-----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, Uvr8xi7PBj0Bv4YpnpSR2VXp9ynnTAj6kaMOcXUnLb0oupJHER6QmvPRnUpQdxn6 4fH8bzTzKU5SaZqohVkquA== 0000912057-97-031693.txt : 19970926 0000912057-97-031693.hdr.sgml : 19970926 ACCESSION NUMBER: 0000912057-97-031693 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19970925 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMBRIDGE SOUNDWORKS INC CENTRAL INDEX KEY: 0000919234 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 042998824 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23456 FILM NUMBER: 97685362 BUSINESS ADDRESS: STREET 1: 311 NEEDHAM ST CITY: NEWTON STATE: MA ZIP: 02164 BUSINESS PHONE: 6173325936 MAIL ADDRESS: STREET 1: 311 NEEDHAM ST CITY: NEWTON STATE: MA ZIP: 02164 10-K 1 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-K (Mark One) X Annual Report Pursuant to Section 13 or 15(d) of --- the Securities Exchange Act of 1934 (Fee Required) for the fiscal year ended June 29, 1997 or ___ Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 (No Fee Required) for the transition period from to . Commission File No. 0-23456 CAMBRIDGE SOUNDWORKS, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-2998824 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 311 Needham Street Newton, Massachusetts 02164 (Address of Principal Offices) (Zip Code)
(617) 332-5936 (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: Common Stock (without 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 the Registrant's knowledge, in definitive proxy or information statements incorporated in Part III of this Form 10-K or any amendments to this Form 10-K. _____________ The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant as of September 12, 1997, was $9,578,897. As of September 12, 1997, there were issued and outstanding 3,803,027 shares of Registrant's Common Stock, without par value. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended June 29, 1997 {Items 5, 6, 7, and 14 (a) (1)} (2) Portions of the definitive Proxy Statement for Registrant's Annual Meeting of Stockholders to be held on November 4, 1997(Items 1, 10, 11, 12, and 13) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CAMBRIDGE SOUNDWORKS, INC. TABLE OF CONTENTS SECURITIES AND EXCHANGE COMMISSION ITEM NUMBERS AND DESCRIPTION PART I PAGE - ---------------------------------- ----------- ITEM 1. Business...............................................2 ITEM 2. Properties............................................11 ITEM 3. Legal Proceedings.....................................11 ITEM 4. Submission of Matters to a Vote of Security Holders...11 PART II ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters.......................12 ITEM 6. Selected Financial Data...............................12 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................12 ITEM 8. Financial Statements and Supplementary Data...........12 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................12 PART III ITEM 10. Directors and Executive Officers of the Registrant....13 ITEM 11. Executive Compensation................................15 ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................................15 ITEM 13. Certain Relationships and Related Transactions........15 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................................16 Inasmuch as the calculation of shares of Registrant's voting stock held by non-affiliates requires a calculation of the number of shares held by affiliates, such figure, as shown on the cover page hereof, represents the Registrant's best good faith estimate for purposes of this Annual Report on Form 10-K, and the Registrant disclaims that such figure is binding for any other purpose. The aggregate market value of Common Stock indicated is based upon the closing sale price of the Common Stock as reported on the Nasdaq National Market System on September 12, 1997. All outstanding shares beneficially owned by executive officers and directors of the Registrant or by any shareholder beneficially owning more than 5% of Registrant's Common Stock, as disclosed herein, were considered solely for purposes of this disclosure to be held by affiliates. 1 PART I ITEM 1. BUSINESS OVERVIEW Cambridge SoundWorks, Inc. (the "Company" or "Cambridge SoundWorks") designs and manufactures audio products for home stereo, home theater, car stereo and multimedia computer audio under the brand name Cambridge SoundWorks. The Company sells its Cambridge SoundWorks products and selected audio and video components manufactured by other companies directly to consumers through its catalog and at its Company-owned retail stores. The sale of these products from other companies enables the Company to offer all of the components necessary for complete stereo and home theater systems. The Company also sells its Cambridge SoundWorks speakers on a wholesale basis. The Company was founded in 1988 to market the Company's proprietary Ensemble-Registered Trademark- speaker system. The Ensemble was sold directly to consumers rather than through audio dealers. As the Company grew, a factory outlet was established at the production facility and opened for retail sales in 1990. In 1990, the Company began offering, in addition to the speaker systems designed by the Company, a variety of high quality home audio products manufactured by other companies, including receivers, VCR's, and cassette, laser disc and compact disc players. In 1991, the Company developed a catalog to supplement its direct advertising in national and local media. In 1994, the Company began its retail expansion and opened 13 new Company-owned stores in New England and Northern California. From January 1995 to June 1996, the Company opened nine additional Company-owned stores. In June 1995, the Company began to sell its products in more than 200 Best Buy Co., Inc. ("Best Buy") stores under an exclusive arrangement. In February, 1997, Creative Technologies Ltd., ("Creative Technologies") the manufacturer of Sound Blaster-Registered Trademark- sound cards for use in PCs, acquired approximately 20% of the Company, and agreed to become the exclusive worldwide distributor of its multimedia speaker products. INDUSTRY TRENDS In recent years, the market for speakers has been affected by increased consumer demand for "surround sound" home theater entertainment systems that use additional audio channels and speakers to reproduce the sound experienced in movie theaters. Home theater entertainment systems require a number of high quality passive and electronically integrated or "active" (amplified) speakers, and thus represent a growth trend in the industry. Another significant trend in the speaker market is the development of multimedia PC's and the creation of a large market for add-on speakers which reproduce high fidelity sound for PC's with interactive CD-ROM's and sound cards. The Company believes that the trend in sales of PC's equipped or upgraded with CD-ROM drives and sound cards will create a large potential customer base for high quality add-on speakers. The introduction of Digital Video Discs (DVD) with enhanced surround sound early in 1997 is having a large impact on both the home entertainment and the computer industries. In both industries, DVD is putting more focus on movies and video, which, in turn, increases demand for home theater sound systems and multimedia speaker systems. Cambridge SoundWorks offers DVD players for sale to its home theatre customers. COMPANY STRATEGY The Company's strategy is to build the Cambridge SoundWorks brand name through a combination of product quality, direct distribution to consumers, new channels of distribution and service. Key elements of this strategy include: 2 - - Brand Building. The Company believes that extensive advertising and promotions of the Company and its products, have helped build the Cambridge SoundWorks brand name and the Company's reputation for selling high quality speakers at competitive prices. - - Consumer-Direct Sales. By selling directly to the consumer through its catalog and Company-owned stores, the Company believes it is able to offer value and service to its customers. The Company's factory-direct selling eliminates the retail mark-up of the conventional dealer network and allows the Company to offer high quality products at competitive prices. At the same time, the Company retains control over all aspects of the sales effort, including presentation of merchandise, demonstration of products and customer service. The Company's direct relationship with the consumer results in feedback which enables it to monitor advertising effectiveness and respond to changes in consumer demands for new or improved audio products. - - New Channels of Distribution. The Company believes that it can enhance its brand image, while maintaining its commitment to bring high quality products to the consumer at the lowest possible cost, by expanding into certain new channels of distribution, including the following: In February, 1995, the Company announced the signing of an agreement with Best Buy, Co., Inc. ("Best Buy"). Under the terms of the agreement, Best Buy will be the exclusive reseller of certain Cambridge SoundWorks products for three years. Best Buy is one of the nation's fastest growing consumer electronics retailers. It offers a wide selection of name brand consumer electronics, personal computers and home office products, entertainment software, major appliances and photographic equipment throughout the United States. Cambridge SoundWorks products are currently displayed at more than 90 Best Buy stores, with Factory Direct Speaker Walls-Trademark- which are specially designed, automated displays for all Cambridge SoundWorks key products, allowing easy consumer self-demonstration. In February, 1997, the Company announced that Creative Technologies had acquired approximately 20% of the company's stock and entered into an exclusive agreement to market Cambridge SoundWorks' multimedia speaker products on a worldwide basis. In addition to Cambridge SoundWorks PCWorks, SoundWorks, and MicroWorks speaker systems, the Company will also manufacture a series of more affordable desktop multimedia speakers to be sold by Creative Technologies under the Creative label. The world leader in multimedia sound products for computers, Creative Technologies manufactures and distributes PC sound cards (under the Sound Blaster label), CD-ROM drives, DVD-ROM drives, video cards, video teleconferencing equipment and complete multimedia PC upgrade kits. Creative Technologies has sold over 55 million sound cards, has over 50,000 retail store outlets selling its products, and reported $1.2 billion in sales for its fiscal year ended June 30, 1997. IBM is now bundling a Cambridge SoundWorks powered subwoofer with its Aptiva "S" series of multimedia computers. Cambridge SoundWorks' amplified speakers system called SoundWorks- Registered Trademark- was marketed nationally as a premium in the 1996 issue of Philip Morris' "Marlboro Gear" catalog. 3 - - Emphasis on Customer Service. The Company strives to provide a high level of personalized service and product information to its catalog and retail customers. The Company's current full-color catalog contains information on how to select and test speakers as well as a detailed introduction to home theater and surround sound technology with little technical jargon. The Company's audio experts are trained to avoid high-pressure sales tactics and they take a consultative approach to selling. The audio experts help consumers make an appropriate selection from the Company's product offerings, provide follow-up technical assistance, keep abreast of consumer preferences and monitor customer comments on the quality and performance of the Company's products. - - Growth through Geographic Expansion. Based on the success of its original retail store in Newton, Massachusetts, the Company has opened 27 stores to date, including the Company's first store in a major urban shopping mall, the CambridgeSide Galleria, in Cambridge, Massachusetts, and the Company's first store in a factory outlet center, the Worcester Common Fashion Outlets Mall in Worcester, Massachusetts. The Company currently has a total of 18 stores in New England and 9 in Northern California. The Company believes that by opening multiple stores in concentrated geographic areas it may be able to achieve certain economies of scale particularly with regard to advertising expenses. The Company is currently evaluating other potential retail sites and plans to open more Company-owned stores in fiscal 1997. Management estimates that the capital cost to open a new retail store currently averages approximately $180,000 (exclusive of start-up inventory and grand-opening advertising). - - Growth Through Product Sub-Category Expansion. The Company also has plans to grow by adding new products and product sub-categories to its line-up of branded goods. To date, the Company's home speakers line has focused on the "subwoofer/ satellite" category, a strong niche of the overall loudspeaker market. In the fall of 1996, the Company plans to introduce its first series of floor-standing "Tower" loudspeakers that use much larger cabinets and are more costly ($599-$1,499 compared to $249-$599). This category represents a significant portion of the overall market for high quality speakers. In addition to the Tower series of speakers, Cambridge SoundWorks has also introduced a new series of high-performance home theatre speaker systems, the MovieWorks line. Priced at $1,299.99 and $1,799.99, MovieWorks and MovieWorks 5.1 offer no-compromise performance from speaker packages designed to gracefully blend into most decorating schemes. The Company has also expanded its multimedia speaker line by adding a high output/high performance model (MicroWorks, $349.99) and a compact, high-value, entry-level model (PCWorks, $99.99). Expanding its multimedia speaker line by adding both more expensive and more affordable models opens up new segments of that market to the Company. Early in 1997, the Company also introduced its first automotive products, the CSW line of high-performance car speakers. - - Growth Through New Market Opportunities. The Company continues to develop speakers for the growing home theater entertainment market. The proliferation of VCR's and increased viewing of home movies is driving consumer demand for surround sound home theater entertainment systems. The Company has developed add-on speakers for the emerging PC/multimedia market. The Company believes its position as a vertically integrated factory- direct retailer gives it important competitive advantages by allowing it to provide high quality products at competitive prices and to react early to new consumer preferences and trends. 4 COMPANY PRODUCTS The Company makes speakers for conventional stereo systems, home theater entertainment systems, for multimedia computing and for car stereo systems. A typical home theater speaker system configuration includes: the original (or upgraded) stereo speakers (placed in front of the listener to the left and right of the TV screen); a center channel speaker (placed directly in front of the listener near the TV to keep dialogue firmly centered); and a pair of surround speakers (placed behind the listener to complete the surround sound effect). In order to convey the low bass energy of special effects, many home theaters are equipped with supplemental subwoofers. The Company offers a number of speakers for all of the above applications as well as many specialty speaker systems. The Company manufactures and sells the following speakers: ENSEMBLE SUBWOOFER-SATELLITE SPEAKER SYSTEMS. The heart of the Cambridge SoundWorks product lineup consists of the Ensemble, Ensemble II, Ensemble III, Ensemble IV, Ensemble III Home Theatre and Ensemble IV Home Theater speaker systems. Subwoofer-satellite speaker systems allow listeners to place the subwoofer in out-of-the-way places without adversely affecting performance. The small satellite speakers convey high performance midrange and treble sound with ease of placement. The original Ensemble system uses two separate subwoofers (which convey the bass notes) to maximize room placement flexibility. Ensemble II uses a single subwoofer cabinet that contains two separate bass drivers. Ensemble III is a more compact, more affordable three-piece system. Ensemble IV is the most compact, most affordable 3-piece system. Ensemble IV Home Theater adds three satellites to the Ensemble IV for the most affordable, high-performance surround speaker system. ENSEMBLE III HOME THEATRE. Ensemble III Home Theatre adds three satellites to the Ensemble III to create a compact, affordable surround speaker system. ENSEMBLE IV HOME THEATRE. Ensemble IV Home Theatre adds three satellites to the Ensemble IV for the most affordable surround speaker system. TOWER-Trademark- SERIES SPEAKERS. The Company has introduced three new floor-standing tower speakers. Tower is a three-way, dual-woofer, bipolar design with real hardwood veneer cabinets that appeals to "high end" audiophile customers. Tower II is very similar to Tower, but does not use a bipolar design (which involves rear-facing speakers that reflect off the wall), and uses wood-simulating vinyl finishes. Tower III is an affordable audiophile speaker system using a two-way, single woofer design. CENTER CHANNEL SPEAKERS. Cambridge SoundWorks manufactures five speakers for use as center channel speakers in Dolby Pro Logic home theater systems which incorporate separate channels for movie sound reproduction (the center channel carries the dialogue). All five speakers are magnetically shielded so they can be placed near a TV or computer monitor. Center/Surround IV and Center/Surround III are small, affordable center speakers designed for use with the Company's Ensemble IV and Ensemble III speaker systems. Center Channel II is a center speaker with a wide/low profile designed to be used with the Company's Ensemble II speaker system. Center Channel Plus is a center speaker with a wide/low profile designed to be used with the Company's Ensemble speaker system. CenterStage-Trademark- is a high-output center speaker with a wide/low profile designed to be used with the Company's Tower series speaker systems. SURROUND SPEAKERS. Cambridge SoundWorks makes seven surround speakers. Center/Surround IV and Center/Surround III are small affordable surround speakers designed for use with the Company's Ensemble IV and Ensemble III speaker systems. Model Seventeen is a two-way, wide-range speaker suitable for use as surround speakers in the new Dolby Digital surround sound systems. The Surround-Registered Trademark- and The Surround II are "dipole radiator" surround speakers which reproduce sound from both sides of the speaker, causing the reflected sound to surround the listener with uniform sound. The Surround has a very high power handling capacity and is often selected for "high end" surround sound systems, including the 5 new Dolby Digital systems. The Surround II is smaller and more affordable than The Surround. The Surround 5.1 and The Surround II 5.1 are similar to The Surround and The Surround II, but add Cambridge SoundWorks' new MultiPole technology that allows them to switch between "dipole" and "bipole" operation, depending on exactly what kind of music or movie soundtrack is being played. These Multipole surround speakers are ideal for systems with the new Dolby Digital 5.1 surround sound format that is featured in virtually all DVD soundtracks. POWERED SUBWOOFERS. The Powered Subwoofer by Cambridge SoundWorks consists of a heavy-duty 12" woofer housed in an acoustic-suspension cabinet with a 140-watt amplifier and a built-in electronic crossover. The Powered Subwoofer II uses a 120 watt amplifier with an 8" woofer. The Powered Subwoofer III uses an even smaller amplifier with a 6 1/2" woofer. Cambridge SoundWorks' Slave Subwoofer, used in connection with the Powered Subwoofer, uses the same woofer driver and cabinet as the Powered Subwoofer, but does not include the amplifier or crossover. MODEL SIX SPEAKERS. Model Six is a two-way, acoustic-suspension speaker available in three cabinet finishes. MODEL SEVENTEEN SPEAKERS. Model Seventeen is a two-way, acoustic-suspension speaker available in four cabinet finishes. AMBIANCE-REGISTERED TRADEMARK- IN-WALL SPEAKERS. Ambiance In-Wall is a compact two-way speaker designed to deliver high performance music reproduction in rooms with limited space. WEATHER-RESISTANT SPEAKERS. Cambridge SoundWorks makes two versions of its all-weather speaker: The Outdoor and The Outdoor In-Wall. These speakers perform like the Ambiance speakers. MICROWORKS. MicroWorks is a high-output, high-performance amplified multimedia speaker system designed for use with computer systems or in home stereo systems. It consists of a pair of satellite speakers and a subwoofer that also encloses the system's amplifier. SOUNDWORKS. SoundWorks is a compact, amplified multimedia speaker system designed for use with computer systems or in home stereo systems. It consists of a pair of satellite speakers and a subwoofer that also encloses the system's amplifier. An optional carry bag and rechargeable battery are also available. PCWorks. PCWorks is an affordable, ultra-compact amplified multimedia speaker system designed for use with computer systems or in home stereo systems. It consists of a pair of satellite speakers and a subwoofer that also encloses the system's amplifier. An optional rechargeable battery is also available. TRANSPORTABLE SPEAKER SYSTEM. The Company's Model Twelve consists of two satellite speakers, a three-channel amplifier with built-in electronic crossover and a carrying case (the patented BassCase-Trademark-) that doubles as the system's subwoofer. The Model Twelve can work on 110, 220 and 12 volts, and is designed for use in computer-audio presentations to groups of people. 6 PRODUCTS OF OTHER MANUFACTURERS The Company sells a variety of audio and home theater products manufactured by Aiwa, Carver, Clarion, Harman Kardon, Marantz, Panasonic, Pioneer, RCA, JVC, Sony, Kicker, Clarion and others, including receivers, cassette decks, CD and laser disc players, DVD players, VCR's, TV's, wide screen televisions and DSS (digital satellite systems). These other products complement the Company's branded speakers and enable the Company to offer all of the components necessary for complete home stereo, car stereo and home theater systems. In addition, the Company sells a variety of audio accessories including audio and video tapes, cable, earphones, stands, mounting brackets, cabinets, remote control systems, and other related equipment. Many of the cable and connecting accessories are sold under the Cambridge SoundWorks brand. Consistent with its overall philosophy, the Company sells only products that it believes will enhance the performance of the Company's speakers. The Company sells a select range of competing products, those designed to be one of the best values in its product category. By pre-selecting what it believes to be the best audio components, the Company saves the consumer the time required to analyze all the different brands and models currently on the market and focuses the selling effort on the Company's speakers. Through high-volume buying arrangements with the manufacturers of these products, the Company believes it is able to offer these products at prices which are, in most instances, comparable to, or lower than, those offered by competitors. The Company currently matches advertised prices from authorized, inventory-stocking dealers for the components featured in its retail stores and in its catalog. CUSTOMER SATISFACTION The Company has a 30-day return policy intended to ensure customer satisfaction. The Company's non-amplified speakers are also covered by a seven-year limited parts and labor warranty covering repairs or replacements due to manufacturing defects in its speakers. Historically, warranty costs are not significant. The Company believes its return policy and warranty are consistent with industry practices and essential to customer satisfaction. The Company has a Cambridge SoundWorks charge card (with credit extended by a bank) which permits qualified customers to make credit purchases without finance charges for extended periods, provided payment is made when due. The Company believes that its charge card facilitates customer purchases of the Company's merchandise and reinforces customer loyalty to the Company's products and brand name. MARKETING AND CATALOG CIRCULATION The Company engages in extensive national advertising in audio magazines, general interest magazines and national and local newspapers targeted by the Company. In certain circumstances, the Company uses its advertising in national audio publications as a mini-catalog for the Company's key products, providing information concerning the Company's products, stressing the Company's reputation for value, the persona and experience of Henry Kloss, and the availability of experienced audio experts. The mini-catalog includes the Company's toll-free number and other information to assist the reader in obtaining the full catalog and ordering products by phone. The Company also advertises extensively on local radio and television stations in the Boston, Massachusetts, and San Francisco, California, markets where its retail stores are located. 7 The Company has developed and uses a customer database which is maintained by its sales personnel. The Company uses this database to monitor inquiry and sales productivity, demographic information and the overall effectiveness of its advertising. The Company believes that its database provides a cost effective means to target repeat customers. The database also provides supplemental information to focus advertising and marketing strategies and to develop new product ideas. The Company creates most of its advertising and marketing materials in-house in order to minimize costs, shorten lead times and control the presentation of the Company's brand image. The Company published three full-color catalogs in the period from June 30, 1996 to June 29, 1997, depicting the Company's speakers as well as selected other audio and video components that complement the Company's speakers. The catalogs contain extracts from trade reviews of the Company's products as well as information on speaker placement, surround sound and home theater technology, and other items of topical interest. The catalogs contain minimal technical jargon and are designed to increase sales through education of the consumer. The Company generates names for its mailing list primarily through advertising and customer referrals. The Company also tests, from time to time, other methods for distributing its catalogs to potential customers, such as including free catalogs with selected issues of specialty magazines and renting selected mailing lists. STORE OPERATIONS As of September, 1997, the Company has 18 stores in New England, and 9 stores in the San Francisco, California, Bay area. These stores contain approximately 2,000 to 4,000 square feet of retail space, including listening rooms. They are decorated with pictures of the Company's factory operations and stock only quantities of inventory sufficient for immediate customer needs. Two stores, one in Newton Upper Falls, Massachusetts and one on Van Ness Avenue in San Francisco, California, are large "SuperStores" capable of doing high-volume business. Three New England stores (Newton Upper Falls, Massachusetts, Harvard Square in Cambridge, Massachusetts and Worcester, Massachusetts) and two Bay Area stores (South San Francisco, California and Milpitas, California) are "Outlet Centers" that include large departments of open-box and refurbished goods at discounted prices. As of September, 1997, Cambridge SoundWorks had 27 retail stores as described in the summary below.
NEW ENGLAND AREA - ----------------------------------------------------------------------------------------------------------------- DATE OPENED LOCATION TYPE OF LOCATION - ---------------------------------------- ----------------------------- ---------------------------------------- 1990 West Newton, Massachusetts Original factory store September 1994 Newton Upper Falls, New factory "SuperStore" Massachusetts February 1994 Hanover, Massachusetts Outdoor shopping center March 1994 Danvers, Massachusetts Major suburban shopping mall Relocated to North Shore Mall Peabody, Massachusetts in August 1996 June 1994 Burlington, Massachusetts Major suburban shopping mall Relocated to Burlington Mall Burlington, Massachusetts in September 1996 October 1994 Nashua, New Hampshire Outdoor shopping center November 1994 CambridgeSide Galleria, Major urban shopping mall Cambridge, Massachusetts
8
NEW ENGLAND AREA - ----------------------------------------------------------------------------------------------------------------- DATE OPENED LOCATION TYPE OF LOCATION - ---------------------------------------- ----------------------------- ---------------------------------------- December 1994 Worcester Common Fashion Enclosed factory outlet center Outlets Mall, Worcester, Massachusetts March 1995 Cape Cod Mall, Hyannis, Major suburban shopping center Massachusetts June 1995 Framingham, Massachusetts Outdoor shopping center September 1995 Harvard Square, Cambridge, Urban "Main Street" location Massachusetts September 1995 Square One Mall, Saugus, Major suburban shopping center Massachusetts September 1995 The Mall at Rockingham Park Major suburban shopping center Salem, Massachusetts September 1995 The Mall of New Hampshire Major suburban shopping center Manchester, New Hampshire October 1995 The Emerald Square Mall N. Major suburban shopping center Attleboro, Massachusetts August 1996 The Maine Mall S. Portland, Major suburban shopping center Maine August 1996 Solomon Pond Mall Marlboro, Major suburban shopping center Massachusetts September 1996 West Farms Mall W. Hartford, Major suburban shopping center Connecticut
SAN FRANCISCO AREA - ---------------------------------------------------------------------------------------------------------------- DATE OPENED LOCATION TYPE OF LOCATION - ------------------------------------ ------------------------------------ ------------------------------------ September 1994 San Francisco, California Urban "Main Street" location October 1994 Berkeley, California Suburban "Main Street" location October 1994 Concord, California Relocated to Major suburban shopping center SunValley Mall Concord, California, September, 1996 December 1994 Palo Alto, California Suburban "Main Street" location June 1995 South San Francisco, California Factory outlet store November 1995 Stonestown Galleria San Francisco, Major suburban shopping center California September 1996 Stoneridge Mall Pleasanton, Major suburban shopping center California September 1996 The Great Mall Milpitas, California Enclosed Factory Outlet center August 1997 The Village at Corte Madera Corte Major suburban shopping center Madera, California
9 PRODUCT DEVELOPMENT To maintain its competitive position in the audio products industry, the Company introduces new products and features that address the demands and preferences of consumers. The Company's research and development effort is directed by the Company's President, Thomas J. DeVesto. The Company's research and development team consists of Henry E. Kloss, product development consultant, Tom Wethern, Engineering Manager, Fred Pinkerton, Product Manager, and Roy Allison, product development consultant. Mr. DeVesto has over 15 years experience working with Mr. Kloss developing a wide range of audio and video products from big-screen TVs to multimedia speaker systems. Mr. Kloss is one of the original founders of the Company, and has over 40 years of experience designing speakers, including best-selling models at Acoustic Research, KLH and Advent. Mr. Wethern was Chief Acoustician at a/d/s, a New England loudspeaker and amplifier manufacturer. Prior to a/d/s, Mr. Wethern was Transducer Engineer for Boston Acoustics. Mr. Pinkerton was formerly Product Manager at Boston Acoustics, Inc. and Advent. Roy Allison has over 40 years of speaker design experience, including highly acclaimed models at Acoustic Research, Allison Acoustics and RDL. At an early date, the Company recognized the importance of home theater (which involves integrating TV and video output with stereo or multi-channel audio sound) and has designed a variety of products for this application. A significant portion of the Company's fiscal 1997 speaker revenues were derived from speaker sales related to the home theater concept. The Company also recognized the emergence of opportunities in the PC/ multimedia markets and introduced SoundWorks in 1994, its first speaker designed for use with multimedia computer systems. The Company's product development cycle is driven by ongoing market analysis, by customer feedback and by its responsive manufacturing process. The Company is quick to identify audio trends and brings new products to market that are of high quality and offer good value to a wide range of consumers. The Company also uses the services of outside consultants in industrial design and the design of electronic circuitry as needed. In addition, the Company works closely with selected audio component suppliers and other technology developers to evaluate the latest developments in audio-related technology. MANUFACTURING, VENDORS AND SUPPLIERS The Company's manufacturing facilities are located in Newton Upper Falls, Massachusetts. The products assembled by the Company include traditional speakers, which require various semi-skilled light assembly operations, as well as electronically integrated, powered speakers, which entail more complex assembly and testing procedures. The Company currently employs 89 production workers and manufacturing support personnel. The Company's speakers are assembled from parts and sub-assemblies designed or selected by its research and development team. Some of these parts and sub-assemblies are purchased from, or specially fabricated for the Company by, outside suppliers. The Company also manufactures parts and sub-assemblies in-house, including some of the speaker cabinets, woofers, crossover networks and electronic components used in the final assembly of many of its branded speakers. The Company has a fully-integrated cabinet building operation including woodworking and paint shops. The Company sells a number of other audio and video components which it purchases from selected manufacturers. The Company offers only those products of selected manufacturers which it believes are of comparable quality to, and compatible with, its own speaker products. 10 TRADEMARKS, LICENSES AND PATENTS The following are trademarks of the Company: Cambridge SoundWorks-Registered Trademark-, Cambridge SoundWorks Listening Room, BassCase-Registered Trademark-, Ensemble-Registered Trademark-, Ensemble by Henry Kloss-Registered Trademark-, Ensemble by Henry Kloss and Design-Registered Trademark- Model Six -Trademark-, Model Seventeen - -Trademark-, Ambiance-Registered Trademark-, Ambiance by Henry Kloss-Registered Trademark-, Ambiance by Henry Kloss and Design-Registered Trademark-, Model Ten-A -Trademark-, The Surround and Design-Registered Trademark-, The Surround -Registered Trademark-, The Surround by Henry Kloss - -Trademark-, The Outdoor -Trademark-, Model Eleven-Registered Trademark-, Model Twelve -Trademark-, Powered Subwoofer -Trademark-, Slave Subwoofer - -Trademark-, SoundWorks -Registered Trademark-, SoundWorks by Henry Kloss - -Registered Trademark-, Factory-Direct Speaker Wall -Trademark-, Cambridge SoundWorks Proline and Design -Trademark-, Tower by Henry Kloss -Trademark-, Center Stage -Trademark-, Center Stage by Henry Kloss -Trademark-, MovieWorks - -Trademark-, Microworks -Trademark-, Microworks by Henry Kloss -Trademark-, You Just Can't Get It Anywhere Else -Trademark-, and A New Kind Of Audio Company -Trademark-. The Company also has a number of other unregistered trademarks. The Company holds a United States patent relating to the design of its BassCase, a component of the Model Eleven-A and Model Twelve speaker systems. The Company believes that the success of its business is more dependent upon marketing and product innovations than patented technology. CUSTOMERS The Company had one customer, Best Buy, which accounted for 22% of net sales for the year ended June 30, 1996. EMPLOYEES At September 12, 1997, the Company had 267 full-time and 17 part-time employees, of whom 104 were engaged in manufacturing, 159 in sales, customer service and marketing, 6 in engineering and product development and 15 in administration. The Company considers its employee relations to be good. None of the Company's employees is covered by a collective bargaining agreement. ITEM 2. PROPERTIES The Company's administration, direct marketing/ catalog fulfillment, audio retail store and manufacturing operations are located in a 73,300 square foot building in Newton Upper Falls, Massachusetts. The building is under a ten year lease that commenced September 1994. The Company signed a four-year lease for 99,000 square feet of warehouse space in Westwood, Massachusetts, in June, 1995. The Company also has a leased warehouse, containing approximately 5,800 square feet, in South San Francisco, California, which is used to service the Company's retail stores in Northern California and fulfill West Coast catalog orders. The Company's retail stores typically contain 2,000 to 4,000 square feet of retail space under operating lease agreements with terms ranging from two to 15 years or tenancies-at-will. The Company plans to open additional retail stores in fiscal 1998 using leased premises. The Company's manufacturing facility generally operated moderately below capacity for the year ended June 29, 1997. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to the section entitled "Market for Registrant's Common Equity and Related Stockholder Matters" on page 3 of the Company's 1997 Annual Report, which is filed herewith as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to the section entitled "Selected Financial Data" on page 2 of the Company's 1997 Annual Report, which is filed herewith as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation", pages 4 and 5 of the Company's 1997 Annual Report, which is filed herewith as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference to the consolidated financial statements of the Company (including the notes thereto) and the auditor's report thereon appearing on pages 6 through 12 of the Company's 1997 Annual Report, which is filed herewith as Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning executive officers and directors of the Company:
NAME AGE POSITION - ---------------------- --- ----------------------------------------------------- Thomas J. DeVesto 50 President, Chief Executive Officer and Director Wayne P. Garrett Vice President-Finance, Chief Financial Officer, 41 Treasurer and Clerk Thomas J. Hannaher 45 Vice President-Marketing Robert S. Mainiero 41 Vice President-Business Development Sandy Ruby 56 Vice President-Retail Thomas E. Brew, Jr. (1)(2) 55 Director Franklin S. Browning, Jr. 69 Director Leo Kahn (1)(2) 80 Director Craig L. McHugh 40 Director Peter B. Seamans (1) (2) 73 Director
- ------------------------ (1) Member of Audit Committee (2) Member of Compensation Committee Thomas J. DeVesto co-founded the Company. He has been a director, President and Chief Executive Officer since 1988. From 1985 to 1988, he was a consultant to ITT Corporation and represented ITT in connection with its relationship with Kloss Video Corporation. From 1978 to 1985, he was Vice President of Sales and Marketing of Kloss Video Corporation. From 1976 through 1978, Mr. DeVesto held various sales management positions in the international and domestic divisions of Advent Corporation. Wayne P. Garrett has been Vice President--Finance, Chief Financial Officer, Treasurer and Clerk of the Company since June 1995. Mr. Garrett was employed by Argus Management Corp. as a management consultant from 1983 to 1995. From 1978 to 1981, he was employed as an auditor by Price Waterhouse. Mr. Garrett has BS and MBA degrees from Boston College and is a Certified Public Accountant. Thomas J. Hannaher has been Vice President--Marketing of the Company since December 1993. From 1979 to 1993, he owned and operated an advertising and marketing agency and provided consulting services to a number of companies, including the Company, Boston Acoustics, NAD, Tweeter and Apple Computer. Robert S. Mainiero has been Vice President--Business Development of the Company since January 1996. Mr. Mainiero was Vice President--Sales for a/d/s from October 1993 to December 1995. From 1985 to 1993 he served as Zone Manager for Alpine Electronics of America and previously served as Assistant National Sales Manager of Kloss Video Corporation. Sandy Ruby has been Vice President--Retail of the Company since July 1995. From 1985 to 1995, Mr. Ruby was a systems consultant and Vice President of Practicorp International. Mr. Ruby was a founder and Chief Executive Officer of Tech HiFi, a 70-store consumer electronics retail chain, from 1968 to 1984. 13 Thomas E. Brew, Jr., has been a director of the Company since June 1995. Mr. Brew has been the President, Chief Executive Officer and a director of Kurzweil Applied Intelligence, Inc., since November 1994. From 1979 to 1994 he was a founder and Executive Vice President of Argus Management Corporation. Mr. Brew is a Certified Public Accountant and an attorney. Franklin S. Browning, Jr. has been a director of the Company since November 1996. Mr. Browning co-founded the Boston advertising agency Humphrey Browning McDoughall in 1970. He was Chairman of HBM from 1970 until 1983. Leo Kahn has been a director of the Company since June 1995. Mr. Kahn has been a partner of United Properties since 1985, and a director of Big V Supermarkets and of Grossman's, Inc., since 1986. In 1948 Mr. Kahn was a founder, President and Chief Executive Officer of Purity Supreme, Inc., and co- founder of Staples, Inc., in 1986. Craig L. McHugh has been a director of the Company since August 1997. Mr. McHugh has been Vice President, General Manager of Creative Labs, Inc. since January 1996. He joined Creative in October 1993 as General Manager of Worldwide OEM and later served as Vice President of Sales and Marketing. Prior to Creative, Mr. McHugh was Vice President of Sales and Marketing at Trace, Inc. and was also a member of their Board of Directors. Peter B. Seamans has been a director of the Company since March 1996. Mr. Seamans has been a partner with the law firm of Peabody & Arnold since 1957. He previously served as a director of Kloss Video Corporation and Advent Corporation and currently serves on the board of the Peabody Essex Museum and the USS Constitution Museum. All directors hold office until the next annual meeting of the stockholders and until their successors are elected and qualified. All officers of the Company are elected annually by the Board of Directors and serve at the Board's discretion. There are no family relationships among any of the directors, or officers of the Company. BOARD COMMITTEES The Board of Directors has a Compensation Committee, which makes recommendations concerning salaries and incentive compensation for employees of, and consultants to, the Company, and an Audit Committee, which reviews the results and scope of the audit and other services provided by the Company's independent auditors. DIRECTOR COMPENSATION Outside directors are compensated for their service on the Board of Directors at the rate of $1,000 per meeting plus expenses. Directors who are employees of the Company are not paid any additional compensation for serving as directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company has a Compensation Committee, consisting of Thomas E. Brew, Jr., Leo Kahn and Peter B. Seamans. The Compensation Committee is responsible for establishing executive compensation. 14 ITEM 11. EXECUTIVE COMPENSATION The information required by this item is 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 November 4, 1997 under the heading "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is 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 November 4, 1997, under the heading "Principal and Management Stockholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the information appearing in the Summary Compensation Table in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held on November 4, 1997 under the heading "Executive Compensation" and the information appearing therein under the heading "Certain Transactions and Relationships." 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are included as part of the report: (1) Financial Statements The following financial statements of the Company and the report of the independent certified public accountants are incorporated by reference to the Company's Annual Report, which is filed herewith as Exhibit 13. Report of Independent Public Accountants Balance Sheets Statements of Operations Statements of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements (2) Financial Statement Schedules None (3) Exhibits Certain of the exhibits listed hereunder have been previously filed with the Commission as exhibits to certain registration statements and periodic reports as indicated in the footnotes below and are incorporated herein by reference pursuant to Rule 411 promulgated under the Securities Act and Rule 24 of the Commission's Rules of Practice. *3.1 Restated Articles of Organization *3.2 Amended and Restated By-Laws *4 Specimen Common Stock Certificate *10.1 License Agreement with Henry E. Kloss *10.2 Form of Noncompetition, Nondisclosure and Assignment of Inventions Agreement *10.3 Cambridge SoundWorks, Inc., 1993 Stock Option Plan *10.4 Form of Incentive Stock Option Agreement *10.5 Form of Nondisclosure Agreement with Consultants *10.6 Employment Agreement (Thomas J. DeVesto) *10.7 Exclusive Retailer Agreement dated February 27, 1995 with Best Buy Co., Inc. *10.8 Lease dated May 31, 1994 with L&CP Realty Corporation, as amended by Addendum to Lease dated June 1, 1994, Agreement dated September 15, 1994, Amendment to Lease dated December 28, 1994, and Agreement of Settlement and Release dated December 28, 1994 *10.9 Lease Agreement dated June 26, 1995 with Granite Investment Corp. *10.10 Loan and Security Agreement dated April 27, 1995 with The First National Bank of Boston *10.11 Letter Agreement dated October 18, 1995 from The First National Bank of Boston to the Company *10.12 Letter Agreement dated February 27, 1996 from the First National Bank of Boston to the Company *10.13 Letter Agreement dated June 30, 1996 from the First National Bank of Boston to the Company *10.14 Letter Agreement dated August 5, 1996 from the First National Bank of Boston to the Company. 16 *10.15 Common Stock and Warrant Purchase Agreement dated as of February 20, 1997 *10.16 Common Stock Purchase warrant dated February 28, 1997 naming Creative Technology Ltd. as Registered Holder *10.17 Investor Rights Agreement dated as of February 28, 1997 by and among the Company and Creative Technology Ltd. *10.18 Exclusive Distribution Agreement dated as of February 28, 1997 by and between the Company and Creative Technology Ltd. *10.19 Letter Agreement, dated October 4, 1996, between the First National Bank of Boston and the Company 13 Cambridge SoundWorks, Inc. 1997 Annual Report\ 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule _________________ *Previously filed (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. 17 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 Town of Newton, Commonwealth of Massachusetts, on the 25th day of September, l997. CAMBRIDGE SOUNDWORKS, INC. BY: /s/ Thomas J. DeVesto ------------------------------------- Thomas J. DeVesto President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of l934, this report has been signed below by the following persons on behalf of the Registrant and in their capacities and on the date indicated. SIGNATURE CAPACITY DATE - --------- -------- ---- /s/ Thomas J. DeVesto President, Chief Executive September 25, 1997 - --------------------- Officer and Director Thomas J. DeVesto (Principal Executive Officer) /s/ Wayne P. Garrett Vice President-Finance, Chief September 25, 1997 - --------------------- Financial Officer, Treasurer Wayne P. Garrett and Clerk (Principal Financial and Accounting Officer) /s/ Peter B. Seamans Director September 25, 1997 - --------------------- Peter B. Seamans /s/ Thomas E. Brew, Jr. Director September 25, 1997 - ----------------------- Thomas E. Brew, Jr. 18 EX-13 2 EX-13 Exhibit 13 ANNUAL REPORT 1997 CAMBRIDGE SOUNDWORKS, INC. To Our Stockholders: Fiscal 1997 was a year of record sales for Cambridge SoundWorks. Our sales increase of 18% came in part because we added new stores, relocated existing stores and instituted an aggressive plan that resulted in significant "comp store" sales increases. Other initiatives in our ongoing program to expand sales included our sales of an OEM powered subwoofer to IBM. 1997 was also an outstanding year for new product introductions, with seven new speaker models introduced at a New York press conference in April 1997. With these new models, in conjunction with our existing lines, Cambridge SoundWorks now covers all the major segments of the home hi fi, multimedia and car stereo speaker markets. We also plan to greatly expand our production facilities by opening a manufacturing factory in China. This high-volume factory will allow us to deliver very large quantities of our multimedia speakers and other products. 1997 also marked the beginning of a very important new partnership with Creative Technology Ltd., the creators of Sound Blaster-Registered Trademark- sound cards and the world's leading manufacturer of multimedia computer products. Record Sales. Net sales for Fiscal 1997 increased 18% to $51.3 million compared to $43.6 million for the same 12 month period last year. New Stores, 15.3% "Comp Store" Sales Increase. In Fiscal 1997, we opened five new Factory-Direct stores, and relocated four stores. We opened new Factory-Direct stores in the Westfarms Mall in Farmington, CT; the Solomon Pond Mall in Marlboro, MA; The Maine Mall in South Portland, ME; the Stoneridge Mall in Pleasanton, CA; and The Great Mall in Milpitas, CA. Relocated stores include the Concord, CA stand-alone store moving to the Sun Valley Mall in Concord, CA; the downtown San Francisco store on Van Ness moving one block to a much larger (4,000 sq. ft.), more visible location; the Danvers, MA stand-alone store moving to the North Shore Shopping Center in Peabody, MA; and the Burlington, MA stand-alone store moving to the Burlington Mall, Burlington, MA. These store relocations, and an aggressive retail and direct response promotional program during the holiday selling season, combined to result in a same-store sales increase of 15.3% for 1997 versus 1996. In addition, we recently opened a new store in The Village at Corte Madera in Marin County, California. Our store strategy is based on the success of Cambridge SoundWorks' current mall and high-traffic locations. These stores focus on home stereo, car stereo, home theater and multimedia products, presenting them in a simple, uncluttered layout that emphasizes both the quality of the products as well as Factory-Direct savings. New Products. At an April 1997 press conference in New York, we introduced seven new products, including one that we feel will have a significant impact on the Company, as well as the multimedia speaker industry -- PCWorksL. A compact, amplified subwoofer/satellite speaker system, PCWorks is the most affordable product we (or, we believe, any company) has ever offered that reproduces true high-performance, wide-range sound, including outstanding bass response. Priced at $99.99, complete with speaker stands and an in-line remote volume control, PCWorks should open new markets to the Company, especially in light of our new distribution agreement with Creative Technology Ltd. [ART] Our new MovieWorks 5.1 system with MultiPole surround speakers. We also introduced new surround sound speaker products in April of '97. The Surround-Registered Trademark- 5.1 and The Surround II 5.1 are the first speakers using our new MultiPoleL technology that allows the user to switch between "dipole" and "bipole" operation. This flexibility makes the two speaker models the ideal choice for use in the surround channels of home theater systems that employ Dolby Digital-Registered Trademark- 5.1 technology. MovieWorksL 5.1 is a complete high-performance surround sound speaker package that includes shielded main speakers, a high-output center speaker, a high-performance powered subwoofer, and The Surround 5.1 surround speakers. We also introduced MovieWorks IV, an affordable surround sound speaker system suitable for use in home theater systems or with multimedia computers. Our first car stereo speaker models, the CS5 and FS502, were also introduced. We expect significant revenue contributions from these new products in Fiscal 1998. CAMBRIDGE SOUNDWORKS, INC. IBM Subwoofer. In Fiscal 1997 we contracted with IBM to design and manufacture a powered subwoofer for use with their Aptiva S series of multimedia computers. This was the result of our ongoing program to pursue OEM business in the multimedia computer field. New Factory In China. In order to meet the growing demand for our multimedia speakers and other products, we plan to open a high-capacity production facility in the Guangdong Province of China in January of 1998. This new facility will be capable of high-volume, low-overhead production that will allow us to compete in the field of multimedia computer products. They will also allow us to reduce costs of certain of our existing home stereo, car stereo and home theater products. Partnership With Creative Technology Ltd. In February 1997, Cambridge SoundWorks agreed to sell approximately 20% of the Company to Creative Technology Ltd. of Singapore. As a result of Creative Technology's investment, Cambridge SoundWorks is creating a complete line of multimedia speakers, and they have become the exclusive worldwide distributor of all Cambridge SoundWorks multimedia speakers. Creative Technology is the world's leading producer of advanced multimedia products and peripherals for personal computers. Its Sound Blaster-Registered Trademark- audio card which allows a personal computer to generate sound, is installed in nearly 30 million computers, or 75 percent of the PC audio systems in the world, and is carried in more than 40,000 retail outlets worldwide. Cambridge SoundWorks has created two complete lines of speakers: - - The Creative-Registered Trademark- line consists of affordable, high-value desktop speakers. - - The Cambridge SoundWorks line consists of high-performance bi-amplified subwoofer/satellite speaker systems, including PCWorks, SoundWorks and MicroWorks. The two companies will also work together to create other innovative products for multimedia, to be manufactured by Cambridge SoundWorks. American Express Catalog. In Fiscal 1997, the Company entered into an agreement with the American Express company, wherein Cambridge SoundWorks speakers and systems would be included in catalogs mailed to American Express card holders. The first catalogs were mailed in early Fiscal 1998. Critical Reviews. The Company's products continue to attract the favorable attention of the industry's critics. A small sampling: - - Boot magazine described our PCWorks speaker system, "...pure acoustic heaven...delivering some of the cleanest sounds you can get for less than 100 bucks. You'll be hard pressed to find a better set of speakers for twice the price." - - Computer Gaming World magazine describes PCWorks saying, "...a speaker system for $100 that should make some $250 systems nervous...Cambridge has created what may be the shape of things to come. A set of speakers for your PC that will more than fill the bill, and not crimp your budget." - - PC magazine says about our MicroWorks system, "The only speakers you'll ever need. The line between quality sound-system speakers and PC multimedia speakers is about to vanish thanks to the MicroWorks system from Cambridge SoundWorks. These speakers are equally at home as high-end PC speakers or as room-filling stereo speakers....If you're looking for excellent sound at a good price, the MicroWorks is worth looking at and listening to." - - PC World says about MicroWorks, "The first time I heard the heavy- duty sounds pumped out by the MicroWorks speakers, I assumed they were powered by testosterone rather than electricity...I haven't heard better speakers at this price." - - Stereo Review magazine describes our Tower II speaker system by saying, "Excellent...first-rate...gut-wrenching bass...the price is right." More New Products On The Way. In addition to the products mentioned, the company intends to continue to introduce new products and new product categories. As we enter Fiscal 1998, we are looking forward to continued growth. BEST REGARDS, Thomas J. DeVesto President, CEO CAMBRIDGE SOUNDWORKS, INC. SELECTED FINANCIAL DATA The following information, except for the year ended July 2, 1995, has been derived from financial statements which have been audited by Arthur Andersen LLP, independent public accountants and their report is included elsewhere herein. The following data, insofar as it relates to the year ended July 2, 1995, has been derived from unaudited financial data, which in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the year. The data set forth below should be read in conjunction with the audited financial statements and notes thereto included herein and Management's Discussion and Analysis of Financial Condition and Results of Operations.
SIX MONTHS YEAR ENDED INCOME STATEMENT DATA: YEAR ENDED ENDED 7/2/95 YEAR ENDED YEAR ENDED (IN THOUSANDS EXCEPT PER SHARE DATA) 12/31/94 7/2/95 (UNAUDITED) 6/30/96 6/29/97 - ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Net sales........................................ $ 19,432 $ 15,015 $ 26,928 $ 43,585 $ 51,285 Cost of goods sold............................... 10,133 8,697 15,043 25,872 30,965 ----------- ----------- ----------- ----------- ----------- Gross profit................................... 9,299 6,318 11,885 17,713 20,320 ----------- ----------- ----------- ----------- ----------- Sales and marketing expenses..................... 6,890 5,830 10,406 14,254 18,320 General and administrative expenses.............. 1,617 1,182 2,197 2,062 2,218 Engineering and development expenses............. 669 404 761 679 587 Total expenses................................. 9,176 7,416 13,364 16,995 21,125 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations.................. 123 (1,098) (1,479) 718 (805) Interest income (expense), net................... 182 10 150 (301) (220) ----------- ----------- ----------- ----------- ----------- Income (loss) before provision (benefit) for taxes........................................ 305 (1,088) (1,329) 417 (1,025) Provision (benefit) for income taxes............. 98 (435) (558) 167 (410) ----------- ----------- ----------- ----------- ----------- Net income (loss).............................. $ 207 $ (653) $ (771) $ 250 (615) ----------- ----------- ----------- ----------- ----------- Net income (loss) per common and common equivalent share............................. $ .08 $ (.23) $ (.27) $ .09 $ (.19) ----------- ----------- ----------- ----------- ----------- Weighed average number of common and common equivalent shares outstanding.................. 2,461 2,873 2,870 2,922 3,194 Dividends per common share....................... -- -- -- -- -- Balance Sheet Data: Working capital................................ $ 9,539 $ 8,363 $ 8,363 $ 7,912 $ 11,079 Total Assets................................... 15,947 15,029 15,029 18,130 21,098 Total Stockholders' Equity..................... 11,703 11,108 11,108 11,361 15,384
2 CAMBRIDGE SOUNDWORKS, INC. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market System under the symbol HIFI. The following table sets forth the range of high and low selling prices for the Common Stock of the Company from April 13, 1994 (the date the Company's Common Stock commenced trading on Nasdaq) for the fiscal periods indicated, as reported on the Nasdaq National Market. This information reflects inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily reflect actual transactions. Fiscal 1994 High Low - --------------------------------------------------------------------------------------------------- Second Quarter (from April 13, 1994)...................................... $ 8.50 $ 7.125 Third Quarter............................................................. $ 8.750 $ 5.875 Fourth Quarter............................................................ $ 9.875 $ 4.875 Fiscal 1995 High Low - --------------------------------------------------------------------------------------------------- First Quarter............................................................. $ 6.75 $ 3.375 Second Quarter............................................................ $ 7.625 $ 4.875 Fiscal 1996 High Low - --------------------------------------------------------------------------------------------------- First Quarter............................................................. $ 7.75 $ 4.75 Second Quarter............................................................ $ 6.00 $ 4.25 Third Quarter............................................................. $ 6.375 $ 3.625 Fourth Quarter............................................................ $ 4.625 $ 3.25 Fiscal 1997 High Low - --------------------------------------------------------------------------------------------------- First Quarter............................................................. $ 4.75 $ 3.25 Second Quarter............................................................ $ 7.125 $ 3.375 Third Quarter............................................................. $ 5.875 $ 3.375 Fourth Quarter............................................................ $ 5.50 $ 4.625
On September 12, 1997, there were 73 record holders of the Company's Common Stock. The Company believes the actual number of beneficial owners of the Common Stock is greater than the stated number of holders of record because a large number of the shares of the Company's Common Stock is held in custodial or nominee accounts for the benefit of persons other than the record holder. The Company has never paid a dividend on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. 3 CAMBRIDGE SOUNDWORKS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth, for the periods indicated, selected income statement data expressed as percentages of net sales.
YEAR ENDED SIX MONTHS YEAR YEAR YEAR DECEMBER 31, ENDED ENDED ENDED ENDED 1994 7/2/95 7/2/95 6/30/96 6/29/97 (UNAUDITED) - ---------------------------------------------------------------------------------------------------------------------------------- Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold.......................................... 52.1 57.9 55.9 59.4 60.4 - ---------------------------------------------------------------------------------------------------------------------------------- Gross profit.............................................. 47.9 42.1 44.1 40.6 39.6 - ---------------------------------------------------------------------------------------------------------------------------------- Sales and marketing expenses................................ 35.5 38.8 38.6 32.7 35.7 General and administrative expenses......................... 8.3 7.9 8.2 4.7 4.3 Engineering and development expenses........................ 3.5 2.7 2.8 1.6 1.2 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses............................................ 47.3 49.4 49.6 39.0 41.2 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations............................. .6 (7.3) (5.5) 1.6 (1.6) Interest income (expense), net.............................. 1.0 0.0 .6 (.6) (.4) - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before provision (benefit) for income taxes. 1.6 (7.3) (4.9) 1.0 (2.0) Provision (benefit) for income taxes........................ .5 (2.9) (2.1) .4 (.8) - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss)......................................... 1.1% (4.4)% (2.8% .6% (1.2)%
Year Ended June 29, 1997 Compared with Year Ended June 30, 1996 Net sales for the twelve month period increased from $43.6 million in 1996 to $51.3 million in 1997, an increase of 18%. The increase in net sales was due primarily to the 45% increase in retail store sales. The Company continued its strategy of retail expansion by adding five new stores during 1997, three in New England and two in Northern California. The Company relocated four other retail stores to high traffic mall locations and closed two retail stores in Northern California in 1997. The Company had 26 retail stores at June 29, 1997, 18 in New England and eight in Northern California. Wholesale sales decreased 23% due to sales inactivity with Best Buy Co. Inc. (Best Buy). During 1997, the Company entered into an agreement with Creative Technology, Ltd. and began shipments under this agreement late in the fourth quarter of 1997. Catalog sales decreased, due in part to shifts in sales to the Company's retail stores. Retail, catalog and wholesale sales accounted for 69%, 12% and 19% of net sales for the year ended June 29, 1997, respectively. For the year ended June 30, 1996, retail, catalog and wholesale sales accounted for 55%, 16% and 29% of net sales, respectively. Sales of products manufactured by the Company accounted for 61%, and sales of stereo components manufactured by other companies accounted for 39% of net sales for the year ended June 29, 1997. For the year ended June 30, 1996, sales of products manufactured by the Company accounted for 72%, and sales of stereo components manufactured by other companies accounted for 28% of net sales. The increase in sales of stereo components manufactured by other companies increased as a percentage of sales due primarily to the decrease in wholesale sales during 1997. The Company's gross margin decreased from 40.6% for the year ended June 30, 1996, to 39.6% for the year ended June 29, 1997. The increase in retail store sales, which have lower overall margins than catalog sales, and retail pricing competition particularly with stereo components manufactured by other companies, had a negative impact on the Company's gross margin. The Company does not expect a significant change in gross margin as the Company adds retail stores and as wholesale sales increase at their projected levels. Sales and marketing expenses increased from $14.3 million for the year ended June 30, 1996 (32.7% of net sales) to $18.3 million (35.7% of net sales) for the year ended June 29, 1997. The hiring of additional retail store personnel, and increased advertising and retail store operating costs, accounted for a substantial portion of the increase. General and administrative expenses for the year increased from $2.1 million (4.7% of net sales) in 1996 to $2.2 million (4.3% of net sales) in 1997. Engineering and development expenses for the year decreased from $680,000 (1.6% of net sales) in 1996 to $587,000 (1.2% of net sales) in 1997. Interest expense of $220,000 and $301,000 for the years ended June 29, 1997 and June 30, 1996 results from the Company's use of its line of credit. The Company's effective income tax rate for the years ended June 29, 1997 and June 30, 1996 was 40.0%. The Company incurred a net loss of $615,000 for the year ended June 29, 1997 compared to net income for the year ended June 30, 1996 of $251,000. The decrease in net income resulted primarily from sales inactivity in the fourth quarter with Best Buy and, due to the timing of orders, from Creative Technology, Ltd., the Company's new multimedia partner. Year Ended June 30, 1996 Compared with Year Ended July 2, 1995 Net sales for the twelve month period increased from $26.9 million in 1995 to $43.6 million in 1996, an increase of 62%. The increase in net sales was due primarily to the Company's continuing strategy of retail and wholesale expansion, which included shipments in connection with an exclusive reseller agreement with Best Buy. The Company opened six retail stores, including five stores in New England and one in Northern California, bringing the total number of retail stores to 23 at the year ended June 30, 1996. Catalog sales decreased, due in part to shifts in sales to the Company's retail stores. Retail, catalog and wholesale sales accounted for 55%, 16% and 29% of net sales for the year ended June 30, 1996, respectively. For the year ended July 2, 1995, retail, catalog and wholesale sales accounted for 55%, 32% and 13% of net sales, respectively. Sales of products manufactured by the Company accounted for 72%, and sales of stereo components manufactured by other companies accounted for 28% of net sales for the year ended June 30, 1996. For the year ended July 2, 1995, sales of products manufactured by the Company accounted for 69%, and sales of stereo components manufactured by other companies accounted for 31% of net sales. The increase in products manufactured by the company as a percentage of net sales results from the expansion of its wholesale channels of distribution. The Company's gross margin decreased from 44.1% for the year ended July 2, 1995, to 40.6% for the year ended June 30, 1996. The increase in retail store sales, which have lower overall margins than catalog sales, retail pricing competition particularly with stereo components manufactured by other companies, and the increased sales volume in the wholesale expansion had a negative impact on the Company's gross margin. The Company does not expect a significant change in gross margin as the Company adds retail stores and as wholesale sales increase at their projected levels. 4 CAMBRIDGE SOUNDWORKS, INC. Sales and marketing expenses increased from $10.4 million for the year ended July 2, 1995 (38.6% of net sales) to $14.3 million (32.7% of net sales) for the year ended June 30, 1996. The hiring of additional retail store personnel and retail store operating costs, along with selling costs associated with the Company's wholesale division accounted for a substantial portion of the increase. General and administrative expenses for the twelve month period decreased from $2.2 million (8.2% of net sales) for 1995 to $2.1 million (4.7% of net sales) in 1996. Engineering and development expenses for the twelve month period decreased from $761,000 (2.8% of net sales) in 1995 to $680,000 (1.6% of net sales) in 1996. Interest income amounted to $165,000 in 1995 from investments in United States Treasury Securities purchased with the net proceeds of the Company's initial public offering, which was completed in April 1994. Interest expense of $301,000 for the year ended June 30, 1996 results from the Company's use of its line of credit. The Company's effective income tax rate for the year ended June 30, 1996 was 40.0% as compared to 41.9% for the year ended July 2, 1995. The Company posted net income for the year ended June 30, 1996 of $251,000 (.6% of net sales), compared to a net loss of $771,000 (2.8% of net sales) for the year ended July 2, 1995. The increase in net income resulted primarily from the Company's ability to increase sales in its retail and wholesale divisions with a minimal increase to operating expense. Year Ended July 2, 1995 Compared with Year Ended December 31, 1994 Net sales for the twelve month period increased from $19.4 million for the year ended December 31, 1994 to $26.9 million for the year ended July 2, 1995, an increase of 39%. The increase in net sales was due primarily to the opening of new retail stores and initial shipments in connection with an exclusive reseller agreement with Best Buy. Catalog sales decreased due in part to shifts in sales to the Company's retail stores. In February 1995, the Company announced the signing of a definitive sales agreement with Best Buy. The Company's products became available in more than 200 Best Buy stores by July 2, 1995. The gross margin on sales of the Company's speakers to Best Buy is significantly lower than on sales of the Company's speakers through its catalog or at its Company-owned retail stores. However, operating expenses as a percentage of net sales are significantly lower on the Company's sales to Best Buy than on its catalog and retail store sales. Retail, catalog and wholesale sales accounted for 55%, 32%, and 13% of net sales for the year ended July 2, 1995, respectivley. For the year ended December 31, 1994, retail stores accounted for 52%, and catalog sales accounted for 48% of net sales. Sales of products manufactured by the Company accounted for 69%, and sales of stereo components manufactured by other companies accounted for 31% of net sales for the year ended July 2, 1995. For the year ended December 31, 1994, sales of products manufactured by the Company accounted for 62%, and sales of stereo components manufactured by other companies accounted for 38% of net sales. The increase in sales of products manufactured by the Company as a percentage of net sales results from the initial shipments under the exclusive reseller agreement with Best Buy. The Company's gross margin decreased from 47.9% for the year December 31, 1994, to 44.1% for the year ended July 2, 1995, due to the increase in retail store sales and the initial wholesale shipments, which have lower overall margins than catalog sales. Sales and marketing expenses increased from $6.9 million for the year ended December 31, 1994 (35.5% of net sales) to $10.4 million (38.6% of net sales) for the year ended July 2, 1995. The hiring of additional personnel, increased advertising expenses, and amortization of pre-opening costs associated with the Company's entrance into the West Coast region late in 1994 accounted for a substantial portion of the increase. General and administrative expenses increased from $1.6 million for the year ended December 31, 1994 (8.3% of net sales) to $2.2 million (8.2% of net sales) for the year ended July 2, 1995. Professional fees, insurance and overhead expenses associated with the Company's retail expansion have resulted in a substantial portion of the increase in general and administrative expenses. Engineering and development expenses increased from $669,000 (3.5% of net sales) for the year ended December 31, 1994 to $761,000 (2.8% of net sales) for the year ended July 2, 1995. Interest income of $182,000 for the year ended December 31, 1994 and $165,000 for the year ended July 2, 1995 resulted from investments in United States Treasury Securities purchased with the net proceeds of the Company's initial public offering, which was completed in April 1994. The Company's effective income tax rate increased to 41.9% for the year ended July 2, 1995 from 32.1% for the year ended December 31, 1994. The Company reported net income for the year ended December 31, 1994 of $207,000 (1.1% of net sales), compared to a net loss of $771,000 (2.8% of net sales) for the year ended July 2, 1995. The decrease in net income resulted primarily from a decrease in the Company's gross margin as noted above, and the amortization of pre-opening costs associated with the Company's entrance into the West Coast region late in calendar 1994. LIQUIDITY AND CAPITAL RESOURCES Prior to 1994, the Company financed its growth primarily from cash generated from operations and seasonal bank borrowings. In April 1994, the Company completed an initial public offering which generated net proceeds to the Company of $9,935,000. A portion of the proceeds, $4,212,334 was used to purchase fixed assets and leasehold improvements for the Company's new retail stores and its new manufacturing, warehousing and administrative office facilities in Newton, Massachusetts. With the introduction of wholesale sales in March 1995, and the continued expansion of retail stores, total inventories increased from $2.4 million at April 1994 to $14.8 million at June 1997. In April 1995, the Company obtained a demand discretionary line of credit with a bank in order to finance its increased investment in inventories and support continued sales growth. Advances are made against the line based on a lending formula on receivables and inventory. The line of credit is secured by all the Company's assets with interest payable at the bank's base rate (8.5% at June 29, 1997) plus 1/4%. As of June 29, 1997 subsequent amendments to the agreement increased the maximum borrowings under the line of credit to $8 million. The Company had $3.7 million in excess availability on the line of credit at June 29, 1997. The Company believes that its resources are adequate to fund its operations through the end of fiscal 1998. 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, possible aquisitions, 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 and services; the rate of growth in the industries of the Company's customers; the presence of competitors with greater technical, marketing and financial resources; the Company's ability to promptly and effectively respond to technological changes which meet evolving customer needs; capacity and supply constraints or difficulties; and the Company's ability to successfully integrate new operations. 5 CAMBRIDGE SOUNDWORKS, INC. BALANCE SHEETS
ASSETS JUNE 30, 1996 JUNE, 29 1997 - ------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash............................................................................. $ 87,421 $ 58,043 Accounts receivable, net......................................................... 2,431,670 719,855 Income tax refund receivable..................................................... -- 404,434 Inventories...................................................................... 11,405,352 14,816,618 Prepaid expenses................................................................. 187,247 181,150 Deferred tax asset............................................................... 570,000 613,653 - ------------------------------------------------------------------------------------------------------------------- Total Current Assets............................................................. 14,681,690 16,793,753 - ------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT, AT COST: Production equipment and tooling................................................. 407,925 580,192 Office equipment and furniture................................................... 1,148,610 1,367,080 Leasehold improvements........................................................... 2,544,495 3,938,224 Motor vehicles................................................................... 180,290 250,252 - ------------------------------------------------------------------------------------------------------------------- 4,281,320 6,135,748 Less Accumulated depreciation and amortization................................... 1,135,478 1,995,287 - ------------------------------------------------------------------------------------------------------------------- Net Property and Equipment..................................................... 3,145,842 4,140,461 - ------------------------------------------------------------------------------------------------------------------- OTHER ASSETS....................................................................... 302,880 163,990 - ------------------------------------------------------------------------------------------------------------------- Total Assets..................................................................... $ 18,130,412 $ 21,098,204 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Borrowings under line of credit.................................................. $ 3,395,557 $ 1,915,713 Accounts payable................................................................. 2,123,773 2,148,399 Accrued expenses................................................................. 979,689 914,978 Customer prepayments and other current liabilities............................... 270,707 735,279 - ------------------------------------------------------------------------------------------------------------------- Total Current Liabilities...................................................... 6,769,726 5,714,369 - ------------------------------------------------------------------------------------------------------------------- COMMITMENTS (Notes 5, 8 and 9) STOCKHOLDERS' EQUITY: Preferred stock, no par value-- Authorized -- 2,000,000 shares................................................. -- -- Common stock, no par value-- Authorized -- 10,000,000 shares Issued and outstanding 2,889,399 shares and 3,803,027 shares at June 30, 1996 and June 29, 1997, respectively.................................. 10,346,710 14,984,557 Retained earnings................................................................ 1,013,976 399,278 - ------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity..................................................... 11,360,686 15,383,835 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity......................................... $ 18,130,412 $ 21,098,204 - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 6 CAMBRIDGE SOUNDWORKS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, ENDED JULY 2, JULY 2, JUNE 30, JUNE 29, 1994 1995 1995 1996 1997 - ------------------------------------------------------------------------------------------------------------------- (UNAUDITED) NET SALES............................ $ 19,431,892 $ 15,014,837 $ 26,927,699 $ 43,585,017 $ 51,285,380 COST OF GOODS SOLD................... 10,133,001 8,696,852 15,043,196 25,871,582 30,965,293 - ------------------------------------------------------------------------------------------------------------------- Gross profit....................... 9,298,891 6,317,985 11,884,503 17,713,435 20,320,087 - ------------------------------------------------------------------------------------------------------------------- SALES AND MARKETING EXPENSES......... 6,890,254 5,829,589 10,406,100 14,253,742 18,320,541 GENERAL AND ADMINISTRATIVE EXPENSES........................... 1,616,323 1,182,245 2,196,623 2,061,351 2,217,765 ENGINEERING AND DEVELOPMENT EXPENSES........................... 669,179 403,773 760,590 679,637 586,901 - ------------------------------------------------------------------------------------------------------------------- Total expenses..................... 9,175,756 7,415,607 13,363,313 16,994,730 21,125,207 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from operations...... 123,135 (1,097,622) (1,478,810) 718,705 (805,120) INTEREST INCOME...................... 187,241 23,078 164,735 -- -- INTEREST EXPENSE..................... (5,225) (13,325) (15,343) (300,870) (219,578) - ------------------------------------------------------------------------------------------------------------------- Income (loss) before provision (benefit) for income taxes........ 305,151 (1,087,869) (1,329,418) 417,835 (1,024,698) PROVISION (BENEFIT) FOR INCOME TAXES.............................. 98,000 (435,000) (558,000) 167,000 $ (410,000) - ------------------------------------------------------------------------------------------------------------------- Net income (loss).................. $ 207,151 $ (652,869) $ (771,418) $ 250,835 $ (614,698) - ------------------------------------------------------------------------------------------------------------------- Net Income (Loss) per Common and Common Equivalent Share............ $ .08 $ (.23) $ (.27) $ .09 $ (.19) - ------------------------------------------------------------------------------------------------------------------- Weighted Average Number of Common and Common Equivallent Shares outstanding........................ 2,461,169 2,872,617 2,869,626 2,922,323 3,193,692 - -------------------------------------------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL --------------------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY - ----------------------------------------------------------------------------------------------------- Balance, December 31, 1993................ 1,456,580 334,750 1,208,859 1,543,609 Initial public offering of common stock, net of issuance costs of $1,344,793... 1,410,000 9,935,207 -- 9,935,207 Exercise of stock options............... 5,000 16,800 -- 16,800 Net income.............................. -- -- 207,151 207,151 - ----------------------------------------------------------------------------------------------------- Balance, December 31, 1994................ 2,871,580 10,286,757 1,416,010 11,702,767 Exercise of stock options............... 17,244 57,940 -- 57,940 Net loss................................ -- -- (652,869) (652,869) - ----------------------------------------------------------------------------------------------------- Balance, July 2, 1995..................... 2,888,824 10,344,697 763,141 11,107,838 Exercise of stock options............... 575 2,013 -- 2,013 Net income.............................. -- -- 250,835 250,835 - ----------------------------------------------------------------------------------------------------- Balance, June 30, 1996.................... 2,889,399 $ 10,346,710 $ 1,013,976 $ 11,360,686 Issuance of common stock, net of issuance costs of $156,649...................... 912,294 4,632,895 -- 4,632,895 Exercise of stock options............... 1,334 4,952 -- 4,952 Net loss................................ -- -- (614,698) (614,698) - ----------------------------------------------------------------------------------------------------- Balance, June 29, 1997.................... $ 3,803,027 $ 14,984,557 $ 399,278 $ 15,383,835
The accompanying notes are an integral part of these financial statements. 7 CAMBRIDGE SOUNDWORKS, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, ENDED JULY 2, JULY 2, JUNE 30, JUNE 29, 1994 1995 1995 1996 1997 - --------------------------------------------------------------------------------------------------------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................ $ 207,151 $ (652,869) $ (771,418) $ 250,835 $ (614,698) Adjustments to reconcile net income (loss) to net cash used in operating activities-- Depreciation and amortization.......... 276,915 286,482 499,888 744,009 1,096,147 Deferred (prepaid) income taxes........ 233,000 (308,000) 100,000 (284,000) (43,653) Changes in current assets and liabilities-- Accounts receivable, net.............. (312,583) (427,164) (692,644) (1,628,623) 1,711,815 Income tax refund receivable.......... (667,000) 286,072 (380,928) 380,928 (404,434) Inventories........................... (5,761,353) (2,189,452) (7,165,942) (881,725) (3,411,266) Prepaid expenses...................... (148,824) 164,622 207,569 (70,038) 6,097 Preopening costs...................... (717,719) 560,114 (157,605) 157,605 -- Accounts payable...................... 2,192,488 (6,161) 2,304,890 (1,205,555) 24,626 Accrued expenses...................... 145,121 (131,269) 172,171 496,513 (64,711) Customer prepayments and other current liabilities.......................... 59,575 (185,085) (13,943) 161,589 464,572 - --------------------------------------------------------------------------------------------------------------- Net cash used in operating activities........................ (4,493,229) (2,602,710) (5,897,962) (1,878,462) (1,235,505) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment...... (2,136,742) (850,943) (2,698,048) (1,224,649) (2,090,766) Increase in other assets................. (46,800) (15,830) (54,156) (223,923) 138,890 - ---------------------------------------------------------------------------------------------------------------- Net cash used in investing activities........................ (2,183,542) (866,773) (2,752,204) (1,448,572) (1,951,876) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit, net..... -- -- -- 3,395,557 (1,479,844) Repayment of capital lease obligation.... (47,812) -- (42,345) -- -- Sale of common stock, net of issuance costs................................... 9,935,207 -- -- -- 4,632,895 Exercise of stock options................ 16,800 57,940 74,740 2,013 4,952 Net cash provided by financing activities............................ 9,904,195 57,940 32,395 3,397,570 3,158,003 NET (DECREASE) INCREASE IN CASH............ 3,227,424 (3,411,543) (8,617,771) 70,536 (29,378) CASH, BEGINNING OF PERIOD.................. 201,004 3,428,428 8,634,656 16,885 87,421 CASH, END OF PERIOD........................ $3,428,428 $ 16,885 $ 16,885 $ 87,421 $ 58,043 - ---------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Income taxes............................ $ 561,563 $ 77,500 $ 157,500 $ 145,500 $ 66,100 - ---------------------------------------------------------------------------------------------------------------- Interest................................ $ 5,225 $ 13,325 $ 14,490 $ 276,454 $ 233,257 - ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 8 CAMBRIDGE SOUNDWORKS, INC. Notes to Financial Statements (Including Data Applicable to Unaudited Periods) Note 1 Operations and Significant Accounting Policies Cambridge SoundWorks, Inc. (the Company) was organized in 1988. The Company designs and manufactures speakers for stereo, home theater and multimedia computers. The Company markets its products and sells other audio and video components through its mail-order catalog, Company-owned retail stores and other methods of distribution, including large retail chains throughout the United States. The accompanying financial statements reflect the application of certain accounting policies described in this note and elsewhere in the accompanying notes to financial statements. The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (a) Change in Fiscal Year On March 14, 1995, the Company's Board of Directors approved a change in the Company's fiscal year. The Company's fiscal year ends on the Sunday nearest the end of June. Included in the accompanying financial statements are unaudited statements of income and cash flows for the year ended July 2, 1995. These financial statements have been prepared on a basis consistent with those of audited periods. (b) Credit Card Policy The Company generally does not extend credit to catalog and Company-owned retail store customers, except through third-party credit cards, including its branded Cambridge SoundWorks credit card. Credit under these accounts is extended by third parties, and accordingly, the Company bears no financial risk under these agreements except in the case of fraud. The Company's agreements with third-party credit companies provide for the electronic processing of credit approvals and the electronic submission of transactions. Upon the submission of these transactions to the credit card companies, payment is transmitted to the Company's bank account. Accordingly, the Company records these amounts as cash upon the electronic submission of the transaction to the appropriate processing agency. The Company pays fees to third-party credit card companies. These fees range from .75% to 3.75% of the amount financed. These fees were approximately $371,000, $198,000, $423,000, $597,000 and $963,000 for the years ended December 31, 1994, for the six-month period ended July 2, 1995, and for the years ended July 2, 1995, June 30, 1996 and June 29, 1997 respectively, and are included in selling and marketing expenses in the accompanying statements of operations. (c) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
JUNE 30, JUNE 29, 1996 1997 - ------------------------------------------------------------------------------------------------------------------ Raw materials and work-in-process.................................................. $ 3,823,302 $ 3,010,897 Finished goods..................................................................... 7,582,050 11,805,721 - ------------------------------------------------------------------------------------------------------------------ $ 11,405,352 $ 14,816,618 - ------------------------------------------------------------------------------------------------------------------ ------------- -------------
Inventories consist of materials, labor and overhead. (d) Prepaid Expenses The Company offers its products and those of others directly to consumers through its mail-order catalog. Direct mail costs related to catalog mailings, including printing and postage, which constitute direct-response advertising, are classified as prepaid expenses and are expensed over the estimated useful life of each catalog, typically two to six months, commencing on the date of the mailing. (e) Preopening Costs Throughout fiscal 1995 and during the first half of fiscal 1996, the Company opened numerous retail stores. The Company incurred direct costs prior to the opening of these new stores and amortized the preopening costs over periods of up to nine months. (f) Depreciation and Amortization The Company provides for depreciation and amortization using the straight-line method by charges to operations in amounts estimated to allocate the cost of the assets over their estimated useful lives as follows:
ESTIMATED USEFUL ASSET CLASSIFICATION LIFE - ------------------------------------------------------------------------------------------------------------------ Production equipment and tooling............................................................ 3--5 Years Office equipment and furniture.............................................................. 5 Years Leasehold improvements...................................................................... Life of lease Motor vehicles.............................................................................. 3 Years
(g) Customer Prepayments Advance payments received from customers are classified as customer prepayments and recognized as revenue when the products are shipped. (h) Revenue Recognition and Warranty Costs The Company recognizes revenue from product sales, net of estimated future sales returns, at the time of shipment. The Company has not provided for any warranty reserves, as warranty costs incurred by the Company have not been significant. (i) Net Income (Loss) per Common and Common Equivalent Share Net income (loss) per share data are computed using the weighted average number of shares of common stock outstanding during each period. Common equivalent shares from stock options have been included in the computation using the treasury stock method only when their effect would be dilutive. Fully diluted net income (loss) per share data have not been separately presented, as the difference from primary net income (loss) per share data is insignificant. On March 3, 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This statement is effective for fiscal years ending after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company will adopt this statement for its fiscal year ended June 28, 1998. The Company believes that the adoption of SFAS No. 128 will not have a material effect on its financial statements. (j) Engineering and Development Expenses Engineering and development expenses are charged to operations as incurred. (k) Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are principally accounts receivable. This credit risk with respect to accounts receivable relates primarily to the following customers to whom the Company has substantial sales.
PERCENTAGE OF ACCOUNTS RECEIVEABLE CUSTOMERS A B C - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1996.......................................................................... 85% -- -- Year Ended June 29, 1997.......................................................................... 3% 13% 36% - -----------------------------------------------------------------------------------------------------------------------------------
To reduce the credit risk, the Company routinely assesses the financial strength of this and other customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited. The Company maintains an allowance for potential credit losses but historically has not experienced any significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area. The estimated fair value of the Company's financial instruments, which include cash, accounts receivable and borrowings under the line of credit, approximates their carrying value. Note 2 Significant Customers During the six-month period and years ended July 2, 1995 and June 30, 1996, one customer accounted for approximately 23%, 13% and 22% of net sales, respectively. This customer accounted for substantially all of the Company's accounts receivable at June 30, 1996. During the years ended December 31, 1994 and June 29,1997, there were no customers that accounted for greater than 10% of net sales. 9 CAMBRIDGE SOUNDWORKS, INC. NOTE 3 LINE OF CREDIT In April 1995, the Company entered into a $5 million demand discretionary line of credit (line of credit) with The First National Bank of Boston. As of June 29, 1997, subsequent amendments to the agreement increased the maximum borrowings under the line of credit to $8 million based upon certain percentages of eligible accounts receivable and inventory, as defined. The line of credit is secured by all assets of the Company. Borrowings under the line of credit accrue interest at the bank's prime rate (8.5% at June 29, 1997) plus .25%. Based on the line of credit lending formula, as defined, the Company had available for borrowing, approximately $3.7 million at June 29, 1997. NOTE 4 INCOME TAXES The Company follows Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, the Company recognizes a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences to the extent they are realizable. The provision (benefit) for income taxes consists of the following:
SIX-MONTH YEAR PERIOD YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED DEC. 31, JULY 2, JULY 2, JUNE 30, JUNE 29, IN THOUSANDS 1994 1995 1995 1996 1997 - -------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Current-- Federal...................................................... $ (104) $ (107) $ (508) $ 345 $ (281) State........................................................ (31) (20) (150) 106 (85) - -------------------------------------------------------------------------------------------------------------------------------- (135) (127) (658) 451 (366) - -------------------------------------------------------------------------------------------------------------------------------- Deferred-- Federal...................................................... 196 (266) 61 (216) (33) State........................................................ 37 (42) 39 (68) (11) - -------------------------------------------------------------------------------------------------------------------------------- 233 (308) 100 (284) (44) - -------------------------------------------------------------------------------------------------------------------------------- Total provision (benefit)............................................ $ 98 $ (435) $ (558) $ 167 $ (410) - --------------------------------------------------------------------------------------------------------------------------------
Pursuant to the provisions of SFAS No. 109, as of June 30, 1996 and June 29, 1997, the Company recorded deferred tax assets of approximately $570,000 and $614,000, respectively. These deferred tax assets primarily result from timing differences in the recognition of revenues and expenses for tax and financial reporting purposes. The sources of these differences and the approximate amount of each are as follows:
JUNE 30, JUNE 29, 1996 1997 - -------------------------------------------------------------------------------------------------------------------- Inventory reserve......................................................................... $ 244,000 $ 216,000 Net operating loss carryforward and other credit carryforwards............................ 66,000 45,000 Other reserves............................................................................ 97,000 103,000 Depreciation.............................................................................. 175,000 350,000 Valuation allowance....................................................................... (12,000) (100,000) - -------------------------------------------------------------------------------------------------------------------- $ 570,000 $ 614,000 - -------------------------------------------------------------------------------------------------------------------- ---------- ----------
At June 29, 1997, the Company had available net operating loss carry forwards of approximately $96,000. These Net operating loss carry forwards may be used to reduce future taxable income, if any. These carry forwards expire through 2012 and are subject to review and possible adjustment by the appropriate taxing authorities. Due to the uncertainty of the realization of certain of these potential tax benefits, the Company has recorded a valuation allowance against a portion of its deffered tax assets. A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:
SIX-MONTH YEAR PERIOD YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED DECEMBER 31, JULY 2, JULY 2, JUNE 30, JUNE 29, 1994 1995 1995 1996 1997 - ---------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Statutory tax rate........................................ 34.0% (34.0)% (34.0)% 34.0% (34.0)% State taxes, net of federal benefit....................... 6.3 (6.3) (6.3) 6.3 (6.3) Research and development credits.......................... (8.2) -- (1.7) -- -- Other..................................................... -- 0.3 -- (0.3) 0.3 - ---------------------------------------------------------------------------------------------------------------------------------- Effective tax rate........................................ 32.1% (40.0)% (42.0)% 40.0% (40.0)% - ----------------------------------------------------------------------------------------------------------------------------------
NOTE 5 COMMITMENTS The Company conducts its operations in leased facilities and leases certain equipment under operating lease agreements. These operating leases expire through December 2011. Future minimum lease payments under these operating leases are approximately as follows:
FISCAL YEAR AMOUNT - ----------------------------------------------------------------------------------------------------- 1998................................................................................. $ 3,083,000 1999................................................................................. 3,063,000 2000................................................................................. 2,554,000 2001................................................................................. 2,435,000 2002................................................................................. 2,466,000 Thereafter........................................................................... 8,919,000 - ------------------------------------------------------------------------------------------------------ $ 22,520,000
The Company is also obligated to pay for certain operating and other expenses in accordance with the terms of its various leases. Total rent expense under these leases for the years ended December 31, 1994, the six-month period ended July 2, 1995 and the years ended July 2, 1995, June 30, 1996 and June 29, 1997 was approximately $320,000, $576,000, $799,000, $1,929,000 and $2,886,000 respectively. Note 6 Stockholders' Equity (a) Issuance of Common Stock The Company entered into a Common Stock and Warrant Purchase Agreement dated as of February 20, 1997 (the Purchase Agreement), with Creative Technology, Ltd., a Singapore corporation. Pursuant of the terms of the Purchase Agreement, the Company sold and issued to Creative Technology, Ltd. (i) 912,294 shares of common stock of the Company at a purchase price of $5.25 per share, and (ii) a warrant to purchase 257,314 shares of common stock of the Compnay at an exercise price of $6.00 per share at a purchase price of $1,000 in the aggregate. (b) Preferred Stock The Company has authorized 2,000,000 shares of no par preferred stock. The Board of Directors has full authority to issue this stock and to fix the voting powers, preferences, rights, qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, redemption privileges and liquidation preferences, and the number of shares constituting any series or designation of such series. With regard to dividends, redemption privileges and liquidation preferences, any particular series of preferred stock may rank junior to, on parity with, or senior to any other series of preferred stock or the common stock. (c) Stock Option Plans The Company's 1993 Stock Option Plan as amended (the 1993 Plan) is administered by the Board of Directors and authorizes the Company to issue options to purchase up to 620,000 shares that have been reserved by the Company. Under the terms of the 1993 Plan, the Company may grant employees either incentive stock options or nonqualified stock options to purchase shares of the Company's common stock, at a price not less than the fair market value at the date of grant, which vest over periods determined by the Board of Directors. In addition, the Company may grant nonqualified options to nonemployees. 10 CAMBRIDGE SOUNDWORKS, INC. Note 6 Stockholders' Equity (Continued) Under a separate plan, on February 1, 1993, the Board of Directors and stockholders granted a former officer an option to purchase 22,244 shares of common stock at an exercise price of $3.36 per share, the fair market value of the common stock at the date of grant as determined by the Board of Directors, pursuant to an Incentive Stock Option Plan and Agreement. As of July 2, 1995, the former officer had exercised all options under this plan. The following table summarizes stock option activity under the stock option plans for the years ended December 31, 1994 the six-month period ended July 2, 1995 and the years ended June 30, 1996 and June 29, 1997:
NUMBER WEIGHTED AVERAGE OF SHARES OPTION PRICE - -------------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 1993...................................................... 22,244 $ 3.36 Granted........................................................................... 101,120 8.01 Terminated........................................................................ (21,440) 8.00 Exercised......................................................................... (5,000) 3.36 - -------------------------------------------------------------------------------------------------------------------- Outstanding, December 31,1994....................................................... 96,924 7.19 Granted........................................................................... 169,200 4.12 Terminated........................................................................ (18,320) 6.14 Exercised......................................................................... (17,244) 3.36 - -------------------------------------------------------------------------------------------------------------------- Outstanding, July 2, 1995........................................................... 230,560 5.42 Granted........................................................................... 356,780 4.86 Terminated........................................................................ (142,190) 5.40 Exercised......................................................................... (575) 3.50 - -------------------------------------------------------------------------------------------------------------------- Outstanding June 30, 1996........................................................... 444,575 5.01 Granted........................................................................... 187,820 4.01 Terminated........................................................................ (50,795) 5.82 Exercised......................................................................... (1,334) 3.71 - -------------------------------------------------------------------------------------------------------------------- Outstanding June 29, 1997........................................................... 580,266 $ 3.92 - -------------------------------------------------------------------------------------------------------------------- Exercisable, June 29, 1997.......................................................... 230,235 $ 4.81 - --------------------------------------------------------------------------------------------------------------------
The range of actual exercise prices for options outstanding and options excercisable as of June 29, 1997 was $3.50 to $8.02. In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair value of stock options or warrants to be included in the statement of operations or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for its employees under the Accounting Principles Board Option No. 25 and elect the disclosure-only alternative under SFAS No. 123 for stock-based compensation awarded in 1996 and 1997 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The underlying assumptions used are as follows:
YEARS ENDED ------------------------ JUNE 30, JUNE 29, 1996 1997 - ------------------------------------------------------------------------------------------------------------------------ Risk-free interest rate....................................................................... 6.13% 6.51% Expected dividend yield....................................................................... -- -- Expected lives................................................................................ 7 7 Expected volatility........................................................................... 60.1% 60.1% Weighted average remaining contractual life of options outstanding (years).................... 8.5 8.6
The weighted average grant date fair value of options granted during the years ended June 29, 1997 and June 30, 1996 under these plans is $3.15 and $2.68, respectively. Had compensation cost for the Company's stock option plans been determined consistent with SFAS No. 123, pro forma net loss and net loss per share would have been:
JUNE 30, JUNE 29, 1996 1997 - ------------------------------------------------------------------------------------------ Net income (loss)-- As reported...................................... $250,835 $ (614,698) Pro forma........................................ (21,011) (1,137,701) Net income (loss) per share-- As reported...................................... .09 (.19) Pro forma........................................ (.01) (.36)
Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Simultaneous with the Common Stock and Warrant Purchase Agreement, the Company entered into an exclusive distribution agreement with Creative Technologies Ltd. which has a life of three years. The Warrant has been valued at approximately $385,000 using the fair value method approach as prescribed in SFAS 123. The Warrant value will be amortized over the life of the relevant distribution agreement. Note 7 Accrued expenses Accrued expenses consist of the following:
JUNE 30, JUNE 29, 1996 1997 - ------------------------------------------------------------------------------------------------------------------- Marketing Expenses........................................................................ $ 192,294 $ 400,296 Other..................................................................................... 787,395 514,682 - ------------------------------------------------------------------------------------------------------------------- $ 979,689 $ 914,978 - -------------------------------------------------------------------------------------------------------------------
Note 8 Related Parties In February 1994, the Company entered into a License Agreement with Henry Kloss, a stockholder of the Company, whereby the Company and Mr. Kloss's name on its products. The License Agreement between the Company and Mr. Kloss provided that the Company has the perpetual right to use his name on products that Mr. Kloss designed or had a substantial role in designing, subject to termination, as to any product whose appearance or performance specifications are materially changed by the Company without Mr. Kloss's consent. Upon termination of Mr. Kloss's employment, as described above, the Company could not thereafter use his name generically or in connection with a product unless the Company had previously done so, unless Mr. Kloss consents to such use. Under this agreement, the Company was not required to make any payments to Mr. Kloss for the right to use his name. In April 1996, the Company entered into a Consulting Agreement with Henry Kloss, with respect to the selection and design by the Company for current and future products, expiring in September 1999. Pursuant to the Consulting Agreement, the Employment Agreement between the Company and Mr. Kloss was effectively terminated, with no additional payments due. The Consulting Agreement called for annual payments to Mr. Kloss of $330,000 plus certain fringe benefits, such as described therein through September 1996 with annual payments thereafter of $110,000, plus certain fringe benefits, as described therein from September 1996 through September 1999. Effective September 30, 1996, Henry Kloss terminated the Consulting Agreement dated April 24, 1996 which he had entered into with the Company to provide general and specific advice, counsel and assistance to the Company with respect to the selection and design by the Company of its current and future products. At the same time, Mr. Kloss notified the Company of his intention not to stand for reelection as a Director. Mr. Kloss continues on an informal basais to act as a consultant to the Company for which he is paid $10,565 per month but for which there is no formanl written agreement. This arrangement can be terminated by either party at will. Mr. Kloss, former Chairman of the Board of Directors of the Company and former Director of Product Development provided consulting services to the Company during year ended June 29, 1997 for which he has received $179,000 from the company. 11 CAMBRIDGE SOUNDWORKS, INC. Note 9 Employment Agreements On February 14, 1997 the Company entered into a three year agreement with Thomas J. DeVesto (the Employment Agreement) employing him in the capacity as President and Chief Executive Officer. Pursuant to the Employment Agreement, which provides for an initial salary of no less than $385,000, with such adjustments thereto after the first year which the Board of Directors may approve. Mr. DeVesto is also entitled to certain fringe benefits, including the right to participate in all bonus and benefit programs that the Company makes available to its employees and an annual $8,000 car allowance. The Employment Agreement may be terminated by any party on six month's prior notice for any reason in which event Mr. DeVesto is entitled to a payment equal to his then annual salary in consideration for an agreement not to compete for one year following the termination of employment. Note 10 Benefit Plan During fiscal 1996, the Company adopted the Cambridge SoundWorks 401(k) Plan (the Plan), a voluntary savings plan for all eligible employees, as defined. The Plan is a qualified benefit plan in accordance with Section 401(k) of the Internal Revenue Code. Under the terms of the Plan, participants may contribute a certain percentage of their annual compensation, up to a defined maximum. The Company may, but is not obligated to, make a matching contribution up to a certain percentage of each participant's contribution. For the year ended June 30, 1996 and June 29, 1997, the Company did not make a matching contribution to the Plan. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cambridge SoundWorks, Inc.: We have audited the accompanying balance sheets of Cambridge SoundWorks, Inc. (a Massachusetts corporation) as of June 30, 1996 and June 29, 1997, and the related statements of operations, stockholders' equity and cash flows for the years ended December 31, 1994, the six-month period ended July 2, 1995 and the years ended June 30, 1996 and June 29, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cambridge SoundWorks, Inc. as of June 30, 1996 and June 29, 1997, and the results of its operations and its cash flows for the year ended December 31, 1994, for the six-month period ended July 2, 1995 and for the years ended June 30, 1996 and June 29, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts July 28, 1997 12 BOARD OF DIRECTORS Thomas J. DeVesto President, Chief Executive Cambridge SoundWorks, Inc. Officer Thomas E. Brew, Jr. President, Chief Executive Kurzweil Applied Officer Intelligence, Inc. Franklin S. Browing, Jr. Business Consultant Leo Kahn Partner United Properties Craig L. McHugh Vice President, General Creative Labs, Inc. Manager Peter B. Seamans Partner Peabody & Arnold
EXECUTIVE OFFICERS Thomas J. DeVesto President, Chief Executive Officer Wayne P. Garrett Vice President--Finance, Chief Financial Officer Thomas J. Hannaher Vice President--Marketing Robert S. Mainiero Vice President--Business Development Sandy Ruby Vice President--Retail
Stock Data CORPORATE INFORMATION Corporate Offices Cambridge SoundWorks, Inc., is traded on the NASDAQ Cambridge SoundWorks, Inc. National Market System under the symbol HIFI. 311 Needham Street Newton, MA 02164 Annual Meeting (617) 332-5936 (617) 332-9229 Fax The annual meeting of shareholders will be held on November 4, 1997 at 11:00 a.m. at the Company's headquarters, 311 Needham Street, Legal Counsel Newton, MA 02164 Peabody & Arnold Press Releases and Quarterly Results Boston, Massachusetts Press releases including quarterly financial results are available by fax to Independent Accountants all shareholders immediately upon their release, free of charge, by calling PR Newswire's Company News On Call at 1-800-758-5804 (ext. 114553) Arthur Andersen LLP or through access on the Internet at http://www.prnewswire.com. Boston, Massachusetts Transfer Agent Form 10-Q and 10-K State Street Bank and Trust Company The Company's quarterly and annual reports to the Security and c/o Boston EquiServe Exchange Commission are filed electronically on Form 10-Q and 10-K, P. O. Box 8200 respectively. These reports can be accessed on the Internet at Canton, MA 02021 http://www.sec.gov or can be obtained, free of charge, by phoning or (617) 575-2000 writing to the Company or its Investor Relations counsel. Investor Relations Internet Site John H. Swanson The Company's Internet site may be accessed at the following address: Swanson Communications, Inc. http:// www.hifi.com. 234 5th Avenue New York, NY 10001 (212) 683-4890 (212) 679-1184 Fax
CAMBRIDGE SoundWorks CAMBRIDGE SOUNDWORKS, INC. 311 NEEDHAM STREET NEWTON, MA 02164 EX-23 3 EXHIBIT 23 CONSENT Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated July 28, 1997 on the financial statements of Cambridge SoundWorks, Inc. as of and for the year ended June 29, 1997, included in this Form 10-K. Arthur Andersen, LLP Boston, Massachusetts September 19, 1997 EX-27 4 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Annual Report for the fiscal year ended June 29, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS YEAR JUN-29-1997 JUL-1-1996 JUN-29-1997 1.0 58 0 720 0 14,817 16,794 6,136 1,995 21,098 5,714 0 0 0 14,985 0 21,098 51,285 51,285 30,965 21,125 0 0 220 (1,025) (410) 0 0 0 0 (615) (.19) (.19)
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