2000 Basic weighted average common shares outstanding 4,774,746 4,914,206 5,016,954 Dilutive effect of assumed exercise of stock options 10,180 47,821 285,780 ----------- ----------- ----------- Weighted average common shares outstanding assuming dilution 4,784,926 4,962,027 5,302,734 =========== =========== =========== For the years ended March 30, 2002, March 31, 2001 and March 25, 2000, 518,738, 296,214 and 213,600 options, respectively, have been excluded from the weighted average number of common and dilutive potential shares outstanding, as their effect would be antidilutive. (3) INCOME TAXES The components of the Company's net 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 been provided for the portion of the deferred tax assets related to net operating loss carryforwards of the Company's Italian and UK subsidiaries, as the realizability of this asset is uncertain. The Company expects to realize the remaining deferred tax amounts. 11 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 The approximate income tax effect of each temporary difference is as follows: March 30, March 31, 2002 2001 Current deferred tax asset- Accrued expenses not currently deductible $ 342,000 $ 905,000 Receivable reserves 600,000 462,000 Inventory reserves 782,000 677,000 Foreign net operating losses 212,000 450,000 ----------- ----------- 1,936,000 2,494,000 Noncurrent deferred tax asset- Depreciation 701,000 381,000 ----------- ----------- Total deferred tax assets 2,637,000 2,875,000 Valuation allowance (212,000) (450,000) ----------- ----------- Net deferred tax assets $ 2,425,000 $ 2,425,000 =========== =========== 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 30, March 31, March 25, 2002 2001 2000 Current- Federal $ 1,302,000 $ 2,885,000 $ 3,467,000 State 258,000 586,000 780,000 ------------ ------------ ----------- 1,560,000 3,471,000 4,247,000 ------------ ------------ ----------- Deferred- Federal - (499,000) (60,000) State - (98,000) (12,000) ------------ ------------ ----------- - (597,000) (72,000) ------------ ------------ ----------- Provision for income taxes $ 1,560,000 $ 2,874,000 $ 4,175,000 ============ ============ =========== 12 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 The Company's effective income tax rate varies from the amount computed, using the statutory U.S. income tax rate, as follows: March 30, March 31, March 25, 2002 2001 2000 Federal statutory rate 34.0% 34.0% 34.1% Increase in taxes resulting from state income taxes, net of federal income tax benefit 4.7 5.7 4.9 Foreign sales corporation / Extra territorial income exclusion (0.9) (2.0) (1.1) Change in valuation allowance related to foreign subsidiaries (9.0) 4.2 0.5 Other (0.3) 0.5 0.2 ------- --------- --------- 28.5% 42.4% 38.6% ======= ========= ========= (4) SHAREHOLDERS' EQUITY (a) Stock Options The Company maintained an incentive option plan (the 1986 Plan) that expired in October of 1996. The Company did not have any options outstanding under the 1986 Plan as of March 31, 2001. 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 up to 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 30, 2002, the Company has 238,000 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 up to 950,000 shares of common stock. The 1997 Plan permits the granting of nonqualified stock options and incentive stock options. As of March 30, 2002, the Company has 464,300 options outstanding under the 1997 Plan. 13 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 The following is a summary of stock option activity under the 1986 Plan, the 1996 Plan and the 1997 Plan: Weighted Number Range of Average of Exercise Exercise Options Prices Price 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 Granted 228,000 9.63-10.81 10.25 Exercised (21,050) 13.00 13.00 Canceled (201,983) 11.63-20.25 14.78 ---------- --------------- ----------- Outstanding at March 31, 2001 640,600 9.63-20.25 13.35 Granted 206,250 9.26-10.37 9.74 Canceled (144,550) 9.63-20.25 12.51 ---------- --------------- ----------- Outstanding at March 30, 2002 702,300 $ 9.26-20.25 $ 12.46 ========== =============== =========== Exercisable at March 30, 2002 372,583 $ 9.26-20.25 $ 13.67 ========== =============== =========== Exercisable at March 31, 2001 277,221 $ 11.63-20.25 $ 15.12 ========== =============== =========== Options available for future grant at March 30, 2002 518,400 ========== 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 Accounting for Stock-Based Compensation (SFAS No. 123) for options granted after January 1, 1996 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The Company follows the provisions of SFAS No. 123, which requires the measurement of the fair value of stock options and warrants issued to other than employees to be included in the statement of income. The weighted average assumptions used for proforma purposes are as follows: March 30, March 31, March 25, 2002 2001 2000 Risk-free interest rate 4.74%-5.01% 6.17%-6.25% 6.03%-6.78% Expected dividend yield (per share) $0.34 $0.34 $0.34 Expected lives 5-10 years 5-10 years 5-10 years Expected volatility 60% 56% 48% 14 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 The weighted average grant date fair value per share of options granted during the years ended March 30, 2002, March 31, 2001 and March 25, 2000 under these plans is $4.46, $4.99 and $5.02, respectively. As of March 30, 2002, March 31, 2001 and March 25, 2000, the weighted average remaining contractual life of outstanding options under these plans is 6.19 years, 7.69 years and 6.09 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 30, March 31, March 25, 2002 2001 2000 Net income- As reported $ 3,910,399 $ 3,897,317 $ 6,646,517 Pro forma 2,752,299 3,199,827 5,795,414 Net income per share, as reported- Basic $ 0.82 $ 0.79 $ 1.32 Diluted 0.82 0.79 1.25 Net income per share, pro forma- Basic $ 0.58 $ 0.65 $ 1.16 Diluted 0.58 0.64 1.09 (b) 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. (c) Subscriptions Receivable During fiscal 2000 and 2001, the Company allowed certain of its employees to exercise options that were issued under certain stock option plans in exchange for the issuance of full recourse promissory notes. The notes bear interest at rates between 7.0%-7.5% per annum and are due and payable in full on maturity dates between June 18, 2002 and November 20, 2003. 15 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 (5) LOAN AGREEMENT AND LINES OF CREDIT In June 1997, the Company entered into an unsecured revolving loan agreement with a bank for $25,000,000. The loan matures on June 1, 2005. Interest is charged at LIBOR on the first day of the interest period plus a fixed-rate spread based on certain financial ratios (ranging from 2.38% to 2.40% as of March 30, 2002). As of March 30, 2002, $2,500,000 was outstanding under this revolving loan agreement, of which all of this amount has been classified as short-term, as the Company expects to repay this amount during fiscal 2003. In connection with this agreement, the Company must comply with certain financial and restrictive covenants, including maintaining minimum levels of profitability. As of March 30, 2002, 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 30, 2002). Direct advances accrue interest at the bank's commercial base rate (4.75% at March 30, 2002). No amounts were outstanding under this line of credit at March 30, 2002 and March 31, 2001. The Company also has a DM 250,000 line of credit with a German bank. At March 30, 2002, there were no amounts outstanding under this line of credit. (6) SEGMENT REPORTING The Company has determined that 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. 16 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 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 Core Multimedia Total 2002 Net sales $ 57,900,666 $ 27,435,102 $ 85,335,768 ============ ============ ============= Gross profit $ 21,769,311 $ 4,430,779 $ 26,200,090 ============ ============ ============= Depreciation and amortization $ 1,887,845 $ 241,768 $ 2,129,613 ============ ============ ============= Capital expenditures $ 1,605,973 $ 236,688 $ 1,842,661 ============ ============ ============= 2001 Net sales $ 61,909,826 $ 58,457,266 $ 120,367,092 ============ ============ ============= Gross profit $ 19,605,868 $ 11,636,756 $ 31,242,624 ============ ============ ============= Depreciation and amortization $ 1,232,441 $ 871,292 $ 2,103,733 ============ ============ ============= Capital expenditures $ 3,023,627 $ 252,054 $ 3,275,681 ============ ============ ============= 2000 Net sales $ 61,131,316 $ 49,259,849 $ 110,391,165 ============ ============ ============= 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 ============ ============ ============= Total assets specifically identifiable within each reportable segment are listed in the table below. Assets included in the OEM and Multimedia segment consist of accounts receivable, inventories and fixed assets. March 30, March 31, 2002 2001 Core $ 44,180,158 $ 46,822,555 OEM and Multimedia 4,238,288 11,209,093 ------------ ------------ $ 48,418,446 $ 58,031,648 ============ ============ 17 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 The following table identifies sales by geographic region. Sales are attributed to countries based on location of customer: For the Year Ended March 30, 2002 March 31, 2001 March 25, 2000 United States $ 72,569,873 $ 99,400,198 $ 90,527,474 Other 12,765,895 20,966,894 19,863,691 ------------ ------------- ------------- $ 85,335,768 $ 120,367,092 $ 110,391,165 ============ ============= ============= No individual country included in "Other" accounted for more than 10% of net sales for the fiscal years presented above. (7) OTHER ACCRUED EXPENSES Other accrued expenses consist of the following: March 30, March 31, 2002 2001 Inventory rework and warranty $ 200,000 $ 1,125,705 Advertising 449,064 774,965 Other 446,305 781,984 ------------ ------------ $ 1,095,369 $ 2,682,654 ============ ============ During fiscal 2001, the Company recorded an accrued expense of $900,000 that represented the estimated cost of rework for one of its finished goods products. The Company completed the rework during fiscal 2002. (8) 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 $59,000, $90,000 and $84,000 to the 401(k) Plan during fiscal years 2002, 2001 and 2000, respectively. (9) COMMITMENTS The Company has leased certain of its facilities under operating lease agreements that expire in fiscal 2003. The leases require payments of approximately $48,000 through 2003. Total rent expense for fiscal 2002, 2001 and 2000 was approximately $247,000, $615,000 and $388,000, respectively. 18 BOSTON ACOUSTICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 30, 2002 (10) ACCOUNTS RECEIVABLE RESERVES
Allowance for Doubtful Accounts Balance, Charged to Beginning Costs and Balance, of Year Expenses Deductions/(1)/ End of Year For the fiscal year ended- March 30, 2002 $ 385,000 $ 41,000 $ (60,000) $ 366,000 ============ ============ ============ ============ March 31, 2001 $ 345,000 $ 61,000 $ (21,000) $ 385,000 ============ ============ ============ ============ March 25, 2000 $ 463,000 $ 7,000 $ (125,000) $ 345,000 ============ ============ ============ ============
/(1)/ Amounts deemed uncollectible net of recoveries of previously reserved amounts.
Reserve for Off-Invoice Allowances/(2)/ Balance, Beginning of Charged to Balance, Year Revenues Deductions End of Year For the fiscal year ended- March 30, 2002 $ 2,711,000 $ 12,771,000 $ (12,477,000) $ 3,005,000 ============= ============= ============= ============ March 31, 2001 $ 2,563,000 $ 13,581,000 $ (13,433,000) $ 2,711,000 ============= ============= ============= ============ March 25, 2000 $ 2,102,000 $ 11,715,000 $ (11,254,000) $ 2,563,000 ============= ============= ============= ============
/(2)/ Amounts are net against accounts receivable and include allowances for sales rebates, timely pay discounts and freight rebates. 19 EX-10.9 3 dex109.txt AMENDED AND RESTATED LOAN AGREEMENT Exhibit 10.9 ------------------------------------------------------------ AMENDED AND RESTATED LOAN AGREEMENT Dated as of May 1, 2002 BETWEEN BOSTON ACOUSTICS, INC. AND CITIZENS BANK OF MASSACHUSETTS ------------------------------------------------------------- AMENDED AND RESTATED LOAN AGREEMENT -------------- THIS AMENDED AND RESTATED LOAN AGREEMENT is made as of May 1, 2002, between BOSTON ACOUSTICS, INC., a Massachusetts corporation (the "Borrower") having its principal place of business and chief executive office at 300 Jubilee Drive, Peabody, Massachusetts 01960, and CITIZENS BANK OF MASSACHUSETTS (the "Lender"), having an office at 28 State Street, Boston, Massachusetts 02109. WHEREAS, the Borrower and State Street Bank and Trust Company, as predecessor to the Lender, entered into that certain Loan Agreement dated as of June 13, 1997 (the "Existing Credit Agreement"); WHEREAS, the Borrower and the Lender desire to amend and restate the Existing Credit Agreement as set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto hereby agree that the Existing Credit Agreement shall be amended and restated effective as of May 1, 2002 to read in its entirety as follows: SECTION 1. DEFINITIONS. ----------- 1.1 Definitions. As used herein, the following terms shall have ----------- the following meanings: "Affiliate" means, with reference to any person, (including an individual, a corporation, a partnership, a trust, any trade or business and any governmental agency or instrumentality), (i) any director, officer or employee of that person, (ii) any other person controlling, controlled by or under direct or indirect common control of that person, (iii) any other person directly or indirectly holding 10% or more of any class of the capital stock or other equity interests (including options, warrants, convertible securities and similar rights) of that person and (iv) any other person with respect to which such person holds, directly or indirectly, 10% or more of any class of capital stock or other equity interests (including options, warrants, convertible securities and similar rights). For purposes of Section 5.1(v) hereof, "Affiliate" means, within the meaning of Section 414 of the Code, (i) any member of a controlled group of corporations which includes the Borrower, (ii) any trade or business, whether or not incorporated, under common control with the Borrower, (iii) any member of an affiliated service group which includes the Borrower, and (iv) any member of a group treated as a single employer by regulation. "Agreement" means this Amended and Restated Loan Agreement, including the Exhibits hereto, as originally executed, or if this Agreement is amended, varied or supplemented from time to time, as so amended, varied or supplemented. -1- "B/A's" means any bankers' acceptance with the Lender. "Business Day" means any day on which the head office of the Lender is open for transactions of all of its normal and customary business, and with respect to Libor Loans, any day which is also a day for trading by and between banks in United States dollar deposits in the London interbank market in which the Lender customarily participates. "Closing Date" means May 1, 2002. "Code" means the Internal Revenue Code of 1986 and the rules and regulations thereunder, as amended. "Current Assets" means the current assets of the Borrower and its Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Current Liabilities" means the current liabilities of the Borrower and its Subsidiaries, as determined on a consolidated basis in accordance with GAAP, and including, in any event, all Loans, Letters of Credit and B/As made or issued for working capital purposes outstanding at the applicable time of reference. "Default" means an event or condition that, but for the requirement that time elapse or notice be given, or both, would constitute an Event of Default. "Encumbrances" shall have the meaning set forth in Section 5.6. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder. "Event of Default" shall have the meaning set forth in Section 6.1. "GAAP" means generally accepted accounting principles consistently applied. "Indebtedness" with respect to any person means and includes, without duplication, (i) all items which, in accordance with GAAP, would be included as a liability on the balance sheet of such person, (ii) the face amount of all banker's acceptances and of all letters of credit issued by any bank for the account of such person and all drafts drawn thereunder, (iii) the total amount of all indebtedness secured by any Encumbrance to which any property or asset of such person is subject, whether or not the indebtedness secured thereby shall have been assumed, and (iv) the total amount of all indebtedness and obligations of others which such person has directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), discounted with recourse or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, including, without limitation, any agreement (a) to advance or supply funds to such other person to maintain working capital, equity capital, -2- net worth or solvency, or (b) otherwise to assure or hold harmless such other person against loss in respect of its obligations. "Initial Financial Statement" shall have the meaning set forth in Section 3.5. "Insolvent" or "Insolvency" means that there shall have occurred one or more of the following events with respect to a person: death; dissolution; liquidation; termination of existence; "insolvent" or "insolvency" within the meaning of the United States Bankruptcy Code or other applicable statute; such person's inability to pay its debts as they come due or failure to have adequate capital to conduct its business; such person's failure to have assets having a fair saleable value net of any cost to dispose of such assets in excess of the amount required to pay the probable liability on its then existing debts (including unmatured, unliquidated and contingent debts); appointment of a receiver of any part of the property of, execution of a trust mortgage or an assignment for the benefit of creditors by, or the filing of a petition in bankruptcy or the commencement of any proceedings under any bankruptcy or insolvency laws or any laws relating to the relief of debtors, readjustment of indebtedness or reorganization of debtors by or against such person, or the offering of a plan to creditors or such person for composition or extension, except for an involuntary proceeding commenced against such person which is dismissed within 45 days after the commencement thereof without the entry of an order for relief or the appointment of a trustee. "Interest Charges" means, for any period, without duplication, all interest and all amortization of debt discount and expense (including commitment fees and similar expenses) on any particular Indebtedness for which such calculations are being made, all as determined in accordance with GAAP. "Interest Period" means, as to any Libor Loan, the period, the commencement and duration of which shall be determined in accordance with Section 2.4.1, provided that if any such Interest Period would otherwise end on -------- a day which is not a Business Day for Libor Rate purposes, such Interest Period shall end on the Business Day next preceding or next succeeding such day as determined by the Lender in accordance with its usual practices and notified to the Borrower at the beginning of such Interest Period. "Letters of Credit" means letters of credit in the form customarily issued by the Lender as standby or documentary or commercial letters of credit, issued by the Lender at the request and for the account of the Borrower. "Libor Loan Rate" means an annual rate of interest for an Interest Period equal to the Libor Rate in effect on the first day of such Interest Period plus the fixed rate spread set forth below which is applicable to the Borrower on the day of any Notice of Borrowing or Conversion (based upon the Borrower's ratio of Total Liabilities to Tangible Net Worth on the last day of the fiscal quarter immediately preceding such Interest Period, as evidenced by the financial statements required to be delivered by the Borrower pursuant to Section 5.1(i): -3- Total Liabilities/ Libor Loan Tangible Net Worth Fixed Rate Spread ------------------ ----------------- greater than 1.5 to 1.0 1.25% greater than 1.0 to 1.0 but less than or equal to 1.5 to 1.0 1.00% greater than 0.75 to 1.0 but less than or equal to 1.0 to 1.0 0.75% less than or equal to 0.75 to 1.0 0.50% "Libor Loans" means, in relation to any Interest Period, any portion of the principal amount of any Revolving Loans on which the Borrower elects pursuant to Section 2.4 to pay interest at a rate determined by reference to the Libor Rate. "Libor Rate" means, with respect to any Interest Period, in the case of any Libor Loan, the annual rate per annum (rounded upward, if necessary, to the nearest 1/32 of one percent) as determined by the Lender on the basis of the offered rates for deposits in U.S. dollars, for a period of time comparable to such Interest Period, which appear on the Telerate page 3750 as of 10:00 a.m. (Boston time) (or as soon thereafter as practicable) on the second Business Day prior to the first day of such Interest Period, provided, however, that if the -------- ------- rate described above does not appear on the Telerate System on any applicable interest determination date, the Libor Rate shall be the annual rate of interest (rounded upward as described above, if necessary) determined by the Lender at or before 10:00 a.m. (Boston time) (or as soon thereafter as practicable) on the second Business Day prior to the first day of such Interest Period, to be the annual rate of interest at which deposits of U.S. dollars are offered to the Lender by prime banks in whatever London interbank market may be selected by the Lender in its sole discretion, acting in good faith, at or about the time of determination and in accordance with the usual practice in such market for delivery on the first day of such Interest Period in immediately available funds and having a maturity equal to such Interest Period in an amount equal (as nearly as may be) to the amount of such Libor Loan. Each such determination by the Lender shall be conclusive. "Loan" means a loan made to the Borrower by the Lender pursuant to Section 2 hereof, and "Loans" means all of such loans, collectively. "Loan Documents" means, collectively, this Agreement (including, without limitation, the agreements and other instruments listed or described in the Closing Checklist attached hereto as Exhibit E), the Note, the Letters of --------- Credit (and all letter of -4- credit applications relating thereto) and any other agreements, instruments or documents referred to herein or therein and/or delivered in connection herewith, and all schedules, exhibits and annexes thereto. "Maturity Date" means July 1, 2005. "Net Income" means the pre-tax gross revenues of the Borrower and its Subsidiaries for the period in question, less all expenses and other proper charges, all determined on a consolidated basis in accordance with GAAP but in any event, excluding from Net Income (without duplication): (i) any gain or loss, amortization or deduction arising from any write-up of assets, except to the extent inclusion thereof shall be approved in writing by the Lender; (ii) earnings of any Subsidiary accrued prior to the date it became a Subsidiary; (iii) the net earnings of any business entity (other than a Subsidiary) in which the Borrower or any of its Subsidiaries has an ownership interest, except to the extent such net earnings shall have actually been received by the Borrower or such Subsidiaries in the form of cash distributions; (iv) any gains or losses on the sale or other disposition of investments or fixed or capital assets; (v) the proceeds of any life insurance policy; (vi) any deferred or other credit representing any excess of the equity of any Subsidiary at the date of acquisition thereof over the amount invested in such Subsidiary; and (vii) any reversal of any contingency reserve, except to the extent that provision for such contingency reserve shall be made from income arising during such period. "Note" means the Revolving Credit Note. "Notice of Borrowing, Continuation or Conversion" shall have the meaning set forth in Section 2.4.1. "Obligations" means any and all obligations of the Borrower or any of its Subsidiaries to the Lender of every kind and description, direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising, regardless of how they arise or by what agreement or instrument they may be evidenced or whether evidenced by any agreement or instrument, and includes obligations to perform acts and to refrain from acting as well as obligations to pay money. "Participant" shall have the meaning set forth in Section 7. "Person" or "person" means any individual, corporation, limited liability company, partnership, limited liability partnership, trust, trade, business and governmental agency and instrumentality. "Plans" means, collectively, each "employee pension benefit plan" and each "employee welfare benefit Plan" (each as defined in ERISA) maintained by the Borrower or any of its Affiliates (as defined in the last sentence of the definition thereof). -5- "Prime Rate" means the annual rate of interest announced and made effective by the Lender from time to time, at the principal office of the Lender, as its prime rate. "Prime Rate Loans" means any Revolving Loans (or any portion thereof) as to which the interest rate is the Prime Rate. "Restricted Payments" means (i) any cash or property dividend, distribution, or other payment, direct or indirect, to any Person who now or in the future may hold an equity interest in the Borrower or any of its Subsidiaries, whether evidenced by a security or not; and (ii) any payment on account of the purchase, redemption, retirement or other acquisition of any capital stock of the Borrower or any of its Subsidiaries, or any other payment or distribution made in respect thereof, either directly or indirectly. "Revolving Credit Maximum Amount" means $25,000,000. "Revolving Credit Note" shall have the meaning set forth in Section 2.1.1. "Revolving Loan" shall have the meaning set forth in Section 2.1.1. "Revolving Loan Account" means the account on the books of the Lender in which will be recorded Revolving Loans made by the Lender to the Borrower pursuant to this Agreement, payments made on such Revolving Loans and other appropriate debits and credits as provided by this Agreement. "Stated Amount" means, with respect to each Letter of Credit outstanding at any given time, the maximum amount then available to be drawn thereunder (without regard to whether any conditions to drawing could then be met). "Subsidiary" means any corporation, association, joint stock company, business trust or other similar organization of which 50% or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity is held or controlled by a Borrower or a Subsidiary of a Borrower; or any other such organization the management of which is directly or indirectly controlled by a Borrower or a Subsidiary of a Borrower through the exercise of voting power or otherwise; or any joint venture, whether incorporated or not, in which a Borrower has a 50% ownership interest or any other entity which would be consolidated with the Borrower in presenting its financial statements in accordance with GAAP. "Tangible Net Worth" means the amount which is equal to the net worth of the Borrower and its Subsidiaries computed on a consolidated basis in accordance with GAAP and with inventory and cost of goods sold determined on a "first in, first out" basis, and minus (i) the book value, net of applicable reserves, of all intangible assets of the Borrower and its Subsidiaries, including, without limitation, goodwill, trademarks, trade names, copyrights, patents and any similar rights and unamortized debt discount and expense, (ii) intercompany accounts with Affiliates (including receivables due from -6- Affiliates), unless existing on the date of the Initial Financial Statement, or created thereafter in the ordinary course of business, consistent with past practices, (iii) to the extent not otherwise approved in advance by Lender, any write up in the book value of any asset of the Borrower and its Subsidiaries resulting from revaluation thereof after the date of the Initial Financial Statement, (iv) the value, if any, attributable to any capital stock of the Borrower or its Subsidiaries held in treasury, and (v) the value, if any, attributable to any notes or subscriptions receivable due from stockholders in respect of capital stock. "Taxes" means, any and all taxes (including, without limitation, income, receipts, franchise, ad valorem or excise taxes, transfer or gains taxes or fees, use taxes, withholding, payroll or minimum taxes) imposed on, or otherwise payable by, or for which responsibility for payment, withholding or collection lies with, the Borrower or any of its Subsidiaries by any governmental authority, federal, state or otherwise, including any taxes imposed on any of the Borrower's direct or indirect Subsidiaries or other Affiliates for which the Borrower or any of its Subsidiaries may be liable under applicable law or by agreement to which the Borrower or any of its Subsidiaries is a party or by which it is bound or subject to, and including, but not limited to, any interest, penalties or additions to tax with respect thereto. "Total Liabilities" means, at any date as of which the amount thereof shall be determined, all obligations of the Borrower and its Subsidiaries that should, as determined on a consolidated basis in accordance with GAAP, be classified as liabilities on the balance sheet of the Borrower and its Subsidiaries, including, in any event, all Indebtedness of the Borrower and its Subsidiaries. "Unused Commitment" for any period of time means the difference for each day during such period between the Revolving Credit Maximum Amount in effect and the sum of the principal amount of Revolving Loans actually outstanding hereunder and the Stated Amount of all outstanding Letters of Credit. SECTION 2. REVOLVING LOANS. ---------------- 2.1 Revolving Loans. --------------- 2.1.1 Upon the terms and subject to the conditions of this Agreement, and in reliance upon the representations, warranties and covenants of the Borrower made herein, the Lender agrees to make loans ("Revolving Loans") to the Borrower at the Borrower's request from time to time, from and after the date hereof and prior to the Maturity Date, provided that the principal amount of Revolving Loans outstanding at any time, plus the aggregate Stated Amount of Letters of Credit outstanding at such time, plus the aggregate amount of any unreimbursed draws under outstanding Letters of Credit, plus the total amount of B/A's outstanding at such time, shall not exceed the Revolving Credit Maximum Amount, and provided, further, that at the time the Borrower requests a -7- Revolving Loan and after giving effect to the making thereof there has not occurred and is not continuing any Default or Event of Default. The Borrower agrees that it shall be an Event of Default hereunder if at any time the debit balance of the Revolving Loan Account, plus the aggregate Stated Amount of Letters of Credit outstanding at any time, plus the aggregate amount of unreimbursed draws under outstanding Letters of Credit at such time, plus the total amount of B/A's outstanding at such time, shall exceed the Revolving Credit Maximum Amount unless the Borrower shall, upon notice of such excess from the Lender, promptly pay cash to the Lender to be credited to the Revolving Loan Account in such amount as shall be necessary to eliminate the excess. Each Revolving Loan shall be in a minimum amount of $100,000 or an integral multiple thereof. The Revolving Loans shall be evidenced by an Amended and Restated Revolving Credit Note (the "Note") in the form of Exhibit A hereto. 2.1.2 Subject to the provisions of Section 2.5, the Borrower may prepay outstanding Revolving Loans and the Note in whole or in part at any time without premium or penalty. Amounts so paid in respect of the Revolving Loans and the Note and other amounts may be borrowed and reborrowed from time to time as provided in Section 2.1.1. On the Revolving Credit Maturity Date, the Borrower shall repay all outstanding Revolving Loans and the Note, together with all unpaid interest thereon and all fees and other amounts due hereunder. 2.2. Letters of Credit. Upon the terms and subject to the conditions of this Agreement, and in reliance upon the representations, warranties and covenants of the Borrower made herein, the Lender agrees to issue, to the extent permitted by law and the Uniform Customs Practices of the International Chamber of Commerce governing Letters of Credit (Publication No. 500 or any successor thereto), Letters of Credit upon the application of the Borrower during the period from the date hereof to one (1) month prior to the Maturity Date; provided that the aggregate Stated Amount of Letters of Credit outstanding at any time, plus the aggregate amount of all unreimbursed draws under such outstanding Letters of Credit, shall not at any time (i) exceed $2,500,000 less the total amount of B/A's outstanding at such time, or (ii) cause the principal amount of Revolving Loans outstanding at such time (after taking into account such Stated Amount and all such unreimbursed draws and the total amount of B/A's outstanding at such time) to exceed the Revolving Credit Maximum Amount; and provided, further, that at the time the Borrower requests the issuance of a Letter of Credit and after giving effect to the issuance thereof, there has not occurred and is not continuing any Default or Event of Default. All Letters of Credit shall have a stated expiration date not to exceed one year and shall, in any event, expire not later than the date which is one (1) month prior to the Maturity Date. Amounts drawn under the Letters of Credit shall become immediately due and payable by the Borrower to the Lender. Without limiting the foregoing, if any Letter of Credit would by its terms expire after the Maturity Date, the Borrower shall, on the Maturity Date, cause another letter of credit issued by another bank to be substituted therefor or cause another bank satisfactory to the Lender to indemnify the Lender to its satisfaction against any and all liabilities and obligations in respect to such Letter of Credit and, in such event, this Agreement and the other Loan Documents shall continue in -8- full force and effect until all of the Obligations under any such Letters of Credit have been paid in full to the Lender. In order to evidence such Letters of Credit, the Borrower shall enter into, with the Lender, such agreements and execute such instruments and documents as the Lender customarily requires in like transactions. 2.2.A. Bankers' Acceptances. -------------------- 2.2.A(i). Upon the terms and subject to the conditions of this Agreement, and in reliance upon the representations, warranties and covenants of the Borrower made herein, the Lender agrees to issue, to the extent permitted by law, B/A's upon the application of the Borrower during the period from the date hereof to one (1) month prior to the Maturity Date; provided that the aggregate amount of B/A's outstanding for the account of the Borrower (after giving effect to the B/A requested) shall not at any time (i) exceed $2,500,000 less the Stated Amount of all Letters of Credit outstanding at such time and less the aggregate amount of all unreimbursed draws under such outstanding Letters of Credit, or (ii) cause the principal amount of the Revolving Loans outstanding at such time, plus the aggregate Stated Amount of Letters of Credit then outstanding, plus the aggregate amount of all unreimbursed draws under such Letters of Credit, to exceed the Revolving Credit Maximum Amount; and provided, further, that at the time the Borrower requests the issuance of a B/A and after giving effect to the issuance thereof, there has not occurred and is not continuing any Default or Event of Default. All B/A's shall have a stated expiration date of less than 180 days and shall in any event expire not later than the date which is one (1) month prior to the Maturity Date. 2.2.A(ii). Amounts due to the Lender in respect to B/A's upon the maturity thereof or the payment by the Lender of any draft pursuant thereto shall become immediately due and payable by the Borrower to the Lender, and may be added to the Revolving Loan Account as Revolving Loans as of the date funds are advanced under such B/A and shall be immediately due and payable upon the maturity of the Note. 2.2.B The Borrower shall enter into, with the Lender, such agreements and execute such instruments and documents as the Lender customarily requires in like transactions. The Borrower hereby acknowledges and agrees that its president and vice president are each authorized to sign applications for the issuance of B/A's and that the execution and submission thereof to the Lender by any such officer for the account of the Borrower shall be for the benefit and liability hereunder of the Borrower. 2.3 Interest and Fees. ----------------- 2.3.1 Interest on any Revolving Loans shall be calculated and due and payable based upon the following interest rate alternatives: (i) In the absence of any election by the Borrower under clause (ii) below, either initially with respect to any Revolving Loan or at the expiration of the applicable Interest Period under such clause (ii) below, such Revolving -9- Loans shall bear interest at a rate per annum equal to the Prime Rate in effect from time to time, with interest thereon being payable monthly in arrears on the last Business Day of each month. Any change in the Prime Rate shall result in a change on the same day in the rate of interest to accrue from and after such day on the unpaid balance of principal of the Revolving Loans bearing interest with reference to the Prime Rate. (ii) In the manner and subject to the provisions set forth in Sections 2.1, 2.4 and 2.5, so long as no Default or Event of Default has occurred and is then continuing, the Borrower may elect from time to time prior to the Maturity Date to have all or a portion of the unpaid principal amount of any Revolving Loan bear interest during any particular Interest Period applicable to Libor Loans at the Libor Rate and be treated as a Libor Loan, with interest, in all cases, being due and payable in arrears on the last Business Day of each month and on the last day of the applicable Interest Period, provided, that any such portion of any Loan shall be in an amount not less than $100,000 or an integral multiple thereof. The rates of interest set forth above shall apply before an Event of Default. After an Event of Default pursuant to Section 6 of this Agreement, interest shall accrue on the balance hereof at a rate equal to four percent (4%) per annum above the highest rate that would otherwise apply to amounts outstanding hereunder. 2.3.2 The Borrower shall pay to the Lender a commitment fee, payable monthly in arrears on the last Business Day of each month, equal to one-eighth of one percent (0.125%) per annum of the Unused Commitment during the preceding month. 2.3.3 The Borrower shall pay to the Lender: (i) for issuance of Letters of Credit (a) a fee equal to the greater of 1% per annum of the face amount of each standby Letter of Credit or such minimum fee for each such Letter of Credit as may be generally in effect from time to time, and (b) a fee equal to the greater of 1% of the face amount of each documentary Letter of Credit or such minimum fee for each such Letter of Credit as may be generally in effect from time to time, and (ii) for issuance of B/A's a fee equal to the greater of 1% per annum of the face amount of each B/A or such minimum fee for each such B/A as may be generally in effect from time to time; plus, in the case of Letters of Credit and B/A's, such transactional fees and charges as are customarily charged by the Lender. 2.3.4 The Borrower authorizes the Lender to charge to the Revolving Loan Account or to any deposit account which the Borrower may maintain with the Lender the principal, interest, fees, charges, taxes and expenses provided for in this Agreement or any other document executed or delivered in connection herewith. 2.3.5 If, after the date hereof, the Lender shall have determined that the adoption of any applicable law, rule, regulation, guideline, directive or request (whether -10- or not having the force of law) regarding capital requirements for banks or bank holding companies, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender with any of the foregoing imposes or increases a requirement by the Lender to allocate capital resources to the Lender's commitment to make Revolving Loans or issue Letters of Credit which has or would have the effect of reducing the return on the Lender's capital to a level below that which the Lender could have achieved (taking into consideration the Lender's then existing policies with respect to capital adequacy and assuming full utilization of the Lender's capital) but for such adoption, change or compliance by any amount deemed by the Lender to be material, then: (i) the Lender shall promptly after its determination of such occurrence give notice thereof to the Borrower; and (ii) to the extent that the costs of such increased capital requirements are not reflected in the Prime Rate, the Borrower and the Lender shall thereafter attempt to negotiate in good faith, within 30 days following the date the Borrower receives such notice, an adjustment payable hereunder that will adequately compensate the Lender in light of the circumstances. If the Lender and the Borrower are unable to agree to such adjustment within 30 days following the date upon which the Borrower receives such notice, then commencing on the date of such notice (but no earlier than the effective date of any such increased capital requirement), the fees payable hereunder shall increase by an amount that will, in the Lender's reasonable determination, provide adequate compensation. The provisions of this Section 2.3.5 shall be applied to the Borrower so as not to discriminate against the Borrower vis-a-vis other customers of the Lender. 2.3.6 Anything hereinbefore to the contrary notwithstanding, if any present or future applicable law (which expression, as used in this Agreement, includes statutes and rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time heretofore or hereafter made upon or otherwise issued to the Lender by any central bank or other fiscal, monetary or other authority, whether or not having the force of law) shall (i) subject the Lender to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Agreement, the maximum amount of the Revolving Loans or Letters of Credit or the payment to the Lender of any amounts due to it hereunder, or (ii) materially change the basis of taxation of payments to the Lender of the principal or the interest on or any other amounts payable to the Lender hereunder, or (iii) impose or increase or render applicable any special or supplemental special deposit or reserve or similar requirements or assessment against assets held by, or deposits in or for the account of, or any liabilities of, or loans by an office of the Lender in respect of the transactions contemplated herein, or (iv) impose on the Lender any other conditions or requirements with respect to this Agreement, the Revolving Credit Maximum Amount, the Letters of Credit or any Revolving Loan, and the result of any of the foregoing is (A) to increase the cost to the Lender of making, funding or maintaining all or any part of the Revolving Loans or the Letters of Credit, or (B) to reduce the amount of principal, interest or other amount -11- payable to the Lender hereunder, or (C) to require the Lender to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregoing interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by the Lender from the Borrower hereunder, then, and in each such case not otherwise provided for hereunder, the Borrower will, upon demand made by the Lender accompanied by calculations thereof in reasonable detail, pay to the Lender such additional amounts as will be sufficient to compensate the Lender for such additional cost, reduction, payment or foregoing interest or other sum, provided that the foregoing provisions of this sentence shall not apply in the case of any additional cost, reduction, payment or foregoing interest or other sum resulting from any taxes charged upon or by reference to the overall net income, profits or gains of the Lender. 2.4 Loan Requests. ------------- 2.4.1 All requests under this Agreement for Revolving Loans or for a conversion of the interest rate applicable to any Revolving Loan (or portion thereof) under Section 2.3 above to a rate of a different type or for a continuation of a Revolving Loan (or a portion thereof) at an interest rate of the same type for an additional Interest Period, shall be made by the Borrower by telecopy or telephone (each such request to be irrevocable), with any such request by telephone to be immediately followed by a written confirmation thereof by the Borrower substantially in the form attached hereto as Exhibit C (each a "Notice of Borrowing, Continuation or Conversion"), specifying (a) the amount of the requested advance or portion of outstanding principal into which the type of interest rate requested is to be converted or continued, (b) the requested borrowing or interest rate conversion or continuation date, (c) whether the requested advance or affected principal portion is to be treated as a Libor Loan, and (d) if the requested advance or affected principal portion is to be in whole or in part a Libor Loan, the length of the requested Interest Period for such advance or principal portion as applicable (which must be, in the case of Libor Loans, for one, two, three, six or nine months, provided, however, that no Interest Period shall extend beyond the Maturity Date, and provided, further, that if any such written confirmation differs in any material respect from the action taken by the Lender, the records of the Lender shall be conclusive absent manifest error. 2.4.2 Each Notice of Borrowing, Continuation or Conversion must be delivered to an officer of the Lender no later than 11:00 a.m. Boston time, (a) 2 Business Days prior to the requested advance, continuation or conversion date, in the case of Libor Loans, or (b) on the requested advance, continuation or conversion date, in the case of Prime Rate Loans. If the Borrower does not request that an existing Libor Loan be maintained as a Libor Loan at least 2 Business Days prior to the end of the Interest Period applicable to such Loan, in accordance with the procedure set forth herein, then the Borrower shall be deemed to have requested that such Loan be converted into a Prime Rate Loan. 2.5 Libor Loan Provisions. --------------------- -12- 2.5.1 The Lender shall promptly notify the Borrower upon determining any Libor Rate. Each such notice shall be conclusive and binding upon the Borrower. If, with respect to any Interest Period, the Lender is unable to determine the Libor Rate relating thereto, or adverse or unusual conditions in or changes in applicable law relating to the London interbank market make it illegal or, in the reasonable judgment of the Lender, impracticable, to fund therein the amount of the requested Libor Loan or make the projected Libor Rate unreflective of the actual costs of funds therefor to the Lender, or if it shall become unlawful for the Lender to charge interest on the Loans on a Libor Rate basis, then in any of the foregoing events the Lender shall so notify the Borrower and interest will be calculated and payable in respect of such projected Interest Period (and thereafter for so long as the conditions referred to in this sentence shall continue) by reference to the Prime Rate in accordance with Section 2.3.1(i). 2.5.2 In the event the Lender shall incur any loss, cost or expense as a result of: (i) any payment, prepayment of or election to change the interest rate applicable to any principal of a Libor Loan on a date other than the last day of any Interest Period applicable thereto, or (ii) any failure by the Borrower to borrow or convert into any Libor Loan on the date or in the amount specified in a Notice of Borrowing, Continuation or Conversion, or (iii) any increase in the cost to the Lender of making Libor Loans (including without limitation costs associated with increases in taxes, with reserves required by law or regulation, or with any other governmental assessments, in connection with Libor Loans), then in any such event the Borrower shall pay to the Lender such amount or amounts as shall be sufficient (in the reasonable opinion of the Lender) to compensate the Lender fully for such loss, cost or expense, such compensation to include, without limitation, an amount equal to the excess, if any, of (a) the amount of interest that would have accrued on the principal amount so paid, prepaid or converted or not borrowed for the period from the date of such payment, prepayment or conversion to the last day of the Interest Period for such Revolving Loan or, in the case of a failure to borrow, for the entire Interest Period for such Revolving Loan, commencing on the date of such failure to borrow, at the applicable rate of interest for such Revolving Loan provided for herein, over (b) the amount of interest (as reasonably determined by the Lender) the Lender would have been offered in the London interbank market for dollar deposits of amounts comparable to such principal amount at a maturity comparable to said period. SECTION 3. REPRESENTATIONS AND WARRANTIES. ------------------------------ The Borrower represe~tc, warrants and covenants as follows: -13- 3.1 Organization and Qualification. The Borrower and each of its Subsidiaries (i) is, with respect to the Borrower, a corporation duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts, and with respect to the Borrower's Subsidiaries, is a corporation duly organized, validly existing and in good standing (or the jurisdictional equivalents thereof), in its respective jurisdiction of organization as set forth on Exhibit B hereto; (ii) has all requisite corporate power and authority to own its property and conduct its business as now conducted and as presently contemplated; and (iii) is duly qualified and in good standing in each jurisdiction (which jurisdictions are listed on Exhibit B hereto) where the nature of its properties or its business (present or proposed) requires such qualification. Since the date of the Initial Financial Statement, the Borrower has continued to engage in substantially the same business as that in which it was then engaged and is engaged in no unrelated business. 3.2 Corporate Authority; Valid Obligations; Approvals. The execution, delivery and performance of the Loan Documents and the transactions and other documents contemplated hereby and thereby are within the Borrower's corporate authority, have been authorized by all necessary corporate proceedings on the part of the Borrower, and do not and will not contravene any provision of law, its charter document or its by-laws, or contravene any provisions of, or constitute a Default or Event of Default hereunder or a default under any other agreement, instrument, judgment, order, decree, permit, license or undertaking binding upon or applicable to the Borrower or any of its properties, or result in the creation, other than in favor of the Lender, of any mortgage, pledge, security interest, lien, encumbrance or charge upon any of the properties or assets of the Borrower. The Loan Documents have been duly executed and delivered and constitute the legal, valid and binding obligations of the Borrower enforceable in accordance with their terms. The execution, delivery and performance of the Loan Documents and the transactions and other documents contemplated hereby and thereby do not require any approval or consent of, or filing or registration with, any person. 3.3 Title to Properties; Absence of Liens. The Borrower and each of its Subsidiaries has good and marketable title to all of its properties, assets and rights of every name and nature now purported to be owned by it, which properties, assets and rights include all those necessary to permit the Borrower and such Subsidiaries to conduct its business as such business was conducted on the date of the Initial Financial Statement, free from all liens, charges and encumbrances whatsoever except for insubstantial and immaterial defects in title and liens, charges or encumbrances permitted under Section 5.6. 3.4 Compliance. The Borrower and each of its Subsidiaries (i) has all necessary permits, approvals, authorizations, consents, licenses, franchises, registrations and other rights and privileges (including without limitation patents, trademarks, trade names and copyrights) to allow it to own and operate its business without any violation of law or the rights of others, (ii) is duly authorized, qualified and licensed under and in compliance with all applicable laws, regulations, authorizations and orders of public authorities -14- (including, without limitation, laws relating to hazardous materials, hazardous waste, oil, and protection of the environment and laws relating to ERISA or to employee benefit plans generally, and the jurisdictional equivalents thereof), and (iii) has performed all obligations required to be performed by it under, and is not in default under or in violation of, its charter or by-laws, or any agreement, lease, mortgage, note, bond, indenture, license or other instrument or undertaking to which it is a party or by which any of it or any of its properties are bound, except for any such violations or failures to comply under clauses (i) through (iii) above which, individually or in the aggregate, would not have a material adverse effect on the business, condition (financial or otherwise), results of operations or assets of the Borrower or the Borrower and its Subsidiaries taken as a whole, and neither the Borrower nor any of its Subsidiaries has received any notice by any governmental authority or third party with respect to the generation, storage, or disposal or release or threat of release of hazardous substances, hazardous materials, or oil, or with respect to any violation of any federal, state or local environmental, health or safety statute or regulation. 3.5 Financial Statements. The Borrower has furnished to the Lender its audited consolidated balance sheet as of March 31, 2001 and the related audited consolidated statements of income and stockholders' equity and cash flows for the year then ended, which were prepared in accordance with GAAP, certified by independent certified public accountants acceptable to the Lender and fairly present the consolidated financial position of the Borrower as at the close of business on such date and the results of its operations for the year then ended. The Borrower has also furnished to the Lender its unaudited consolidated balance sheet as of December 31, 2001 and the related unaudited consolidated statements of income and stockholders' equity and cash flows for the three quarters then ended (collectively, such audited and unaudited financial statements are referred to as the "Initial Financial Statement"). At the date hereof, the Borrower and its Subsidiaries have no material Indebtedness or other liabilities, whether accrued, absolute, contingent or otherwise, and whether due or to become due, that are not set forth on the Initial Financial Statement or on Exhibit B hereto. Since the respective dates of the Initial Financial Statement there have been no material adverse changes, individually or in the aggregate, in the assets, liabilities, financial condition or business of the Borrower or the Borrower and its Subsidiaries taken as a whole, except as set forth on Exhibit B hereto. 3.6 Events of Default; Solvency. As of the date of this Agreement, no Default or Event of Default exists and the Borrower is not, and immediately after giving effect to the consummation of the Revolving Loans will not be, Insolvent. 3.7 Taxes. The Borrower and each of its Subsidiaries has filed all federal, state and other tax returns required to be filed for all Taxes, and has paid (or has established adequate reserves in accordance with GAAP for the payment of) all Taxes, assessments and other such governmental charges due from the Borrower have been fully paid. Neither the Borrower nor any of its Subsidiaries has executed any waiver that would have the effect of extending the applicable statute of limitations in respect of any Tax. -15- 3.8 Labor Relations; Litigation. Neither the Borrower nor any of its Subsidiaries is engaged in any unfair labor practice and, except as set forth on Exhibit B attached hereto, there is no litigation, proceeding, governmental investigation (administrative or judicial) or labor dispute, pending or, to the best knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries, which, if decided adversely to the Borrower or such Subsidiary, could have a materially adverse effect on the business, properties or condition (whether financial or otherwise) of the Borrower or the Borrower and its Subsidiaries taken as a whole or on the ability of the Borrower to perform its obligations under this Agreement or any other agreement or document contemplated hereby, nor is any substantial basis for any such litigation or labor dispute known to exist. 3.9 Restrictions on the Borrower. Neither the Borrower nor any of its Subsidiaries is party to or bound by any contract, agreement or instrument, nor subject to any charter or other corporate restriction which will, under current or foreseeable conditions, materially and adversely affect its business, property, assets, operations or conditions, financial or otherwise. 3.10 Contracts with Affiliates, Etc. Except as disclosed on Exhibit B attached hereto, and except for agreements or transactions (in each case) in the ordinary course of business and on an arm's-length basis, neither the Borrower nor any of its Subsidiaries is a party to or otherwise bound by any agreements, instruments or contracts (whether written or oral) with any Affiliate, except for any such agreement, instrument or contract (other than an agreement, instrument or contract with respect to Indebtedness for borrowed money) as would not materially and adversely affect the condition (financial or otherwise), properties, business or results of operations of the Borrower or the Borrower and its Subsidiaries taken as a whole. 3.11 Disclosure. No representations and warranties made by the Borrower in this Agreement, any other Loan Document or in any other agreement, instrument, document, certificate, statement or letter furnished to the Lender by or on behalf of the Borrower, and no other factual information heretofore or contemporaneously furnished by or on behalf of the Borrower to the Lender, in connection with any of the transactions contemplated by any of the Loan Documents contains (as of the date given) any untrue statement of fact or omits to state a fact necessary in order to make the statements contained therein not misleading in any material respect in light of the circumstances in which they are made. Except as disclosed herein or in the Initial Financial Statement or in the other Loan Documents, there is no fact known to the Borrower which materially adversely affects, or which would in the future materially adversely affect, the business, condition (financial or otherwise), results of operations or assets of the Borrower or the Borrower and its Subsidiaries taken as a whole. 3.12 Subsidiaries. As of the date hereof, the Borrower and its Subsidiaries have no Subsidiaries, except as disclosed on Exhibit B attached hereto. SECTION 4. CONDITIONS OF LOANS. ------------------- -16- 4.1 Conditions to Initial Revolving Loan, Letter of Credit and B/A. The obligation of the Lender to make the initial Revolving Loan and to issue the initial Letter of Credit and B/A is subject to the fulfillment to the satisfaction of the Lender on the date hereof of the following conditions precedent: 4.1.1 Receipt by the Lender of all of the agreements, documents, instruments, certificates and opinions listed or described on the Closing Checklist attached hereto as Exhibit E, in form and substance satisfactory to the Lender, and duly executed and delivered by the parties thereto, along with such additional instruments, certificates, opinions and other documents as the Lender shall reasonably request. 4.1.2 The representations and warranties contained herein shall be true and accurate on and as of the date hereof, the Borrower shall have performed and complied with all covenants and conditions required herein to be performed or complied with by it prior to the making of such Revolving Loan, and no Default or Event of Default shall be continuing or result from the Revolving Loans to be made on the date hereof or the transactions contemplated hereby. 4.2 Conditions to all Loans, Letters of Credit and B/A's. The obligation of the Lender to make any Revolving Loan and to issue any Letter of Credit or B/A is subject to the fulfillment to the satisfaction of the Lender immediately prior to or contemporaneously with each such Loan of each of the following conditions: (i) the representations and warranties contained herein or otherwise made in writing by or on behalf of the Borrower pursuant hereto or in connection with the transactions contemplated hereby shall be true and correct in all material respects at the time of each such Loan (except for representations and warranties limited as to time or with respect to a specific event) with and without giving effect to the Loan to be made at such time and the application of the proceeds thereof, (ii) no Default or Event of Default shall be continuing or result from such Loan, (iii) no material adverse change in the condition (financial or otherwise), business or properties of the Borrower shall have occurred since the date of the Initial Financial Statement, and (iv) no change in applicable law or regulation shall have occurred as a consequence of which it shall have become and continue to be unlawful for the Lender or the Borrower to perform any of its respective agreements or obligations under any Loan Document to which it is a party. SECTION 5. COVENANTS. --------- During the term of this Agreement and so long as any Obligation of the Borrower in respect of any Loan remains outstanding, the Borrower hereby covenants to the Lender that: 5.1 Financial Statements and Other Reporting Requirements. The ----------------------------------------------------- Borrower shall furnish to the Lender: -17- (i) as soon as available to the Borrower, but in any event within 90 days after each fiscal year-end, the 10-K Annual Report of the Borrower filed with the Securities and Exchange Commission, which shall include the consolidated balance sheet of the Borrower as at the end of, and related consolidated statements of income, retained earnings and cash flow for, such year prepared in accordance with GAAP and certified by independent certified public accountants satisfactory to the Lender that such statements present fairly the consolidated financial position of the Borrower prepared in accordance with GAAP applied in a manner consistent with the Borrower's past practices; and concurrently with such Annual Report and financial statements, if in the opinion of such accountants a Default or Event of Default exists, a written statement by such accountants that, in the making of the audit necessary for their report and opinion upon such financial statements, they have obtained knowledge of such Default or Event of Default, and they shall disclose in such written statement the nature and status thereof; (ii) as soon as available to the Borrower, but in any event within 45 days after the end of each fiscal quarter of each fiscal year of the Borrower, the 10-Q Quarterly Report of the Borrower filed with the Securities and Exchange Commission, which shall include the consolidated balance sheet of the Borrower as at the end of, and related consolidated statements of income, retained earnings and cash flow for, the portion of the year then ended and for the quarter then ended, prepared in accordance with GAAP (with the exception of footnotes) applied in a manner consistent with the audited financial statements required by clause (i) above (subject to normal year-end audit adjustments, none of which shall be materially adverse) and certified pursuant to the report to be delivered to the Lender under clause (iv) of this Section 5.1; (iii) promptly as they become available, copies of all such financial statements, proxy material and reports as the Borrower shall send to or make generally available to stockholders and promptly as they become available, but in any event within 5 days after the filing thereof, copies of all regular and periodic reports filed by the Borrower or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental authority succeeding to any or all of the functions of said Commission, and promptly as they become available, a copy of each report (including any so-called management letters) submitted to the Borrower by independent certified public accountants in connection with each annual audit of the books of the Borrower by such accountants or in connection with any interim audit thereof pertaining to any phase of the business of the Borrower; (iv) concurrently with each delivery of financial statements pursuant to clause (i) and clause (ii) of this Section 5.1, a chief financial officer's report in substantially the form of Exhibit D hereto, and including, without limitation, computations in reasonable detail evidencing compliance with the covenants contained in Sections 5.16, 5.17 and 5.18; -18- (v) promptly after obtaining knowledge of the existence thereof, notice of (a) the occurrence of any event which constitutes a Default or Event of Default, together with the nature and duration thereof and the action proposed to be taken with respect thereto, (b) the occurrence of any condition or event with respect to the Borrower or any Subsidiary or Affiliate which could be expected to constitute a material adverse change in or to have a material adverse effect on the business, properties or condition (financial or otherwise) of the Borrower or any of its Subsidiaries, together with the nature and duration thereof and the action proposed to be taken with respect thereto, (c) any litigation or any investigative proceedings of a governmental agency or authority commenced or threatened against the Borrower, any Subsidiary or Affiliate or any Plan which could be expected to have a material adverse effect on the business, properties or condition (financial or otherwise) of the Borrower, or the issuance of any judgment, award, decree, order or other determination in or relating to any such litigation or proceedings, (d) the occurrence of a reportable event (as defined in ERISA) or any communications to, or receipt of communications from, the PBGC, the United States Department of Labor or the IRS by the Borrower or any Affiliate relating to any Plan, along with copies of all such communications, (e) the adoption by the Borrower of any stock option or executive compensation plan, whether or not subject to ERISA, and any Plan subject to ERISA, or the substantial modification of any such plan, along with the vesting and funding schedules and other principal provisions thereof, and (f) any communications given or received by the Borrower or any Subsidiary in any way relating to compliance with, any violation or potential violation of, or any potential liability under, any environmental law or regulation (including those relating to pollution control, hazardous materials and hazardous wastes), along with copies of all such communications; and (vi) from time to time, such other financial data and information about the Borrower and/or any of its Subsidiaries as the Lender may reasonably request. 5.2 Conduct of Business. The Borrower will, and will cause each of its Subsidiaries to, maintain its corporate existence, continue to have a fiscal year ending on the last Saturday of March of each year (unless otherwise agreed to by the Lender) and remain or engage in substantially the same business as that in which it is now engaged, and will duly observe and comply with all applicable laws and all requirements of any governmental authorities relative to it, its assets or to the conduct of its business, including laws relating to the environment, pollution control, hazardous materials and hazardous waste (except where the failure to observe and comply with such laws or requirements would not materially and adversely affect the condition (financial or otherwise), properties, business, or results of operations of the Borrower or the Borrower and its Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations to the Lender) and will maintain and keep in full force and effect all licenses and permits necessary to the proper conduct of its business. -19- 5.3 Maintenance and Insurance; Deposit Accounts. The Borrower will, and will cause each of its Subsidiaries to, maintain and keep its properties in good repair, working order and condition so that its business may be properly and advantageously conducted at all times, and will comply with the provisions of all material Leases to which it is a party or under which it occupies property so as to prevent any material loss or forfeiture thereof or thereunder. The Borrower at all times will, and will cause each of its Subsidiaries to, maintain insurance with such insurance companies, in such amounts against such hazards and liabilities and for such purposes as is customary in the industry for companies of established reputation engaged in the same or similar businesses and owning or operating similar properties. Upon request of the Lender from time to time, the Borrower shall furnish to the Lender certificates or other evidence satisfactory to the Lender of compliance with the foregoing insurance provisions. The Borrower will, and will cause each of its Subsidiaries to, maintain its primary deposit accounts with the Lender. 5.4 Taxes. The Borrower will, and will cause each of its Subsidiaries to, pay or cause to be paid all taxes, assessments or governmental charges on or against it or its properties prior to such taxes becoming delinquent, except for any tax, assessment or charge which is being contested in good faith by proper legal proceedings and with respect to which adequate reserves have been established and are being maintained, provided that no enforcement action to enforce a lien has been commenced against the Borrower or any such Subsidiary with respect to any such tax, assessment or charge which is material in amount. 5.5 Limitation of Indebtedness. Except with the prior written consent of the Lender, the Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist, or in any manner become or be liable directly or indirectly with respect to, any Indebtedness except: (i) the Obligations; (ii) Indebtedness for borrowed money existing on the date of this Agreement and described on Exhibit B hereto or in the Initial Financial Statement; (iii) Indebtedness on open account for the purchase price of services, materials and supplies incurred by the Borrower or any such Subsidiary in the ordinary course of business (not as a result of borrowing), so long as all of such open account Indebtedness shall be promptly paid and discharged when due or in conformity with customary trade terms and practices, except for any such open account Indebtedness which is being contested in good faith by the Borrower or any such Subsidiary and as to which adequate reserves required by GAAP have been established and are being maintained and (iv) Indebtedness expressly permitted by Section 5.8 hereof. 5.6 Restrictions on Liens. Without the Lender's prior written consent, the Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any mortgage, pledge, security interest, lien or other charge or encumbrance, including the lien or retained security title of a conditional vendor, ("Encumbrances") upon or with respect to any property or assets, real or personal, of the Borrower or any such Subsidiary, or assign or otherwise convey any right to receive income, except: -20- (i) Encumbrances existing on the date of this Agreement and set forth on Exhibit B hereto; (ii) Encumbrances in favor of the Lender; (iii) liens for taxes, fees, assessments and other governmental charges to the extent that payment of the same is not required in accordance with the provisions of Section 5.4; or (iv) liens incurred or deposits made in the ordinary course of the Borrower's business in connection with workers' compensation, unemployment insurance, social security and other similar laws, or liens of mechanics, laborers, materialmen, carriers and warehousemen arising by operation of law to secure payment for labor, materials, supplies or services incurred in the ordinary course of Borrower's business, but only if the payment thereof is not at the time required and such liens do not, individually or in the aggregate, materially detract from the value or limit the use of any property subject thereto. 5.7 Mergers, Acquisitions and Purchases and Sales of Assets. The Borrower will not, and will not permit any of its Subsidiaries to, (i) consolidate or merge with or into any other corporation or other entity, (ii) acquire the assets or stock of any entity, other than in connection with acquisitions of interests in other corporations or business entities engaged in the same business as that in which the Borrower is now engaged or in a reasonable extension or expansion thereof (either through the purchase of assets or capital stock or otherwise); provided, that (a) the aggregate amount of all such acquisitions shall not exceed $500,000, (b) the properties and assets acquired in connection with such acquisitions shall be free from all liens, charges and encumbrances whatsoever, and (c) immediately prior to and after giving effect to such acquisition, no Default or Event of Default shall exist, or (iii) sell, lease, transfer or otherwise dispose of or discount any portion of its assets (including any note, instrument or account), other than the sale of finished goods and the disposition of scrap, waste and obsolete items in the ordinary course of business. Any acquisition having an aggregate purchase price in excess of $500,000 (in one or a series of transactions) shall be subject to the prior written approval by the Lender, which such approval the Lender may give, withhold or condition in its sole discretion. 5.8 Investments and Loans. The Borrower will not, and will not permit any of its Subsidiaries to, make or have outstanding at any time any investments in or loans to any other person, whether by way of advance, guaranty, extension of credit, capital contribution, purchase of stocks, notes, bonds or other securities or evidences of Indebtedness, or acquisition of limited or general partnership interests or interests in any limited liability company, other than: (i) in direct obligations of the United States of America, maturing within one year of their issuance; (ii) in time certificates of deposit or repurchase agreements, maturing within one year of their issuance, from banks or other financial institutions in the United States having capital, surplus and undivided profits in -21- excess of $200,000,000; (iii) in short-term commercial paper carrying the highest rating by Moody's or Standard and Poor's rating services and issued by corporations headquartered in the United States, in currency of the United States; (iv) in shares of money-market mutual funds having assets in excess of $100,000,000 and substantially all of the assets of which consist of investments referred to in clauses (i) through (iii), inclusive, above; (v) advances to employees for business related expenses to be incurred in the ordinary course of business and consistent with past practices in an amount not to exceed $150,000 in the aggregate outstanding at any one time, provided that no such advances to any single employee shall exceed $100,000 in the aggregate; (vi) loans to employees from time to time in an aggregate principal amount not in excess of $2,500,000 at any time outstanding for the purpose of permitting such employees to exercise stock options pursuant to the Borrower's duly adopted stock option plan; (vii) loans or other investments by the Borrower in its Subsidiaries, provided that such loans and investments shall not exceed (x) $100,000 to any such Subsidiary at any time outstanding, and (y) $250,000 to all such Subsidiaries at any time outstanding, in each case without the prior written approval of the Lender; and (viii) investments in addition to those permitted by this Section 5.8 and disclosed on Exhibit B attached hereto. 5.9 Restricted Payments The Borrower shall not, directly or indirectly (through any Affiliate or Subsidiary or otherwise), and shall not permit any of its Subsidiaries to, declare, pay or make any Restricted Payment other than (i) regular compensation and bonuses paid to employees of the Borrower and its Subsidiaries in the ordinary course of business and consistent with past practices, (ii) dividends in respect of, or repurchases of, the Borrower's or any Subsidiaries' common stock, provided that, (x) no Default or Event of Default exists or would occur by reason of the taking of such action, (y) with respect to any stock repurchase by the Borrower or any Subsidiary, the Borrower shall have furnished to the Lender a pro forma financial statement and covenant compliance certificate evidencing compliance with all financial covenants after giving effect to such repurchase, and (z) the Borrower shall maintain its existing dividend policy as in effect on the Closing Date, and (iii) any Subsidiary of the Borrower may pay dividends to the Borrower. 5.10 ERISA Compliance. None of the Borrower or its Affiliates, any Plan and any fiduciary thereof shall (i) engage in any "prohibited transaction" or incur, whether or not waived, any "accumulated funding deficiency" (both as defined in ERISA and the Code), (ii) fail to satisfy any additional funding requirements set forth in Section 412 of the Code and Section 302 of ERISA, or (iii) terminate or withdraw from participation in any Plan in a manner which could result in the imposition of a lien on any property of, or impose a substantial withdrawal liability on, the Borrower or any of its Affiliates or Subsidiaries. The Borrower and its Affiliates and each Plan shall comply in all material respects with ERISA. -22- 5.11 Inspection by the Lender; Books and Records. The Borrower will, and will cause each of its Subsidiaries to, permit the Lender or its designees, at any reasonable time and from time to time, to visit and inspect the properties of the Borrower and its Subsidiaries, to examine and make copies of the books and records of the Borrower and to discuss the affairs, finances and accounts of the Borrower and its Subsidiaries with appropriate officers. The Borrower and its Subsidiaries will keep adequate books and records of account in which true and complete entries will be made reflecting all of its business and financial transactions, and such entries will be made in accordance with GAAP and applicable law. 5.12 Use of Proceeds. The Borrower may use the proceeds of the Loans solely for (i) its working capital needs, (ii) treasury stock purchases to the extent permitted by Section 5.9 hereof, (iii) the issuance of Letters of Credit and B/A's, and (iv) acquisitions to the extent permitted by Section 5.7 or otherwise approved by the Lender. No portion of any Loans shall be used for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations G, U or X of the Board of Governors of the Federal Reserve System. 5.13 Transactions with Affiliates. The Borrower will not, directly or indirectly, and will not permit its Subsidiaries to, enter into any transaction with any Affiliate except in the ordinary course of business on terms that are no less favorable to the Borrower or such Subsidiary than those which might be obtained at the time in a comparable arm's-length transaction with any person who is not an Affiliate. 5.14 No Amendments to Certain Documents. The Borrower will not, and will not permit its Subsidiaries to, at any time cause or permit any of the Redemption Agreement, the charter or other incorporation documents or by-laws of the Borrower or such Subsidiary to be modified, amended or supplemented in any respect whatever, without the express prior written agreement, consent or approval of the Lender, except for immaterial changes which could not adversely affect the Lender or its rights hereunder. 5.15 Subsidiaries. The Borrower shall give the Lender written notice of the formation after the date hereof of any Subsidiary, and agrees that it shall cause any such Subsidiary to engage in the business of conducting branches or divisions of the business now conducted by the Borrower or holding any of the property of the Borrower. The Borrower will, at the direction of the Lender, cause each such Subsidiary which is organized under the laws of the United States to become a party to this Agreement and to such of the other Loan Documents as the Lender shall require. 5.16 Leverage. The Borrower will not permit the ratio of (i) Total Liabilities to (ii) Tangible Net Worth as at any fiscal quarter-end, commencing with the fiscal quarter ended March 31, 2002, to be more than 1.25 to 1.0. 5.17 Profitability. The Borrower will not permit (a) its Net Income for the fiscal quarter ended December 31, 2001 to be less than $500,000; or (b) its Net Income during -23- any four consecutive fiscal quarters (as determined at the end of each fiscal quarter for the four quarters then ending), commencing with the fiscal quarter ended March 31, 2002 to be less than $1,500,000. 5.18 Current Ratio. The Borrower will not permit the ratio of (i) its Current Assets, to (ii) its Current Liabilities as at any fiscal quarter-end, commencing with the fiscal quarter ended March 31, 2002, to be less than 1.50 to 1.0. SECTION 6. EVENTS OF DEFAULT; ACCELERATION. 6.1 The following shall constitute events of default (individually, an "Event of Default"): (i) default in the payment, when due or payable, of any Obligation for the payment of money; or (ii) default in the performance or observance of or compliance with (i) any of the provisions of Sections 2 (other than the payment of principal and interest), 5.1, 5.5 through 5.9, inclusive, 5.11 through 5.18, inclusive, of this Agreement, or (ii) any term or condition of the Note (other than the payment of principal and interest on the Note), or (iii) any other covenant or condition of this Agreement, any other Loan Document or any other Obligation not listed previously in this Section, and such default continues for more than 15 days; or (iii) any representation or warranty at any time made by or on behalf of the Borrower and its Subsidiaries in any Loan Document or otherwise shall prove to have been false in any material respect upon the date when made or deemed to have been made; or (iv) the occurrence of any default under any agreement, note or other instrument evidencing or relating to any obligation of the Borrower or any of its Subsidiaries to any other person or entity for the payment of $200,000 or more; or (v) issuance of an injunction which might have a material adverse effect on the condition (financial or otherwise), properties, business or results of operations of the Borrower or the Borrower and its Subsidiaries taken as a whole, or attachment which in the aggregate exceeds $200,000 in value, against the Borrower or any of its Subsidiaries, any property of the Borrower or any of its Subsidiaries or any endorser, guarantor or surety for any Obligation which is not dismissed or bonded, to the satisfaction of the Lender, within 30 days after its issuance; (vi) calling of a meeting of creditors, formation or appointment of a committee of creditors or liquidating agents or offering of a composition or extension to creditors by, for or with the consent or acquiescence of any of the Borrower or any of its Subsidiaries or any endorser, guarantor or surety for any Obligation; -24- (vii) Insolvency of the Borrower or any of its Subsidiaries or any endorser, guarantor or surety for any Obligation; (viii) any money judgment or judgments aggregating in excess of $200,000 are entered against the Borrower or any of its Subsidiaries or any endorser, guarantor or surety for any Obligation (except to the extent fully covered by insurance and the insurance carrier has not reserved the right to disallow such claim), and shall continue unsatisfied and in effect for a period of 30 days, provided that the total cost of any bond applied in order to procure a stay of execution in any such litigation shall not exceed $25,000; or (ix) any Loan Document, or any covenant, agreement or obligation contained therein or evidenced thereby, shall cease in any material respect to be legal, valid, binding or enforceable in accordance with its terms, or shall be cancelled, terminated, revoked or rescinded; or (x) any action at law, suit in equity or other legal proceeding to cancel, revoke or rescind any Loan Document shall be commenced by or on behalf of the Borrower, any of its Subsidiaries or any other person bound thereby, or by any court or any other governmental or regulatory authority or agency of competent jurisdiction; or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or shall issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents, or any one or more of the obligations of any Borrower or any other person under any one or more of the Loan Documents, are illegal, invalid or unenforceable in any material respect in accordance with the terms thereof; or (xi) any default or event of default shall occur and be continuing under the Redemption Agreement. 6.2 If an Event of Default shall occur and be continuing, the Lender may, at its option, (i) declare any or all of the Obligations of the Borrower to the Lender to be immediately due and payable without further notice or demand, whereupon the same shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower, (ii) limit, suspend or terminate the Borrowers' right to borrow hereunder, and (iii) exercise any rights and remedies under this Agreement and law; provided that in the event of any Event of Default specified in Sections 6.1(vi) or 6.1(vii), all Obligations shall become immediately due and payable automatically and without any requirement of notice from the Lender or action by the Lender. SECTION 7. SET OFF; PARTICIPATIONS. -25- Any deposits or other sums at any time credited by or due from the Lender to the Borrower may, without notice (any such notice being expressly waived hereby) and to the fullest extent permitted by law and without regard to any source of payment whatsoever, at any time during the continuance of an Event of Default, be applied to or set off against Obligations on which the Borrower is primarily liable and may at or after the maturity thereof be applied to or set off against Obligations on which the Borrower is secondarily liable. The Borrower invites any financing institution which may consider investing or participating in the Loans (each such financing institution being referred to in this Section as a "Participant") to rely upon all of the representations, warranties, covenants and other provisions of this Agreement, the Note and the other agreements, instruments and documents referred to herein or contemplated hereby in making such investment or participation and agrees that its becoming a Participant in the Loans shall constitute an acceptance of such offer and shall make the Participant a creditor of the Borrower. Any Participant may exercise the rights of set-off given to the Lender in this Section 7 with respect to any outstanding indebtedness of the Borrower to such Participant hereunder. SECTION 8. GENERAL. ------- 8.1 Written Notices. Any notices, expressly required by this Agreement to be in writing, to any party hereto shall be deemed to have been given when delivered by hand, when sent by telecopier, when delivered to any overnight delivery service freight pre-paid or 3 days after deposit in the mails, postage prepaid, and addressed to such party at its address given at the beginning of this Agreement or at any other address specified in writing. Written notices to the Borrower shall be sent to the attention of Fred E. Faulkner, Jr., President, with a copy to Donald S. Burnham, Esq., Peabody & Arnold, LLP, 50 Rowes Wharf, Boston, Massachusetts 02110, and written notices to the Lender shall be sent to the attention of David Keller, Vice President, with a copy to Philip A. Herman, Esq., Goulston & Storrs, P.C., 400 Atlantic Avenue, Boston, Massachusetts 02110-3333. Any notice, unless otherwise specified, may be given orally or in writing. 8.2 No Waivers. No failure or delay by the Lender in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies otherwise provided by law. 8.3 Further Assurances. The Borrower shall do, make, execute and deliver all such additional and further acts, things, assurances, and instruments as the Lender may reasonably require more completely to vest in and assure to the Lender its rights hereunder and under the other Loan Documents and to carry into effect the provisions and intent of this Agreement and the other Loan Documents. -26- 8.4 Governing Law. This Agreement and the other Loan Documents shall be deemed to be contracts made under seal and shall be construed in accordance with and governed by the laws of The Commonwealth of Massachusetts (without regard to conflicts of laws rules). Any legal action or proceeding arising out of or relating to this Agreement or any Obligation may be instituted in the courts of The Commonwealth of Massachusetts or of the United States of America for the District of Massachusetts, and the Borrower hereby irrevocably submits to the jurisdiction of each such court in any such action or proceeding; provided, however, that the foregoing shall not limit the Lender's rights to bring any legal action or proceeding in any other appropriate jurisdiction. 8.5 Expenses, Taxes and Indemnification. (a) The Borrower will pay and indemnify and hold the Lender harmless against all taxes (other than taxes on the income of the Lender), charges and expenses of every kind or description, including without limitation attorneys' fees and expenses and the costs and expenses of field audits and commercial finance exams, reasonably incurred or expended by the Lender in connection with or in any way related to the Lender's relationship with the Borrower, whether hereunder or otherwise, except that the Lender shall be responsible for its attorneys' fees incurred or expended in connection with the preparation, execution and delivery of this Agreement. (b) The Borrower shall absolutely and unconditionally indemnify and hold the Lender harmless against any and all claims, demands, suits, actions, causes of action, damages, losses, settlement payments, obligations, costs, expenses and all other liabilities whatsoever which shall at any time or times be incurred or sustained by the Lender or by any of its shareholders, directors, officers, employees, subsidiaries, affiliates or agents (except any of the foregoing incurred or sustained as a result of the gross negligence or willful misconduct of the Lender) on account of, or in relation to, or in any way in connection with, associated with or ancillary to this Agreement, the other Loan Documents and the other documents executed or delivered in connection herewith, and the arrangements or transactions contemplated therein, whether or not all or any of the transactions contemplated by, associated with or ancillary to this Agreement or any of such documents are ultimately consummated. 8.6 Amendments, Waivers, Etc. This Agreement, the Note and the other Loan Documents and any provision hereof or thereof may be waived, discharged or terminated only by an instrument in writing signed by the Lender and may be amended only by an instrument in writing signed by the Borrower and the Lender. 8.7 Binding Effect of Agreement. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns. The Lender may sell, assign or otherwise transfer all or any portion of its right, title and interest in, and its obligations under, this Agreement, the Loans made and to be made hereunder, or grant participations in its right, title and interest herein and therein. The Borrower may not assign or transfer its rights or obligations hereunder. -27- 8.8 Computation of Interest and Fees, Etc. Interest, fees and charges shall be computed daily on the basis of a year of 360 days and paid for the actual number of days for which due. If the due date for any payment of principal is extended by operation of law, interest shall be payable for such extended time. If any payment required by this Agreement becomes due on a day on which banks in Boston, Massachusetts are required or permitted by law or an appropriate authority to remain closed, such payment may be made on the next succeeding day on which such banks are open, and such extension shall be included in computing interest in connection with such payment. All payments required of the Borrower hereunder or under the Note shall be made in lawful money of the United States of America in federal or other funds immediately available to the recipient thereof at the prescribed place of payment. 8.9 Entire Agreement; Miscellaneous. This Agreement, including the exhibits hereto, sets forth the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein, and supersedes all prior agreements, promises, covenants, arrangements, communications, representations, warranties, whether oral or written, by any officer, employee or representative of any party hereto. The captions for the sections of this Agreement are for ease of reference only and are not an integral part of this Agreement. This Agreement may be signed in any number of counterparts with the same effect as if the signatures hereto and thereto were upon the same instrument. The provisions of this Agreement are severable, and if any of these provisions shall be held by any court of competent jurisdiction to be unenforceable, such holdings shall not affect or impair any other provision hereof. 8.10 WAIVER OF JURY TRIAL. THE BORROWER HEREBY IRREVOCABLY WAIVES TRIAL BY JURY IN ANY JURISDICTION AND IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OBLIGATIONS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO OR THERETO, OR ANY CLAIM OR DISPUTE HOWSOEVER ARISING, BETWEEN THE BORROWER AND THE LENDER. THIS WAIVER SHALL BE EFFECTIVE FOR EACH DOCUMENT EXECUTED BY THE BORROWER OR THE LENDER AND DELIVERED TO THE LENDER OR THE BORROWER, AS THE CASE MAY BE, WHETHER OR NOT SUCH DOCUMENT SHALL CONTAIN A WAIVER OF JURY TRIAL. THE BORROWER FURTHER ACKNOWLEDGES THAT ALL DOCUMENTS DELIVERED BY THE LENDER OR THE BORROWER ARE SUBJECT TO THIS WAIVER OF JURY TRIAL AS TO ANY ACTION THAT MAY BE BROUGHT AS TO ANY OF SUCH DOCUMENTS, AND -28- CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE. WITNESS the execution hereof under seal on the day and year first above written. BOSTON ACOUSTICS, INC. By: /s/ Debra A. Ricker-Rosato --------------------------------- Name: Debra A. Ricker-Rosato Title: Vice President-Finance CITIZENS BANK OF MASSACHUSETTS By: /s/ Michael G. McAuliffe --------------------------------- Name: Michael G. McAuliffe Title: Vice President -29- EX-10.10 4 dex1010.txt AMENDED AND RESTATED REVOLVING CREDIT NOTE Exhibit 10.10 AMENDED AND RESTATED REVOLVING CREDIT NOTE --------------------- $25,000,000.00 Date: May 1, 2002 FOR VALUE RECEIVED, the undersigned (hereinafter, together with its successors in title and assigns, called the "Borrower"), by this promissory note (hereinafter, together with the Schedule annexed hereto, called "this Note"), absolutely and unconditionally, promises to pay to the order of Citizens Bank of Massachusetts (hereinafter, together with its successors in title and assigns, called the "Bank"), the principal sum of Twenty-Five Million and 00/100 Dollars ($25,000,000.00), or so much thereof as shall have been advanced by the Bank to the Borrower by way of Revolving Loans or other extensions of credit under the Loan Agreement (as hereinafter defined) and shall remain outstanding, such payment to be made as hereinafter provided, and to pay interest on the principal sum outstanding hereunder from time to time from the date hereof until the said principal sum or the unpaid portion thereof shall have become due and payable as hereinafter provided. Capitalized terms used herein without definition shall have the meaning set forth in the Loan Agreement. The unpaid principal (not at the time overdue) under this Note shall bear interest at the rate or rates from time to time in effect under the Loan Agreement. Accrued interest on the unpaid principal under this Note shall be payable on the dates specified in the Loan Agreement. On July 1, 2005, the date of the final maturity of this Note, there shall become absolutely due and payable by the Borrower hereunder, and the Borrower hereby promises to pay to the Bank, the balance (if any) of the principal hereof then remaining unpaid, all of the unpaid interest accrued hereon and all (if any) other amounts payable on or in respect of this Note or the indebtedness evidenced hereby. Each overdue amount (whether of principal, interest or otherwise) payable on or in respect of this Note or the indebtedness evidenced hereby shall (to the extent permitted by applicable law) bear interest at the rates and on the terms provided by the Loan Agreement. The unpaid interest accrued on each overdue amount in accordance with the foregoing terms of this paragraph shall become and be absolutely due and payable by the Borrower to the Bank on demand by the Bank. Interest on each overdue amount will continue to accrue as provided by the foregoing terms of this paragraph, and will (to the extent permitted by applicable law) be compounded daily until the obligations of the Borrower in respect of the payment of such overdue amount shall be discharged (whether before or after judgment). 1 Each payment of principal, interest or other sum payable on or in respect of this Note or the indebtedness evidenced hereby shall be made by the Borrower directly to the Bank in dollars, at the address of the Bank set forth in the Loan Agreement, on the due date of such payment, and in immediately available and freely transferable funds. All payments on or in respect of this Note or the indebtedness evidenced hereby shall be made without set-off or counterclaim and free and clear of and without any deductions, withholdings, restrictions or conditions of any nature. This Note is in substitution of the Revolving Credit Note in the principal amount of $25,000,000 dated June 13, 1997 made by the Borrower in favor of the Bank and is made and delivered by the Borrower to the Bank pursuant to the Amended and Restated Loan Agreement, dated as of May 1, 2002, by and between the Borrower and the Bank (hereinafter, as originally executed, and as now or hereafter varied or supplemented or amended and restated, called the "Loan Agreement"). This Note evidences the obligation of the Borrower (a) to repay the principal amount of the Revolving Loans made by the Bank to the Borrower pursuant to the Loan Agreement; (b) to pay interest, as herein and therein provided, on the principal amount hereof remaining unpaid from time to time; and (c) to pay other amounts which may become due and payable hereunder or thereunder as herein and therein provided. The Borrower will have the right to prepay the unpaid principal of this Note in full or in part upon the terms contained in the Loan Agreement. The Borrower will have an obligation to prepay principal of this Note from time to time if and to the extent required under, and upon the terms contained in, the Loan Agreement. Any partial payment of the indebtedness evidenced by this Note shall be applied in accordance with the terms of the Loan Agreement. Pursuant to and upon the terms contained in Section 6 of the Loan Agreement, the entire unpaid principal of this Note, all of the interest accrued on the unpaid principal of this Note and all (if any) other amounts payable on or in respect of this Note or the indebtedness evidenced hereby may be declared to be immediately due and payable, whereupon the entire unpaid principal of this Note, all of the interest accrued on the unpaid principal of this Note and all (if any) other amounts payable on or in respect of this Note or the indebtedness evidenced hereby shall (if not already due and payable) forthwith become and be due and payable to the Bank without presentment, demand, protest or any other formalities of any kind, all of which are hereby expressly and irrevocably waived by the Borrower, excepting only for notice expressly provided for in the Loan Agreement. All computations of interest payable as provided in this Note shall be computed by the Bank daily on the basis of a 360 day year and paid for the actual number of days for which due. The interest rate in effect from time to time shall be determined in accordance with the terms of the Loan Agreement. 2 Should all or any part of the indebtedness represented by this Note be collected by action at law, or in bankruptcy, insolvency, receivership or other court proceedings, or should this Note be placed in the hands of attorneys for collection after default, the Borrower hereby promises to pay to the holder of this Note, upon demand by the holder hereof at any time, in addition to principal, interest and all (if any) other amounts payable on or in respect of this Note or the indebtedness evidenced hereby, all court costs and attorneys' fees and all other collection charges and expenses reasonably incurred or sustained by the holder of this Note. The Borrower hereby irrevocably waives notice of acceptance, presentment, notice of nonpayment, protest, notice of protest, suit and all other conditions precedent in connection with the delivery, acceptance, collection and/or enforcement of this Note or any collateral or security therefor, except for notices expressly provided for in the Loan Agreement. The Borrower hereby absolutely and irrevocably consents and submits to the jurisdiction of the courts of the Commonwealth of Massachusetts and of any federal court located in Suffolk County in the said Commonwealth in connection with any actions or proceedings brought against the Borrower by the holder hereof arising out of or relating to this Note. This Note is intended to take effect as a sealed instrument. This Note and the obligations of the Borrower hereunder shall be governed by and interpreted and determined in accordance with the laws of the Commonwealth of Massachusetts without regard to its law relating to choice of law. IN WITNESS WHEREOF, this AMENDED AND RESTATED REVOLVING CREDIT NOTE has been duly executed by the undersigned on the day and in the year first above written in Boston, Massachusetts. WITNESS: BOSTON ACOUSTICS, INC. By: /s/ Debra A. Ricker-Rosato - ------------------------------- ------------------------------ Name: Debra A. Ricker-Rosato Title: Vice President-Finance 3 EX-23.1 5 dex231.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated May 13, 2002 included in this annual report on Form 10-K, into the Company's previously filed Registration Statement No. 333-75559, No. 33-18793, No. 333-62581 and No. 333-84714. /s/ Arthur Andersen LLP Boston, Massachusetts May 31, 2002 EX-99.2 6 dex992.txt LETTER TO SECURITIES AND EXCHANGE COMMISSION Exhibit 99.2 Boston Acoustics, Inc. 300 Jubilee Drive Peabody, Massachusetts 01960 June 6, 2002 Securities and Exchange Commission Washington, DC 20549 Ladies and Gentlemen: Boston Acoustics, Inc. (the "Issuer") is today filing with the Commission the Issuer's Annual Report on Form 10-K for the fiscal year ended March 30, 2002 (the "Filing"). The Filing includes financial statements with respect to which Arthur Andersen LLP ("Andersen") has issued an accountant's report. Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, the Issuer hereby advises the Commission that Andersen has represented to the Issuer that the audit is subject to Andersen's quality control system for the U.S. accounting and audit practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on audits, availability of national office consultation and availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the audit. Very truly yours, Boston Acoustics, Inc. By: /s/ Debra A. Ricker-Rosato -------------------------- Debra A. Ricker-Rosato Vice President and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----